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MCA widens CSR for defence personnel

Measures for the CAPF and CMPF veterans and dependants now a part of CSR activity

Ankit Vashishth, Executive, Vinod Kothari and Company; corplaw@vinodkothari.com

Introduction

Schedule VII of the Companies Act, 2013 (‘Act’) currently includes measures taken for the armed forces veterans, war widows and their dependants as one of the CSR activities. The Ministry of Corporate Affairs (“MCA”) vide its Notification[1] dated 23rd June, 2020 has included contribution made towards the benefit of Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans and their dependents including widows, within the ambit of CSR.

MCA has issued several notifications either to clarify or broaden the ambit of Schedule VII. This Notification is yet another step taken by the MCA for widening the scope of CSR activities to include CAPF and CMPF veterans and their dependants and war widows.

This note tries to provide a quick coverage on the said amendment.

Difference between Armed Forces and CAPF/CPMF

Armed Forces CAPF CPMF
The term “armed forces” basically means – Indian Armed Forces which are the military forces of the Republic of India. It comprises three professional uniformed services :

1.   The Indian Army

2.   The Indian Navy

3.   The Indian Air Force

CAPF (Central Armed Police Force)[2]  consists of :

1.         Assam Rifles (AR);

2.         Border Security Force (BSF);

3.         Central Industrial Security    Force (CISF);

4.         Central Reserve Police Force (CRPF);

5.         Indo Tibetan Border Police (ITBP);

6.         National Security Guard (NSG); and

7.       Sashastra Seema Bal (SSB)

The nomenclature CAPF will be used uniformly for CPMF as per the Office Memorandum [3]issued by the Ministry of Home Affairs issued on March 18, 2011

Current CSR spending pattern and changes expected due to the amendment

The current pattern for CSR spending for armed forces veterans, war widows and their dependants include contributions to several funds like:

  1. Armed Forces Flag Day Fund (AFFDF)[4]
  2. Army Wives Welfare Association (AWWA)[5]
  3. The Army Welfare Fund Battle Casualties[6]

Apart from donating to these funds, companies have also provided financial relief to the martyr’s families and have conducted workshops for the children of war widows as a part of their CSR projects.

Further, in addition to the above, contribution to “National Defence Fund” which is used for the welfare of the members of the Armed Forces (including Para Military Forces) should be eligible for being a CSR activity.

As a result of the enhanced scope for CSR spending for CAPF/ CAMF, contribution to the fund “Bharat Ke Veer Corpus Fund”[7], which was previously not eligible for CSR considering the fact that it specifically benefits CAPF, will now be covered as per the amendment. Accordingly, any contribution to this fund will now qualify as a CSR activity.

High Level Committee on CSR

MCA had constituted[8] a High Level Committee (HLC) on CSR in February, 2015 under the Chairmanship of Secretary (Corporate Affairs) to review the existing CSR framework and formulate a coherent policy on CSR and further make recommendations on strengthening the CSR ecosystem, including monitoring implementation and evaluation of outcomes. Later, the HLC on CSR was re-constituted[9] in November, 2018. The scope of HLC was widened to include recommendation of guidelines for enforcement of CSR provisions. Though the Report discussed on amending Schedule VII in line with promoting sports, senior citizens’ welfare, welfare of differently abled persons, disaster management, and heritage, however, it did not consider widening the clause relating to the scope of armed forces in the Schedule.

Further, as evident from the data given in the HLC Committee Report[10], CSR expenditure made on armed force veterans, war widows/ dependents have seen an upward trend over the years, however it forms a very small proportion of the total CSR expenditure made.

Concluding Remarks

The service spirit of CAPF is no less than that of the Indian Army. Acknowledging this fact MCA has brought this amendment. While all the areas for CSR are extremely important for the overall socio-economic welfare and development, the measures taken for the benefit of veterans and dependants of the armed forces and CAPF/ CPMF is an extremely noble activity.

