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MCA allows COVID-19 under CSR Expenditure: Can/ Will Startup Get Money?

There are 3 notifications that are currently relevant in the CSR context of India:

  1. Inclusion of COVID-19
  2. Inclusion of Incubators
  3. Mode of CSR expenditure

The first is the one issued by Ministry of Corporate Affairs on 23 March 2020. This notification is being interpreted as addition of expenditure made towards fighting against gowid 19 to the list of permitted avenues for CSR expenses. While this is correct from an understanding perspective, technically the notification only communicates that since the novel coronavirus has been declared as a pandemic by the World Health Organization and subsequently Government of India has decided to treat this as a notified disaster, funds spent on various activities related to COVID-19 would automatically be covered under the existing items under Schedule VII of the Companies Act, 2013.

The minor difference here being that the list has not changed, only one item now qualifies to be part of the list under already approved activities.

The other notification pertains to funds disbursed to incubators. That notification was brought in to edit the previous provision. The new notification broadened the definition of eligible incubator. Earlier only technology business incubators as defined by Department of Science and Technology located within academic institutes were eligible to receive funds under CSR. The new notification permits all incubators that are supported by any state or central government / agency to be eligible.

An important point to note here is that once the money is received by the incubator, it is up to the incubator how they would want to spend this money . This means that the incubator can share some of this money as debt or as equity or as grant with any start-up(s). The incubator can pay salaries, invest in research and development facilities, conduct events, seminars or even built their own website.

The 3rd notification pertains to Corporate Social Responsibility Rules, 2014 . These rules define the various modalities of how CSR expenditure is to be undertaken. CSR activities can only be undertaken by a trust for a society Section 8 company under the Companies Act. In case the trust, society, company are not established by the company itself, it could be a different Trust, Society, Section 8 company that has a track record of at least 3 years in undertaking similar projects.

The rules also mentioned that the CSR committee should recommend certain activities that could be taken up by the company for that year. The CSR committee also has to recommend and formulate the CSR policy which the board could approve. In cases where companies would like to divert their existing CSR money towards fighting COVID-19 , they would need to ensure that healthcare and slash or disaster relief is already a part of their CSR policy or suitable amendments to the CSR policy need to be made. There are no restrictions on the number of times the CSR policy can be amended. Both could be added. In case where companies would like to fund specific initiatives by start ups they could channelize these funds through any incubator that is supported by the state or central government / agencies and incubators could find these startups.

Another aspect of the CSR rules 2014 is that it explicitly provides for the money to be spent. This means that if a company manufacturers sanitary masks, they cannot simply donate masks versus certain amount and counted towards their CSR expenses. Up to 5% of the entire CSR amount can be directed towards building internal capacity or under the head of salary for people dedicated towards CSR expenditure in the company. Under no circumstances shall the money spent on betterment of the employees or something that in any way directly benefits the company, would be counted toward CSR expenses.

There is still no provision for direct funding of private entities. But if a startup or an innovator is working on a particular product, a section 8 company or an incubator can provide it support due to the business intent that is high during these extraordinary times when the country needs funds to be channelized to the right places.