CSR: Normal course of business in times of COVID-19

The COVID-19 pandemic has left India grappling with a health, economic and humanitarian crisis of unprecedented proportions. It has forced the Government of India to dig deep into its existing pool of resources, which was already stretched, to tackle the fallout from the impact of COVID-19.

The impact of the prolonged lockdown on the economic activity with industries and businesses across various sectors being forced to shut down has had a crippling effect. Over the course of the last two months, the Central and state governments have declared a slew of relief packages aimed at restarting economic activity and infusing liquidity into the market.

Considering the magnitude of the crisis, it is apparent that the government would appreciate a helping hand from the private sector.

Opportunity for companies

The COVID-19 pandemic has presented an opportunity to companies to make good on their corporate social responsibility (CSR) commitments and several companies have contributed to the fight against COVID-19 by making donations to relief funds established by the Central and state governments and undertaking other relief measures such as manufacturing of masks, PPE kits, sanitisers and even ventilators.

Companies have also taken the lead in the distribution of essential supplies including food and medicines in lockdown-affected areas.

Quite a few companies are relying on their core competencies and leveraging their existing business capabilities to provide COVID-19 related relief to the public. Such companies may be looking to appropriate the costs incurred in providing such relief towards their CSR expenditure under the Companies Act, 2013 (Companies Act).

The Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules) inter alia prescribe that CSR activities should be undertaken by a company, as per its stated CSR policy, excluding activities undertaken in pursuance of its “normal course of business”. Further, the CSR Rules prescribe that CSR activities do not include activities undertaken in pursuance of “normal course of business” of a company.

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What is normal course of business?

Unfortunately, the scope of the expression “normal course of business” in the CSR Rules has not been clarified by the Ministry of Corporate Affairs (MCA) through any notification or circular. In the absence of this clarification, the issue that arises is whether donation of its own goods or provision of services by a company, free of cost, can be treated as a CSR activity.

The probable reason for excluding activities in “normal course of business” from the scope of CSR activities is that by undertaking their core activities, the companies should not circumvent their CSR commitments. However, whether donation of goods manufactured by a company or provision of its core services free of cost should be considered as a part of normal course of business of a company has been a moot point.

Having said that, on March 28, 2014, the MCA filed an affidavit in Mohd. Ahmed vs Union of India and others, a case being heard in the Delhi High Court. In the said affidavit, the MCA clarified the scope of the term “normal course of business” in the context of the CSR Rules.

The MCA gave the example of a pharmaceutical company donating medicines/drugs and stated that such donation would be considered as a CSR activity as the same is not an activity undertaken in pursuance of its “normal course of business”.

The MCA also clarified that an activity carried out by a company which is covered under the relevant schedule of the Companies Act relating to CSR activities and is a part of its core business, if not done with a profit motive, amounts to a CSR activity. The affidavit was taken on record by the Delhi High Court and the Government of India was held bound by it.

Despite this affidavit, we believe that MCA has issued notices to some companies refusing to treat donation of their own goods or providing their core services free of cost, as a CSR activity. MCA’s reasoning behind this stand appears to be that: (a) company would misuse the CSR activity to market its own goods and services and enhance its brand value; (b) by doing so, the company would not be required to make any payments or go out of pocket; and (c) company would donate sub-standard goods or services as part of the CSR activity.

CSR obligations

The intent of CSR obligations is not merely to generate funds which could have been achieved by additional taxes. It is also to involve companies to use their innovative ideas and management skills towards social development. For CSR, companies should be permitted to do what they can do best, which is in fact, their core activities.

Any brand promotion resulting from an activity undertaken by a company with a social objective, without a profit motive, should be considered by the MCA only as an unintended outcome rather than as a surrogate to promote its brand. Therefore, this cannot be the reason to not permit a company from donating its own goods or provide services for free under the ambit of CSR activities.

To say that that the company is not incurring any expenses in donating its own goods or providing its own services as part of CSR activities is not correct. In the case of goods, the company would have incurred expenses in manufacturing or purchasing them and in the case of services, the company would pay salaries to its employees for, inter alia, providing these services, without recovering the cost involved in providing the services. Therefore, in each case, the company would incur substantial costs and expenses.

By providing sub-standard goods, the company would harm its own reputation and goodwill in the market and again, this should not be the reason to not allow companies to donate their own goods for free as part of their CSR activities.

Conclusion

In light of the COVID-19 pandemic, the MCA has rightly clarified that CSR related funds may be spent by companies for COVID-19 related activities under items (i) and (xii) of Schedule VII of the Companies Act and spending CSR funds for COVID-19 related activities shall qualify as CSR expenditure. The MCA has also reiterated its position that the items in Schedule VII are broad-based and may be interpreted liberally for the purpose of CSR expenditure.

Bearing in mind the larger objective of COVID-19 relief, we hope that the MCA takes a similar liberal and pragmatic approach to allow companies to use their own products and services to provide COVID-19 related relief as part of their CSR activities under the Companies Act.

A narrow interpretation of the “normal course of business” restriction under the CSR Rules in the background of the COVID-19 pandemic would limit the participation of companies in these relief measures.

If the ultimate goal of providing relief and assistance to COVID-19 victims in these difficult times is achieved by companies through reliance on their core competencies and experience in their respective industry segments, then it would indeed be a major contribution in the fight against COVID-19.