Link to our other articles:

CSR: A ‘Corporate Social Responsibility’ or a ‘Corporate Social Compulsion’?

http://vinodkothari.com/2019/08/csr-a-corporate-social-responsibility-or-a-corporate-social-compulsion/

Proposed changes in CSR Rules

http://vinodkothari.com/2020/03/proposed-changes-in-csr-rules/

FAQs on Corporate Social Responsibility

http://vinodkothari.com/2019/11/faqs-on-corporate-social-responsibility/

Read our other articles on Corplaw : http://vinodkothari.com/category/corporate-laws/

Link to our Youtube Channel : https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

 

[1] http://egazette.nic.in/WriteReadData/2020/220133.pdf

[2] https://www.mha.gov.in/about-us/central-armed-police-forces

[3] Office Memorandum can be viewed here

[4] http://ksb.gov.in/armed-forces-flag-day-fund.htm

[5] https://awwa.org.in/contribution-under-csr-awwa

[6] The Army Welfare Fund Battle Causalities

[7] https://www.bharatkeveer.gov.in/about

[8] https://www.mca.gov.in/Ministry/pdf/General_Circular_01_2015.pdf

[9] https://www.mca.gov.in/Ministry/pdf/OfficeOrderCommitteeOnCorporate_26112018.pdf

[10] https://www.mca.gov.in/Ministry/pdf/CSRHLC_13092019.pdf

 

 

New CSR avenues, innovative bonds and much more in the Social Stock Exchange package!

Timothy Lopes, Executive, Vinod Kothari Consultants

finserv@vinodkothari.com

In the Union Budget of 2019-2020 the Hon’ble Finance Minister proposed “to initiate steps towards creating an electronic fund raising platform – a Social Stock Exchange (‘SSE’) – under the regulatory ambit of Securities and Exchange Board of India (‘SEBI’) for listing social enterprises and voluntary organizations working for the realization of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund.”

A Working Group was subsequently formed on 19th September, 2019 to recommend possible structures and mechanisms for the SSE. We have tried to analyse and examine what the framework would look like based on global SSEs already prevalent in a separate write up.

On 1st June, 2020, the Working Group on Social Stock Exchange published its report for public comments. In this write up we intend to analyse the recommendations made by the working group along with its impact.

The idea of a Social Stock Exchange

Social enterprises in India exist in large numbers and in several legal forms, for e.g. trusts, societies, section 8 companies, companies, partnership firms, sole proprietorships, etc. Further, a social enterprise can be either a For-Profit Enterprise (‘FPE’) or a Non-Profit Enterprise (‘NPO’). The ultimate objective of these enterprises is to create a social impact by carrying out philanthropic or sustainable development activities.

Certain gaps exist for social enterprises in terms of funding, having a common repository able to track these entities and their performance. The sources of funding for social enterprises have been philanthropic funding, CSR, impact investing, government agencies, etc.

 

Funding is important in terms of the effectiveness of NPOs in creating an impact. The funding, however, is contingent upon demonstration of impact or outcomes.

Here comes the idea and role of a social stock exchange. An SSE proposed to be set up is intended to fill the gaps not only in terms of funding, but also to put in place a comprehensive framework that creates standards for measuring and reporting social impact.

Who is eligible to be listed on the SSE?

The SSE is intended for listing of social enterprises, whether for-profit or non-profit. Listing would unlock the funds from donors, philanthropists, CSR spenders and other foundations into social enterprises.

There is no new legal form recommended by the working group which a social enterprise will have to establish in order to get listed. Rather, the existing legal forms (trusts, societies, section 8 companies, etc.) will enable a NPO or FPE to get listed through more than one mode.

Is there any minimum criteria for listing on the SSE?

In case of NPOs, the minimum reporting standards recommended to be implemented, require the NPO to report that it has received donations/contributions of at least INR 10,00,000 in the last financial year.

Further, in case of FPEs, it must have received funding from any one or more of the impact investors who are members of the Impact Investors Council. Certain eligibility conditions for equity listings would also apply in case of FPEs, as per the SEBI’s Issue of Capital, Disclosure Requirements (ICDR).

