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Whether expense towards Corporate Environment Responsibility (CER) be eligible...

Whether expense towards Corporate

Environment Responsibility (CER) be
eligible as CSR spending?
April 14, 2021 / 3 Comments / in Companies Act 2013, Corporate Laws / by
Staff

Nitu Poddar, Senior Associate (corplaw@vinodkothari.com)

[mailto:corplaw@vinodkothari.com]

Introduction
Since the amendment in the CSR provisions on 22.01.2021, even
the existing eight year old provision has gained substantial
attention and deliberation by the stakeholders. This article is to
discuss yet another topic on CSR which is “whether amount spend
towards Corporate Environment Responsibility (CER[1] [#_ftn1] )
stipulated as specific condition under Environment Clearance by
the Ministry of Environment, Forest and Climate Change (MoEFCC)
can be included as a CSR project?” In other words, whether CER
obligations can be merged with CSR obligations or are these two
mutually exclusive.

What is CER?
Industrial sectors (specified in the Environment Impact
Assessment (EIA) Notification 2006 dated September 14, 2006[2]
[#_ftn2] ) which have direct environmental footprint are required
to take prior Environment Clearance (EC) from the MoEFCC before
setting up any new project / expansion / modernisation of an
existing project / change in the product-mix. While granting such
EC, the Ministry puts certain conditions (requirements) on the
applicant (referred as Project Proponent (PP) in two categories –
specific conditions and general conditions – implementation of
which, if unsatisfactory, the EC may be revoked. One of such
specific condition imposed by the MoEFCC while granting EC is
that the applicant should undertake CER / ESC which is to be
based on the local needs and should be restricted to the affected
areas around the proposed project.
As per Office Memorandum[3] [#_ftn3] (OM) No. F. No. 22-65 /
2017-IA.III of MoEFFC dated May 01, 2018,

Some of the activities which can be carried out in CER, are

infrastructure creation for drinking water supply, sanitisation,
health, education, skill development, roads, cross drains,
electrification including solar power, solid waste management
facilities, scientific support and awareness to local farmers to
increase yield of crop and fodder, rain water harvesting, soil
moisture conservation works, avenue plantation, plantation in
community areas, etc.
Unlike CSR, CER is based on project cost and not profits made by
the proposed project. The obligation of CER is within the range of
2.5% – 5% of the project cost.

Why CER?
The MoEFCC, in its Office Memorandum (OM) No.J-11013/25/2014-
IA.I dated August 11, 2014, discussed that since the CSR obligation
is based on profits, there might be cases where the proposed
project is yet to make profit. In such case, since the project will
have already created impact on the society and environment, it is
required to commit towards the same, irrespective of profits,
through CER commitment. Further, as per the 2018 OM, all the
activities proposed under CER is also required to be monitored
and reported bi-annually and also posted on the website of the
company.

Anomaly created by different OMs and

correspondences of MoEFCC
Considering that the activities undertaken pursuant to CER are
akin to the one of the activities prescribed under schedule VII of
the Companies Act, 2013 – specifically “ensuring environmental
sustainability” among others, it is intuitive to say that expenditure
towards CER should be includes as compliance of CSR
commitment.

However, on perusal of several OMs and summary record of

meeting of the Expert Appraisal Committee (EAC), formed under
MoEFFC, one may have to re-think on the above ratio. The
relevant extracts of the OMs and summary record are reproduced
below for perusal:

1. [4] [#_ftn4] 2014 OM:

6. ….In case these activities (or some of these activities) are

proposed to be covered by the project proponent under CSR
activities, the project proponent should commit providing for
 the same. In either case, the position regarding the agreed
activities, their funding mechanism and the phasing should
be clearly reflected in the EC letter.

Author’s Comment: This indicates that overlap might be

acceptable provided the commitment is clear from the beginning.

2. [5] [#_ftn5] Summary record of 2nd meeting of EAC – 2015 –

The Member Secretary has informed the Committee that

presently the Expert Appraisal Committee has been insisting for
earmarking either 2.5% of the total cost of the project or 5% of the
total cost of the project towards Enterprises Social Commitment /
Corporate Social Responsibility, depending upon the size of the
project. In this context, copy of Office Memorandum No. J-
11013/25/2014-IA.I dated 11.08.2014 issued by the Ministry
regarding guidelines on Environment Sustainability and CSR
related issue was circulated. Deliberating on the issue, the
Committee was of the view that the name of ‘Enterprises Social
Commitment’ or ‘Corporate Social Responsibility’ in respect of
environment clearance should be in the first place considered for
replacement by the name ‘Environmental Conservation Support
Activities’.
Author’s Comment: From this discussion, it seems that the terms
ESC / now CER and CSR have been used interchangeably and
therefore CER and CSR commitment can overlap.

