(Roshni Ghosh is a second year student of Department of Law, University of Calcutta and Tapamoy Ghose is a second year student of National Unversity of Advanced Legal Studies, Kochi.)
Fearured Art: April. Fresco in Palazzo Schifanoia (detail) by Francesco del Cossa
Introduction
The formation of the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM-CARES FUND) and its inclusion in Schedule VII of the Companies Act, 2013, through a notification dated 28th March 2020, by amending the Companies Act, 2013, attracted many controversies from the very beginning itself. The PM-CARES Fund was granted Corporate Social Responsibility (CSR) exemption by virtue of that amendment, but the same was denied to the State COVID relief Funds, as it can be seen from a FAQ by the MCA dated 11th April. In this article, we are going to discuss why this particular exclusion of the State funds from the CSR umbrellas unconstitutional and unjust on the ground that-
- It violates Article 14 of the Constitution of India.
- It goes against the principle of Co-operative Federalism.
PM Cares and Equality
The decision of the Ministry of Corporate Affairs to include the PM-Cares fund in Schedule VII of the Companies Act, 2013, and to deny the respective Chief Minister’s COVID relief funds the same prima facie violates Article 14 of the Constitution of India. As a result of this preferential treatment, donations to the PM-Cares fund are eligible as CSR, and the donations to the CM- Relief funds are not. Now a question that can come is “Whether the PM-Cares and CM-Relief funds for COVID-19 belong to the same class or not” for the purpose of Art. 14.
Any administrative action of the State needs to comply with the test of arbitrariness as envisaged under Art. 14 of the Constitution. Art. 14 require that a particular legislation or administrative action of the State should treat everyone in the same class alike. This reiterates the fact and principle that “Likes should be treated alike,” as held by the Apex Court in Gauri Shankar v. Union of India.
The PM-Cares fund is a public charitable trust set up in order to deal with any emergency distress situation such as the COVID-19 pandemic. The Chief Ministers Relief fund for COVID-19, too, has a similar objective, which is to fight the COVID-19 pandemic. If compared through their objectives or purposes, they are indistinguishable and belong to the same classes and categories, which makes this discrimination based on CSR, against the principle that “likes should be treated alike” and thus, violates Article 14 of the Constitution.
However, the State is allowed to classify between two objects (in this case, two relief funds) if that classification is reasonable. To determine the reasonability, two tests were developed by the Apex Court in the judgment of Shri Ram Krishna Dalmia v. Shri Justice S.R. Tendolkar& Ors. They are as follows-
- The classification cannot be artificial, evasive, or arbitrary. It has to be based on an intelligible differentia or some real and substantial distinction which distinguishes persons or things grouped together in the class from others left out of it.
- The differentia which is adopted as the basis of the classification must have a rational nexus with the objective sought to be achieved by the action in question.
In Ramana Dayaram Shetty v. The International Airport Authority, the Supreme Court of India held that every action on the part of the State needs to be informed by reason and guided by public policy and public interest. If not, then the action can be termed as arbitrary and violative of the equality clause of the Constitution. The decision of the Government to amend the Companies Act, 2013, to include the PM-Cares for CSR while neglecting the State relief funds operating for identical purposes is completely devoid of any reason. Further, it is opposed to the genuine interest of the public at large. If the State relief funds were also included in the amendment, it would have streamlined more funds to fight this pandemic, which would have benefitted the public at large. Hence, this classification between the State funds and the PM-Cares is prima facie arbitrary and fails to satisfy the first test mentioned above.
The main objective of granting CSR expenditure to the corporate entities while donating to the PM-Cares fund is to gather more funds to battle the current pandemic. In a federal structure like India, states are also playing a pivotal role in containing COVID-19. In such circumstances, the objective of fighting COVID-19 would have much more successful if the State relief funds were included in the CSR exemption umbrella too. However, that was not done, and the State relief funds were left out. As a result of that, the classification between the PM-Cares and the Chief Ministers COVID relief fund with respect to CSR exemption has no rational nexus with the objective sought to achieve (objective being curbing COVID-19). As a result of that, the classification fails to meet the threshold of reasonability, as mentioned in the second test above.
It is not imperative that the classification should be mathematically precise. Nevertheless, if there is no difference based on functions or objects between the two things which have been treated unequally, then that classification is unreasonable. This was affirmed by the Apex Court in Deepak Sibal v. Punjab University. The PM-Cares and the respective State relief funds are identical in their objectives, hence following this dictum, the classification based on CSR is not reasonable, and the concerned amendment needs to be struck down for violating the equality clause under Article 14 of the Constitution.
PM-Cares and Co-operative Federalism
Not only does the inclusion of the PM-Cares Fund in Schedule VII of the Companies Act, 2013 violate Article 14 of the Indian Constitution, but it also violates the federal nature of the Indian Constitution. The act of granting CSR exemption to PM-Cares Fund and denying the States of the same in itself defies the concept of “Cooperative Federalism.” The essence of Cooperative Federalism is that the Centre and the States should be guided by the interest of the citizens at large. Their main concern should be to solve the problems faced by the citizens using the resources available. Nevertheless, that is not what we see happening here. It is the States who are combating the COVID-19 pandemic from the frontline, it is the States who are experiencing the perils of this pandemic first hand, but they do not have enough resources to do so.