The working group has requested SEBI to look into the following aspects of eligibility and recalibrate the existing thresholds in the ICDR:

  • Minimum Net Worth;
  • Average Operating Profit;
  • Prior Holding by QIBs, and;
  • Criteria for Accredited Investor (if a role for such investors is envisaged).

Listing, compliance and penalty provisions must be aptly stringent to prevent any misuse of SSE platform by FPEs.

What is a social enterprise? Is the term defined?

Social enterprises broadly fall under two forms – A For-Profit Enterprise and a Non-Profit Enterprise.

For-Profit Enterprise – A FPE generally has a business model made to earn profits but does so with the intent of creating a social impact. An example would be creating innovative and environmental friendly products. FPEs are generally in the form of Companies.

Non-Profit Enterprise – NPOs have the intention of creating a social impact for the better good without expecting any return on investment. These are generally in the form of trusts, societies and Section 8 companies. These entities cannot issue equity. The exception to this is a section 8 company which can issue equity shares, however, there can be no dividend payment.

The working group defines a social enterprise as a class or category of enterprises that are engaging in the business of “creating positive social impact”. However, the group does not recommend a legal/regulatory definition but recommends a minimum reporting standard that brings out this aspect clearly, by requiring all social enterprises, whether they are FPEs or NPOs, to state an intent to create positive social impact, to describe the nature of the impact they wish to create, and to report the impact that they have created. There will be an additional requirement for FPEs to conform to the assessment mechanism to be developed by SEBI.

Therefore, an enterprise is “social” not by virtue of satisfying a legal definition but by virtue of committing to the minimum reporting standard.

Since there would be no legal definition to classify as a social enterprise, a careful screening process would be required in order to enable only genuine social enterprises to list on the exchange.

Who are the possible participants of the SSE?

What are the instruments that can be listed? What are the other funding structures? What is the criteria for listing?

In case of Section 8 companies, there is no restriction on issue of shares or debt. However, there is no dividend payment allowed on equity shares. Further, there is no real regulatory hurdle in listing shares or debt instruments of Section 8 companies. However, so far listing of Section 8 companies is a non-existent concept, as these avenues have not been utilized by Section 8 companies apparently due to their inherent inability to provide financial return on investments.

The working group recognises that trusts and societies are not body corporates under the Companies Act, and hence, in the present legal framework, any bonds or debentures issued by them cannot qualify as securities under the Securities Contracts (Regulation) Act 1956 (SCRA).

In this regard the working group suggests introducing a new “Zero Coupon Zero Principal” Bond to be issued by these entities. The features and other specifics of these bonds are discussed further on in this write up.

Further, it is recommended that FPEs can list their equity on the SSE subject to certain eligibility conditions for equity listings as per the SEBI’s Issue of Capital, Disclosure Requirements (ICDR) and social impact reporting.

Funding structures and other instruments are discussed further on in the write up.

What are the minimum reporting standards?

One of the important pre-requisites to listing on the SSE is to commit to the minimum reporting standards prescribed. The working group has laid down minimum reporting standards for the immediate term to be implemented as soon as the SSE goes live. The minimum reporting standards broadly cover the areas shown in the figure below –

The details of the minimum reporting standard are stated in Annexure 2 to the working group report. The working group states in its report that over time, the reporting requirements can begin to incorporate more rigour in a graded and deliberate manner.

Overall, it seems as though the reporting framework at the present stage is sufficient to measure performance and identify truly genuine social enterprises. The framework sets a benchmark for reporting by NPOs and FPEs and will provide the requisite comfort to investors.

Innovative bonds and funding structures

The SSE’s role is clearly not limited to only listing of securities and trading therein. The working group has recommended several innovative funding mechanisms for NPOs that may or even may not end up in creation of a listable security. Following are the highlights of the proposed structures –

1. Zero coupon zero principal bonds –

The exact modalities of this instrument are yet to be worked out by SEBI.

