Companies can spend up to 5% of their total CSR fund in building CSR capacities of their own personnel or those of implementing agencies
As companies prepare to file their annual reports and include the last financial year’s corporate social responsibility (CSR) expenditure as required by the Companies Act, 2013, more loopholes and grey areas emerge.
The CSR rules, which came into force on 1 April last year under Section 135 of the new Companies Act, state that every company with a net worth of Rs.500 crore or more or a turnover of at least Rs.1,000 crore or a net profit of Rs.5 crore in a given financial year should spend 2% of their profit of the last three years on activities listed in Schedule VII of the rules, as CSR activities.
Under these rules, companies can spend up to 5% of their total CSR fund in building CSR capacities of their own personnel or those of implementing agencies. But companies feel this allocation is not enough for them to put in place the required infrastructure, which in turn will enable them to meet the 2% target.
Ranjit Singh, general manager (CSR and sustainability) at Maruti Suzuki India Ltd says, “While it is good to have a cap on overheads, salaries and training costs to avoid misuse, the 5% limit needs to be reviewed.” According to Singh, firms that implement CSR programmes directly with a large in-house team may find the cap restrictive, whereas the same may be adequate for firms working primarily through not-for-profits. “A cap is a positive move, but the ‘one-size-fits all’ approach can be avoided, specially now at the initial stages of CSR when companies are expanding their CSR teams and their training. Once projects have scaled up and team size has stabilized, overheads costs may come down,” adds Singh.
Consultants and CSR heads believe that while they are trying to meet all the requirements of the 2014 rules, the 5% cap will play out in different ways for companies and should be reviewed by the ministry of corporate affairs (MCA). Abhay Gupte, senior director at Deloitte India, says the 5% limit is restrictive, especially for companies that are just starting out on CSR programmes. “For companies that have been undertaking CSR activities long before 2014, this clause may work because they already have in place the network, infrastructure and even personnel to implement CSR projects. But companies that are just starting CSR initiatives will need to hire the qualified personnel, conduct studies to design programmes to understand the need of communities that they are going to be working with. All this needs man hours and therefore money… It is unlikely the 5% will cover even half the cost.”
Till September, companies were not clear what this 5% overheads cost included, as the rules specifically stated that salaries of individuals involved in CSR will not be considered as part of the companies’ CSR spend. However, following a circular issued by the MCA in September, “things got clearer”, says S.K. Jain, general manager CSR at NTPC—India’s largest power producer. “The total overheads cost—whether it be capacity building, training workshops, or salaries of people employed in implementing CSR—all could be included under this,” he explains. But like Singh, he too believes the amount that will come under this percentage will often be too little. “The thumb rule for all businesses when setting up a new department or vertical is to spare a minimum of 10% of the total expenditure for overheads cost…and here we are stuck with 5%.” When the rules were being drafted, companies made presentations to the government to include the salary of individuals implementing CSR as part of the spend.
“The request was not for a percentage, but complete cost because companies were hoping to deploy topmost officials to do CSR work on the field,” said Lalit Kumar, partner at J. Sagar Associates Advocates and Solicitors. The idea, he said, was that if a CMD or CEO spent 15 to 30 days on the field for CSR, the salary the firm will pay in full would be considered part of CSR spend.
However, the MCA included the clause specifying a cap so that the entire salary of CMD or CEO could not be included under the 5% overhead rule.
This article was taken from here.