New Delhi, Feb. 27: The Centre has sent a coded warning to companies not to mask direct or indirect payments to political parties as expenditure on corporate social responsibility (CSR) projects.
The corporate affairs ministry today came out with the long-awaited CSR rules that will underlie the legislative provision embedded in the Companies Act Parliament passed last year.
The law requires companies with a net worth of over Rs 500 crore, turnover of over Rs 1000 crore, or net profit of more than Rs 5 crore to spend at least 2 per cent of the average net profit in the immediate three preceding years on CSR activity.
Profit from overseas operations will not be counted but foreign companies registered in India will be covered. (See Business)
“Contribution of any amount directly or indirectly to any political party… shall not be considered as CSR activity,” the rules said.
It is curious why such an instruction was considered necessary since contributions to political parties are covered under a separate clause -- section 182 of the act -- and has never been under the ken of CSR.
Section 182 of the Companies Act limits contributions to political parties to 7.5 per cent of the average net profit of a company in the three immediately preceding financial years.
The warning may have become necessary because of suggestions that some NGOs espousing social causes could be funding some parties. The expenditure by and the contributions to these NGOs have been under a cloud for sometime. A recently formed party also has some leaders who operate NGOs.
“The government has clearly said that a corporate entity can carry out CSR activity through a trust, society or another company. But if it doesn’t set up such an institution, it can fork out funds to an unrelated entity that has a three-year track record in carrying out such projects,” said a corporate law expert.
The rules state that the onus will be on the company shovelling out the funds to ensure that there is a clear monitoring and reporting mechanism to determine how the funds have been used and in which projects or programmes, he added.
India is the first country in the world that has embedded a CSR provision into a statutory legislation.
This was done because the country has a poor record of voluntary philanthropy. A study by global consulting firm Bain & Company had said that India’s giving in 2006 totalled close to $5 billion, translating into an estimated $7.5 billion in 2009. This was only 0.6 per cent of India's GDP. By contrast, Americans gave more than $307.75 billion, or around 2 per cent of GDP, to charity in 2009 in spite of the recession.
The act says that companies do not have to mandatorily spend 2 per cent of their net profit on CSR activity.
“The board of the companies will only have to report how much they spent on CSR and explain why they couldn’t meet the commitment. The government will not ask them to amplify on that explanation,” Bhaskar Chatterjee, director-general and CEO of the government-funded think-tank Indian Institute on Corporate Affairs and a former bureaucrat who was instrumental in drafting the CSR guidelines, had said in Mumbai at a presentation last November.
Several companies have ensured transparency in political contributions in the past, notably the Tatas and the Aditya Birla group which have established specially-funded electoral trusts.
Ranbaxy -- when it was run by the Malvinder and Shivinder Singh -- was an exception because it would report its political contributions in its annual balance sheet. In the year ended December 2008, the company donated Rs 40 lakh each to the Punjab Pradesh Congress Committee and the Shiromani Akali Dal. In earlier years, it had donated funds to other political parties like the BJP and the Telugu Desam.
Most companies, however, use elaborate stratagems to fund political parties.