Business can be a force for good. In his uplifting book, Grow the Pie: How Great Companies Deliver both Purpose and Profit (a Financial Times Book of the Year 2020), Professor Alex Edmans provides powerful examples, as well as evidence, that socially responsible businesses generate even higher long term profits.
While Professor Edmans has provided evidence-based analysis on how well-designed businesses can yield benefits in terms of both financial returns and returns for the benefits of society as a whole, we are here examining a small aspect of CSR, which is Administrative overhead in a jurisdiction where CSR is mandatory for certain profit making companies.
The CSR mandate under Section 135 of the Companies Act, 2013 was founded on the ‘comply, or explain’ principle. Compliance with Section 135 of the Act was originally intended to be voluntary, and not mandatory. However, except for big corporates, the intended outcome wasn’t there for giving back to the community. With the notification of new CSR Rules and during the past 7-8 years, there has been a complete departure from its original intent. The rules being notified are made prescriptive to bring in uniformity in evaluating expenditure and thereby restricting the flexibility to the Companies towards its implementation. In this article, we will be discussing the recent changes in the rules related to Administrative overheads in CSR to evaluate how the flexibility in its implementation has been reduced over the years.
Earlier in 2014, MCA (Circular dated 18th June 2014), had clarified that salaries paid to CSR staff engaged in administrative activities can be factored into the CSR project cost as part of the CSR expenditure. Just three months thereafter, MCA (Circular dated 17th September, 2014) conveyed the changes to the erstwhile Rule 4(6) of the CSR Rules that salaries paid to CSR staff engaged in administrative activities cannot be factored into the CSR project cost, rather it should be classified as Administrative overhead which shall be capped at 5% of the total CSR expenditure in a financial year. This includes the capacity-building part of the company as well as the implementing agencies.
Surprisingly, till January 2021, the term ‘Administrative Overheads’ was not specifically defined under the Companies Act, 2013 (“the Act”) as a result of which, the Companies usually included the expenses incurred in the general and other administration of the Corporate Social Responsibility (CSR) projects undertaken by them.
As per the Companies (Corporate Social Responsibility Policy) Amendments Rules, 2021, introduced by the Ministry of Corporate Affairs (“the Ministry”) on January 22, 2021, Rule 2 (1) (b) defines the term Administrative Overheads as expenses incurred by the company for general management and administration of Corporate Social Responsibility functions in the Company, excluding expenses directly incurred for designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility (CSR) project or programme. Rule 7 (1) caps the expenses falling under the ambit of Administrative Overheads at 5 % of the CSR expenditure.
Reading Rule 2(1) (b) and Rule 7 (1), we can infer that there is no cap placed on the expenses incurred on monitoring, evaluation and designing of the CSR programme. Stipulations are open-ended on the expenses incurred by implementing agency on monitoring, evaluating and designing the CSR programme. The stakeholders have different views on whether the cap of 5 % shall be applicable or not. Therefore, we anticipate that the Ministry will provide additional clarification in the near future.
Now, let us move further and try answering some queries for better understanding on the subject:
1. What is the meaning of the term “Administrative Overheads” under the Foreign Contribution (Regulation) Act, 2010 (‘FCRA’)?
As per the Foreign Contribution (Regulation) Rules, 2010, the definition of administrative overheads is open-ended.
However, it clarifies that the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or programme shall be excluded from administrative overheads.
Further, the Central Government has outlined a list of following expenses that constitute administrative expenses, for the purpose of FCRA:
2. Which expenses are considered as administrative overheads under the Companies Act?
The expenses which assist in the implementation of the CSR project, and are vital to carry out the project (but are not directly incurred or related to the CSR project or programmes) are considered as administrative overheads.
For your reference, we have listed below some of the examples which are considered as administrative overheads:
Please note that the nature of the above expenses may vary depending on the CSR Project, and has to be assessed relating to the CSR Project.
3. What is the treatment of expenses which are not considered as administrative overheads?
The expenses which are not considered as administrative overheads, the same shall form part of the CSR expenditure, meaning thereby the same shall be considered for the calculation of the required CSR obligation of two percent. For example, the salary of school teachers or other staff, etc. for education-related CSR projects shall be covered under education project cost and shall not be considered as administrative overheads.
4. Whether the “administrative overheads” are expenses incurred by the company only, or the same can include the expenses incurred by the implementation agency?
The term administrative overheads defined under the Act clearly defines that the expenses which are incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company are considered as administrative overheads. So, it is clear that the administrative overheads should be seen from the point of view of the Company and not the implementing agency.
Further, as per FAQs introduced by the Ministry vide General Circular No. 14/2021 dated 25th August, 2021, it is clarified that the expenses incurred by implementing agencies on the management of CSR activities shall not amount to administrative overheads and cannot be claimed by the company.
5. What is an implementing agency ?
The term ‘Implementing agency’ is not defined under the CSR regime. However, as per Rule 4 of the CSR Rules, the Company can undertake its CSR activities either through itself or through the following entities:
6. Is expenditure on impact assessment over and above the administrative overheads of 5%, or included in the same?
Yes, the expenditure incurred on impact assessment is over and above the specified administrative overheads of 5%. Under Rule 8(3) (c), expenditure up to a maximum of 5% of the total CSR expenditure for that financial year or 50 lakh rupees (whichever is lower) can be incurred separately for impact assessment.
Please note that the term ‘Impact Assessment’ has not been defined under the Companies Act, 2013. However, in general term, impact assessment is a formal evidence based procedure that assesses the economic, social and environmental effects of a project / programme on the society.
The amended CSR Rules while defining the term administrative overheads have brought some clarity on the subject but at the same time made the provisions too prescriptive thereby snatching away the flexibility in the implementation of the CSR projects. The monitoring and evaluation obligations are required to be complied with even when the CSR projects are undertaken directly by the implementing agencies. The question arises, if the CSR Rules have specifically defined the inclusion and exclusions in the term Administrative Overheads, then what shall be the treatment of expenses incurred on monitoring and evaluation of the projects? This question will remain unanswered unless corporates are given flexibility in implementing the CSR programme.
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