03 Nov 2016 17:09 IST

Is donating own products under CSR normal course of business?

We should explore how to enable corporates to “do well by doing good”

It’s been over two years since the Companies Act 2013 defined rules related to Corporate Social Responsibility (CSR) in the form of Companies (CSR Policy) Rules, 2014. The fact that we have an act approved by Parliament to this effect is in itself a commendable step for the world to follow.

It must be appreciated that the law does a great job of ensuring that corporates, who are not doing as much in the space of social responsibility as they should be, are now bound by law to do it. At the same time, those already doing good work, are encouraged to do more.

Nonetheless, in between the arguments for and against making it obligatory by law to make companies take their CSR seriously (as against letting the conscience of the management decide how much is good enough), one point remains unanswered, or so most feel.

It relates to one of the rules of the law regarding distribution of goods and services manufactured/rendered by companies as part of their CSR spent and monetisation thereof. In other words, should donating own products constitute a part of the CSR policy?

What the law states

As per the law, Section 135 very clearly states that a company has to spend a particular amount, hence it obviously can’t be in kind. The question that arises is this: is that always feasible?

While the government strongly supports not allowing businesses to go beyond certain defined limits in the matter, something it has already incorporated in the Act, in 2014, the Ministry of Corporate Affairs (MCA) agreed to allow pharmaceutical companies to donate their medicines under CSR. This was as per Schedule VII of the Act ‘promoting healthcare including preventive healthcare’. This also extends to making provisions for aids and appliances to differently-abled persons, as well as giving medical and legal aid to road accident victims.

As for other businesses, donating their own products under CSR is relegated to ‘normal course of business’. Considering that a specific company would try to formulate its CSR activity/programme using its strength and expertise, it is but natural that it may have to use its own products/services for a related cause.

The Institute of Chartered Accountants of India (ICAI), under the FAQs explaining the provisions of CSR under Section 135, explains that if a company supplies its own products or services free of cost or at a concessional rate to people affected by natural calamities, it can be classified as CSR expenditure.

A socially conscientious company would never want to wait for a natural disaster to be able to use its products and services for the larger good. Or should it?

Sensible or stubborn?

A case in point would be, for instance, an electronics manufacturing or IT Company wanting to equip schools in a disadvantaged region with smart boards or a projector. Producing electronics is obviously the company’s strength, and it makes perfect sense for it to use it to its advantage so as to empower the institute or its students.

Even if it does so at the cost of production, the rules say it is an act done in the normal course of business, and hence, will be out of the purview of what’s allowed under CSR. Similarly, if a furniture brand would like to donate some of its furniture to an old age home via its partner, it would still not count as a CSR activity.

It is of course understood that the above companies would not buy products from competing businesses to achieve its ultimate objective. The business world argues that this amounts to limiting the potential of businesses as a whole.

Limiting scope

It needs to be reiterated that such activities ultimately do good for the end user — the one who is the ultimate beneficiary of CSR. The corporates have money and resources that place them in an enviable position of being able to bring about changes by being socially responsible. By limiting the use of its core strength (read: its own resources and products), the government may be inhibiting greater value and limiting the contribution towards a bigger cause.

Many business houses, both big and small, could be holding back their ideas in the field as they feel discouraged owing to the above stated rules. This limits the scope of CSR practices.

The other side

One understands the government’s concerns as mentioned at length in the report submitted by the Anil Baijal Committee, formulated by the MCA in 2015. The administration fears that allowing companies to contribute to CSR in kind and services will give businesses a free run to justify their acts carried out under the garb of CSR.

Some companies may also indulge in unethical acts of dumping used, or rejected, or sub-standard/unsold products close to the date of expiry. The committee also pointed out that ‘valuation of such activities could always create a problem, in spite of accounting guidance note issued by ICAI’.

Could this happen? Perhaps, yes. After all, no law can control the innovativeness of the human mind.

Law checklist

But then, it is ultimately in the hands of the government to put checks and balances in place, wherever relevant. One of the ways could be to ensure that the move to donate own products under a CSR programme is part of a holistic scheme under the CSR ambit, and not just the only step involved.

For instance, if a corporate gives away solar panels to an off-grid village, it should be part of a bigger programme where it also commits to training villagers in the technology and integrates it within ‘ensuring environment sustainability’ of the law. The law can have a provision that these are contributed only at the cost of production.

Additionally, the regulator can make it mandatory for donations of own products to not go beyond a specific percentage of the entire programme. It could be set initially in a range of 20 per cent to 30 per cent; or any limit the MCA deems fit.

Two-way street

The companies on their part will keep their books completely transparent and their intentions clear, if they wish some of such measures to come about. Their CSR activities are as it is in the public domain and recorded by the MCA. Additionally, third party review of the programmes on quality, quantity, and value-for-money proposition can further help establish the initiative’s credibility.

It has to be a two-way street, and that’s precisely when this one-of-its-kind law in the world will be successful in its intent in the truest sense of the word. We should explore how to enable corporates to “do well by doing good”, by ensuring that quality products and services reach rural India.

(Sudhir Singh is Partner - Advisory, PwC India and Abhishek Tripathi is Director - Responsible Business Advisory, PwC India)

Videos

Growth vs Value Investing

'Children are having a bigger say in family purchases'

'Recruiters want students with good domain knowledge'

Recommended for you