However, in the same paragraph, the decision taken by the EAC

has been recorded as follows:

The Committee unanimously agreed for uniform earmarking 2.5%

of the capital cost of the project towards Environmental
Conservation Support Activities, in addition to the committee’s
[this seems to be a typo error- should be “company”]
commitment under the Companies Act.

Author’s Comment: This indicates that CER and CSR are two
independent commitments and responsibility of the company and
both have to be individually followed and fulfilled.

In one of the scrutiny and deliberation as discussed in the

summary records, in the matter of Expansion of Cement Plant,
Clinker (1.8 MTPA to 2.6 MTPA) at Village Rauri, Tehsil Arki, District
Solan, Himachal Pradesh by M/s Ambuja Cement Ltd. [F. No. J-
11011/986/2008-IA-II (I)], one the specific condition was as follows:

1. At least 5 % of the total cost of the project shall be earmarked

towards the Enterprise Social Commitment based on Public
Hearing Issues and item-wise details along with time bound
action plan shall be prepared and submitted to the Ministry’s
 Regional Office at Dehradun. Implementation of such
program shall be ensured accordingly in a time bound
manner.

The project proponent mentioned that they have already spent an

amount of 3.01%, 4.06% and 2.57% of the net profit after tax (PAT)
towards CSR activities in the year 2012, 2013 and 2014
respectively in compliance of the Companies Act 2013. It has been
requested to consider the proposal to waive-off the Specific
Condition No. XV, as mentioned above.
The Committee noted that the expenditure of 5% of the total cost
of the project towards ESC was prescribed for a period of 5 years.
Based on the discussions, held the Committee decided that
instead of waiving off the specific condition, it is recommended to
extend the implementation period of 5 years for implementing
ESC activities to a period of 10 years, which the proponent had
also agreed to.
Author’s Comment: This again seems to indicate that MoEFCC is
not inclined to mix the CER commitment with the CSR
commitment.

3. [6] [#_ftn6] Summary record of 2nd meeting of EAC – 2016 –

In all the ECs being granted, as a part of specific condition, the CER
commitment has been recorded as below:

At least 2.5% of the total cost of the project shall be earmarked

towards the Enterprise Social Commitment based on Public
Hearing issues, locals need and item-wise details along with time
bound action plan shall be prepared and submitted to the
Ministry’s Regional Office. Implementation of such program shall
be ensured by constituting a Committee comprising of the
proponent, representatives of village Panchayat and District
Administration. Action taken report in this regard shall be
submitted to the Ministry’s Regional Office.
In addition to the above provision of ESC, the proponent shall
prepare a detailed CSR Plan for the next 5 years including annual
physical and financial targets for the existing-cum-expansion
project, which includes village-wise, sector-wise (Health,
Education, Sanitation, Skill Development and infrastructure etc)
activities in consultation with the local communities and
administration. The CSR Plan will include the amount of 2% retain
annual profits as provided for in Clause 135 of the Companies Act,
2013 which provides for 2% of the average net profits of previous
3 years towards CSR activities for life of the project. A separate
budget head shall be created and the annual capital and revenue
expenditure on various activities of the Plan shall be submitted as
part of the Compliance Report to RO. The details of the CSR Plan
shall also be uploaded on the company website and shall also be
provided in the Annual Report of the company.
Author’s Comment: The view of keeping CER and CSR as two
independent commitments seems to being continued.

4. [7] [#_ftn7] 2018 OM (supersedes 2014 OM) –. Relevant

extracts have been reproduced:

(I) The cost of CER is to be in addition to the cost envisaged for the
implementation of the EIA/EMP which includes the measures for
the pollution control, environmental protection and conservation,
R&R, wildlife and forest conservation/protection measures
including the NPV and Compensatory Aforestation, required, if
any, and any other activities, to be derived as part of the EIA
process.
XXX

(IV) The proposed activities shall be restricted to the affected area

around the project.

(VI) The entire activities proposed under the CER shall be treated
as project and shall be monitored. The monitoring report shall be
submitted to the regional office as a part of half-yearly compliance
report, and to the District Collector. It should be posted on the
website of the project proponent.

XXX
Author’s Comment: The provision with respect to commitment of
any particular CER activity as CSR, as was present in the 2014 OM,
has been dropped.