2. Mutual Fund Structure –

  • Under this structure, a conventional closed-ended fund structure is proposed wherein the Mutual Fund acts as the intermediary and aggregates capital from various individual and institutional investors to invest in market-based instruments;
  • The returns generated out of such fund is will be channelled to the NPOs who in turn will utilise the funds for its stated project;
  • The principal component will be repaid back to the investors, while the returns would be considered as donations made by them;
  • There could also be a specific tax benefit arising out of this structure;
  • The other benefit of this structure is that the role of the intermediary can be played by existing AMCs.

3. The Social/ Development Impact Bond/ Lending Partner Structure –

These bonds are unique in a way that they returns on the bonds are linked to the success of the project being funded. This is similar to a structured finance framework involving the following –

  • Risk Investors/ Lenders (Banks/ NBFCs) – Provide the initial capital investment for the project;
  • Intermediary – Acts as the intermediating body between all parties. The intermediary will pass on the funds to the NPO;
  • NPO (Implementing Agency) – will use the funds for achieving the social outcomes promised;
  • 3rd party evaluator – An independent evaluator who will measure and validate the outcomes of the project;
  • Outcome Funder – Based on the third party evaluation the outcome funders will pay the Principal and Interest to the risk investors/ lending partners in case the outcome of the project is successful. In case the outcome is not successful the outcome funders have the option to not pay the risk investors/ lending partners.

Although banks may not be looking into risky lending, the structure provides incentive to the bank in the form of Priority Sector Lending (PSL) qualification. In order to meet their PSL targets, banks may choose to lend under this structure.

4. Pay-for-success through grants –

This structure is where a new CSR aspect comes in. The working group recommends a structure which is similar to the pay-for-success structures stated earlier however, this required the CSR arm of a Company to select the NPO for implementation of the project. The CSR funds are then kept in an escrow account earmarked for pay-for-success, for a pre-defined time period over which the impact is expected to be created (say 3 years).

The initial capital required by the NPO to achieve the outcomes, will be provided by an interim funding partner (typically a domestic philanthropic organization, and distinct from the third-party evaluator).

If the CSR funder finds that the NPO has achieved the outcomes, then it pays out the CSR capital from the escrow account partly to the interim funding partner (similar to the earlier mentioned pay-for success structures), and partly to the NPO in the form of an accelerator grant up to 10% of the program cost in case the NPO exceeds the pre-defined outcome targets. The grant to the NPO is designed to provide additional support for non-programmatic areas such as research, capacity building, etc.

If the CSR funder finds that the NPO has not achieved the outcomes, then it either rolls over the CSR capital in the escrow account (if the pre-defined time period is not yet over), or routes the CSR capital to items provided under Schedule 7 of the Companies Act such as the PM’s Relief Fund (if the pre-defined time period is over).

An avenue for Corporate Social Responsibility

The implementation of the SSE will provide a new platform, not just for CSR spending but also a trading platform for trading in a “CSR certificates” between corporates with excess CSR expenditure and those with a deficit in a particular year.

Investment in securities listed on the SSE are likely to qualify as CSR expenditure. However, necessary amendments in the Companies Act, 2013 will also be required to permit the same to qualify as CSR expenditure. The working group has made the necessary policy recommendations in its report.

Trading platform for CSR spending –

India is one of the only countries that has mandated CSR spending. In a particular year, a Company may fail to meet its required spending obligations owing to several reasons. The High Level Committee on CSR had recommended the transfer of unspent CSR funds to a separate account and the said amount should be spent within 3 years from the transfer failing which the funds would be transferred to a fund specified in Schedule VII. The necessary provisions were inserted by the Companies (Amendment) Act, 2019, however, the same is yet to be notified.

The working group has proposed a new model that could solve the issue of unspent CSR funds. It is recommended that CSR Certificates [may be negotiable instruments, somewhat similar to Priority Sector Lending Certificates (PSLCs)], be enabled to be bought and sold on a separate trading platform. This will allow Companies which have unspent CSR funds to transfer these funds to those Companies that have spent excess for CSR in a particular year. This in turn motivates Companies to spend more than the minimum required CSR amount in a particular year.

