Under section 135 of the Companies Act, 2013 (“Act”), every company having a net worth of Rs. 500 Crores or more, or turnover of Rs. 1000 Crores or more or a net profit of Rs. 5 Crores or more during the preceding financial year shall constitute a CSR Committee. This CSR Committee shall formulate and recommend a CSR policy for the activities to be undertaken by the company, recommend the amount of expenditure to be incurred on the activities and monitor the CSR policy of the company from time to time. The company shall spend, in every financial year, at least 2% of its average net profits made during three immediately preceding financial years or since incorporation, whichever is applicable. Moreover, the CSR expenditure shall include projects and programs specified under Schedule VII of the Act.

Keeping in mind the requirement under the Act, the Ministry of Corporate Affairs (“MCA”) issued a General Circular No. 10/2020 dated 23.03.2020 (“General Circular”) on the spending of CSR funds for COVID-19. The MCA has clarified that spending of CSR funds for COVID-19 is an eligible CSR activity. The MCA through the General Circular has included the promotion of health care including preventive health care and sanitation, and disaster management to the list of CSR activities under Schedule VII. Furthermore, it is pertinent to note here that as per General Circular No. 21/2014 dated 18.06.2014 issued by MCA, the entries in Schedule VII are broad-based and must be interpreted liberally so as to capture the essence of the subjects therein. With this change, Schedule VII now recognizes any contribution to incubators funded by Central or State Government or any Government agency engaged in conducting research in science, technology, engineering, and medicine as falling within the ambit of CSR. 

Moreover, the Government of India has set up a public charitable trust under the name of Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (“PM CARES Fund”) to deal with any kind of emergency or distress situation, like the one posed by the COVID-19 pandemic. In view of this, the MCA issued Office Memorandum F. No. CSR-05/1/2020-CSR-MCA dated 28.03.2020 which provides that any contribution made to the PM CARES Fund shall qualify as CSR expenditure under item No. (viii) of the Schedule VII of the Act, which reads as under:

“(viii) contribution to the prime minister’s national relief fund or any other fund set up by the central govt. for socio-economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women”

The MCA issued further clarifications vide General Circular No. 15/ 2020 dated 10.04.2020 (“New Circular”) due to several queries on the eligibility of CSR expenditure related to COVID-19 activities. The following are the clarifications issued in the New Circular:

1. The contribution made to the PM CARES Fund shall qualify as CSR expenditure under item no. (viii) of Schedule VII of the Act as stated above.
2. Any contribution to ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ is not included in Schedule VII of the Act and therefore, it shall not qualify as CSR expenditure.
3. As provided in the General Circular, contribution made to State Disaster Management Authority to combat COVID-19 shall qualify as CSR expenditure under item no. (xii) of Schedule VII of the Act which reads as under:

“(xii) disaster management, including relief, rehabilitation and reconstruction activities”

4. Funds spent on various activities related to COVID-19 under the items of Schedule VII with respect to the promotion of health care including preventive health care, sanitation, and disaster management shall qualify as CSR expenditure.
5. The payment of salary/wages to employees and workers during the lockdown period is a moral obligation of the employers, as they have no alternative source of employment or livelihood during this Lockdown Period. Therefore, payment of salary/wages to the employees and workers during the Lockdown Period shall not qualify as admissible CSR expenditure. Moreover, payment of wages to temporary or casual, or daily wage workers during the Lockdown Period shall also not count as CSR expenditure as this forms a part of the contractual or moral obligation of the company and is applicable to all companies irrespective of whether they have any legal obligation for CSR contribution under section 135 of the Act.
6. In case of any ex-gratia payment made to temporary/ casual workers/ daily wage workers over and above the payment of wages, specifically for the purpose of fighting COVID-19, the same shall be considered CSR expenditure. It is pertinent to point out that this payment shall be admissible as a one-time exception provided there is an explicit declaration to that effect by the Board of the company, which is duly certified by the statutory auditors.

To sum it up, the MCA has clarified that the expenses made by the corporate entities with regard to COVID-19 shall be construed to be part of the CSR responsibilities under the Companies Act, 2013 if the activities and expenses include the following:

1. Contribution to PM CARES Fund;
2. The contribution made to State Disaster Management Authority; and
3. Funds spent on activities relating to the promotion of health care including preventive health care, sanitation, and disaster management.

Further, to put rest to the discussions pertaining to payment of salaries and wages to the employees or contract workers, the MCA has also clarified that payment of salaries and wages are moral obligations of a company irrespective of the CSR contribution. Therefore, payment of salaries and wages do not form part of CSR expenditure. However, MCA has provided a one-time exception for ex-gratia payment to the temporary or casual workers for fighting COVID-19.      

Corporates are opting for a hybrid approach where they are partly contributing to the various funds and simultaneously directly getting involved in the process of fighting the disease by manufacturing equipment, making quarantine facilities, and distributing free rations. The key here is to fight the disease from all possible fronts with the help of all possible avenues. Corporates taking an active part reflects their values and shall positively impact their reputation management efforts. However, had the payment of wages been included in the CSR activity, employees who are losing their job could see some respite. That said, the one-time exception for temporary and casual workers is definitely a positive step that goes a long way in resolving the economic distress that is affecting individuals and businesses alike.