5. [8] [#_ftn8] Minutes of 53rd meeting of EAC (Infrastructure-2)

held in 2020:

While presenting the parameters of the Project to obtain EC, Tamil

Nadu Waste Management Limited, represented as follows:

(xi) The CER fund shall be allocated as per the MoEF&CC office
memorandum F.no.22- 65/2017-IA.III dated, 1st May, 2018, which
is around Rs. 0.48 Crores which shall be utilized over a period of 3
years. The CSR budget will be allocated as per rules prescribed by
the Government of India / Companies Act 2013.

6. [9] [#_ftn9] Standard EC Conditions – MoEFCC OM No. F.No.

22- 34/2018-IA.III dated 9th August 2018:

7. Corporate Environment Responsibility

XXX
 1. The company shall have a well laid down environmental
policy duly approve by the Board of Directors. The
environmental policy should prescribe for standard operating
procedures to have proper checks and balances and to bring
into focus any infringements/deviation/violation of the
environmental / forest /wildlife norms/ conditions. The
company shall have defined system of reporting
infringements / deviation / violation of the environmental /
forest / wildlife norms / conditions and / or shareholders /
stake holders. The copy of the board resolution in this regard
shall be submitted to the MoEF&CC as a part of six-monthly
report.

iii. A separate Environmental Cell both at the project and company

head quarter level, with qualified personnel shall be set up under
the control of senior Executive, who will directly to the head of the
organization.

1. Action plan for implementing EMP and environmental

conditions along with responsibility matrix of the company
shall be prepared and shall be duly approved by competent
authority. The year wise funds earmarked for environmental
protection measures shall be kept in separate account and
not to be diverted for any other purpose. Year wise progress
of implementation of action plan shall be reported to the
Ministry/Regional Office along with the Six Monthly
Compliance Report.
2. Self environmental audit shall be conducted annually. Every
three years third party environmental audit shall be carried
out.

Author’s Comment: Looking at the elaborative independent

requirements / compliance in respect of CER, the view about the
intent of the Ministry to keep CER independent of CSR gets
stronger

Provisions of Companies Act, 2013

It is also pertinent to note that pursuant to Rule 2(d)(vi) of the
Companies (Corporate Social Responsibility Policy) Rules, 2014
,“activities carried out for fulfilment of any other statutory
obligations under any law in force in India” is excluded from the
definition of CSR. The idea behind this exclusion seems to be that
what a company is obligated to spend as a part of its statutory
obligation is anyway a mandatory condition. Such
statutory compliance, even if it results into a spending, cannot be
regarded as CSR spending. An example may be payment of taxes
many of which are dedicated to infrastructure activities. Swachh
Bharat Cess is specifically towards cleanliness. However, one
cannot take such an expense as a spending towards CSR. Hence,
(CSR) responsibility and statutory obligations cannot be inter-
mixed.

Difference between CSR and CER

While already discussed above, the difference in CER and CSR is

being highlighted:

1. CSR spending is profit-linked whereas CER spending is project

cost-linked. Hence, CER may, at times be applicable even
before the company has started making profits.
2. Another major difference between EC-triggered spending and
CSR spending is that there is a wide range of activities which
may qualify as CSR. However, the EC forces these activities to
be focused and restricted around village/social development
in the areas affected by the project only. In that sense,
the EC forces the entity to give back to the local area where
the company has an environment footprint.

Conclusion

While it would have been rational to include CER under CSR, but
this seems to be grey in terms of clarity, both legally and
practically. There are two school of thought that is being endorsed
– one, that the CER and CSR are two different statutory obligation
under two different ministries and therefore should be honoured
independently; the other, and more logical argument is that both
the commitment are meant to return back to the society and
environment on which the company has left its footprint.
Accordingly, taking a view that CER and CSR commitments are
mutually independent would be putting the company to double
compliance for a single objective. Considering that CER is
applicable, irrespective of profit, the same should ideally be
aligned with CSR plan of the company where section 135 of
Companies Act, 2013 is applicable.

While this question may lurk until there is any explicit clarity from
either of the ministries, from the bi-annual disclosure on
compliance report being submitted by the companies, it seems
that India Inc is divided on this matter.

[1] [#_ftnref1] CER has also been termed as Enterprise Social

Commitment (“ESC”) in several ECs granted to applicants. Later, in
the Office Memorandum (OM) No. F. No. 22-65 / 2017-IA. .III of
MoEFFC dated May 01, 2018, the terms CER was used.

[2] [#_ftnref2]
https://parivesh.nic.in/writereaddata/ENV/EnvironmentalClearance-