The certificates are recommended to have a validity of 3-5 years but may be used only once. In order to avoid any profit making on excess CSR spends, it is recommended that these transactions must involve only a flat transaction fee that gets charged to the platform and involves actual transfer of funds.

Further, the working group has recommended that If the platform as described above succeeds in facilitating the trading of CSR certificates, the government might then consider licensing private platforms that provide an auction mechanism for the trading of CSR certificates (similar to the RBI’s licenses for Trade Receivables Discounting Systems or TReDS). However, this would require additional clarifications on whether CSR certificates must have the status of negotiable instruments or not and on how companies are to treat any profits from the sale of such certificates.

Conclusion

The recommendations of the working group has given an expanded role to the SSE. The working group also attempted to address the role of the SSE in terms of COVID-19 by proposing the creation of a separate COVID-19 Aid Fund to activate solutions such as pay-for-success bonds which can be used to provide loan guarantees to NBFC-MFIs that wish to extend debt moratoriums to their customers.

Necessary changes in law have also been recommended, while several other tax incentives have been recommended by the working group.

The SSE framework seems to be interesting in the Indian context. Nevertheless, the implementation of the same is yet to be seen.

Clarification on eligibility of CSR Expenditure during COVID-19

Vinod Kothari & Company

corplaw@vinodkothari.com

 

CSR funds may be used for COVID-19 relief, clarifies MCA

Team Vinod Kothari & Company | corplaw@vinodkothari.com

Updated on 29th March, 2020

Like all other public agencies, MCA has been taking a series of steps in the wake of the rapidly spreading COVID-19 and issued clarification[1] on spending of CSR funds for COVID 19 stating that the amount spent on COVID-19 by companies will count towards CSR spending. The activities falling under item nos. (i) & (xii) of Schedule VII of Companies Act, 2013 undertaken due to COVID 19 shall qualify as CSR activity which covers the following:

  • Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
  • Disaster management, including relief, rehabilitation and reconstruction activities.

Subsequently, the Ministry on 28th March, 2020 has also clarified by way of an office memorandum, that companies contributing towards recently formed Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (‘PM CARES Fund’) shall also qualify as CSR expenditure under item (viii) of Schedule VII of Companies Act, 2013.

Hence, this is the right occasion, and unarguably, one of the noblest causes, to use CSR funds in whatever way, one may think of for the welfare of society.

Notably, substantial CSR money remains unspent, very often for want of appropriate CSR projects. Many companies have to explain the same by finding some reason or the other. Currently the country is passing through an epidemic that has affected the whole world. Hence, companies may come forward and spend their unspent CSR budgets. Indeed companies are also welcome to over-spend this year’s budget pursuant to a proposal in the Companies Amendment Bill which permits carry forward of excess spending as well.

Questions are often being asked – can the company include the expenditure incurred for COVID-19 preparedness for its own employees and workmen – say, giving of masks, sanitizers, or similar expense, as a part of its CSR spending?

Our answer to this question is the same as what we have continuously answered as a part of our FAQs[2] on CSR that CSR is spending on a social cause. An employer spending for the well being, safety or welfare of employees is performing the employer’s legal or moral obligation. That cannot be regarded as CSR. However, if the company spends on COVID-19 preparedness, either by itself or through implementing agencies, for a wider section of public, and its employees or their families are also the beneficiaries of such an exercise, there is no denial as to eligibility of the same as CSR spending.

Our detailed write ups on CSR may be viewed here:

Proposed changes in CSR Rules

Draft CSR Rules Make CSR More Prescriptive

CAB, 2020: Bunch of Proposals for revamping CSR Framework

[1]http://www.mca.gov.in/Ministry/pdf/Covid_23032020.pdf

[2]http://vinodkothari.com/2019/11/faqs-on-corporate-social-responsibility/

Injeti Srinivas’s Committee: Changes recommended in provisions of Corporate Social Responsibility