Maharashtra, with 52667 cases, has lost 15.6% of its GSDP (Gross State Domestic Product) in the past few months, while Tamil Nadu and Gujarat have lost 9.4% and 8.6%, respectively. All the states are experiencing severe revenue shortage due to the pandemic. At this point, when the Centre cannot cough out a part of its income to the states, it is completely on the states to combat the situation with the funds that are available to them. So, in such a situation, if the CM-Relief Fund is made eligible for CSR, it would have benefitted every State.
Schedule VII of the Companies Act, 2013 specifies government-approved CSR activities, which include activities eradicating hunger, poverty, and malnutrition, and promoting health care. According to the Ministry of Corporate Affairs, the donations made to the CM-Relief Fund by the corporate sector had not been included in Schedule VII. As a logical consequence of this, the corporations are being deterred from contributing to the state relief funds, and the money is being redirected to PM-Cares Fund. Owing to this, the amount of money donated to the State Fund is much less than what it otherwise could have been. Had the contributions to the fund been qualified as admissible CSR expenditure, the corporate firms would have had an incentive to donate the money; therefore, the amount raised could have been more.
The very optics of the Centre refusing to extend CSR benefits to the donations made to the state funds have granted primacy to the PM-Cares Fund. This led to the State Governments of West Bengal, Maharashtra, Punjab, and Rajasthan to raise demand for classifying contributions to the state funds as CSR expenditure. Dismissing the financial capacity of the states by denying them this is likely to have a pernicious effect on the governments.
According to the West Bengal State Emergency Relief Fund Committee, the CM-Relief Fund dedicated to combating COVID-19 had received an encouraging response from these corporations before the amendment was made. This particular move made by the Centre severely jeopardized the states’ efforts to raise the resources required to combat the pandemic.
In Kuldip Nayar v. Union of India & Ors, the Apex Court laid down a series of tests in order to determine the Federalism of a State. They are as follows:-
The first criterion is that the State must exercise compulsive power in the enforcement of a given political order. Secondly, these powers must be regularly exercised over all the inhabitants of a given territory. Finally and most importantly, the activity of the State must not be completely circumscribed by orders handed down for execution by the superior unit.
The first two points are not of much significance in our case. It is the third test we will be focusing on here. The third point distinctly says that ‘the State must not completely be circumscribed’ which envisages that some powers of the State are bound to be circumscribed by exercising the federal authority.
According to Entry 6, List II, Seventh Schedule of the Constitution of India, the matters of ‘Public Health and Sanitation’ fall exclusively within the legislative competence of the states. The states, thereby, are vested with the exclusive authority to legislate on the issues of relief to public health. Therefore, the question that pops up now is, on what basis are they diminishing the capacity of the states to raise donations through their separate relief funds? The Ministry of Corporate Affairs offered a rationale that the CM-Relief Fund is not included in the seventh schedule of the Companies Act; therefore, is not eligible for CSR. However, several concerns can be brought up against this reasoning.
Firstly, if ‘disaster management’ in Schedule VII of the Companies Act can be interpreted to include donations made to the State Disaster Management Authority, then why cannot Schedule VII, Item No.(i) ‘promoting healthcare including preventive healthcare’ be interpreted to include donations made to the Emergency Relief Funds, set up by the states to exclusively combat the pandemic?
Secondly, even if we assume that the aforementioned interpretation of the first item of Schedule VII is not plausible, why is it not feasible for the Centre to promulgate an ordinance, amending Schedule VII, specifically including the CM-Relief Funds within the ambit of CSR expenditure? No law prevents such an ordinance from being promulgated.
The Centre has both the means and opportunity to include the contributions made to the CM-Relief Funds under CSR. The fact that it chose not to projects a deliberate omission rather than a compulsion arising out of existing legal constraints and strikes at the core of the concept of co-operative Federalism.
Therefore, this particular amendment of Schedule VII violates the principle of Federalism, a basic structure of the Indian Constitution as affirmed in Kuldip Nayar v. Union of India. The basic structure cannot be destroyed by any legislation of the Parliament. If that happens, then the amendment is bound to be deemed as unconstitutional. Hence, it is safe to say that the amendment of Schedule VII regarding the eligibility of the PM-Cares Fund as CSR is unconstitutional.
Conclusion
The task of remedying the existing situation is up to the respective State Governments. They should move to the Supreme Court of India under Article 131 of the Constitution of India, seeking inclusion of the State relief funds under CSR exemption. Earlier this year, when Mohua Moitra, the TMC MP from West Bengal, moved the Apex Court regarding the Same, the Court remarked that they would listen if the aggrieved parties come before them (that being the States). Granting relief to the State funds will not hurt anyone’s interest but will give the State governments a solid footing to fight this pandemic side by side with the Union Government. That will further uphold the principle of Co-operative Federalism and equality as enshrined under our holy Constitution.
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