Diluting federalism in the fight against the COVID-19 pandemic

While CSR money can be donated to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund), no such contributions of CSR funds can be made to ‘Chief Minister’s Relief Fund’ or the ‘State Relief Fund. The author argues that this undermines the federal nature of the Constitution and compromises the ability of the states to deal with the pandemic.



ON 28 March 2020, Prime Ministre Narendra Modi announced that the government was constituting the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) to help the country better combat the COVID-19 pandemic. The Prime Minister is the ex-officio Chairman of the PM CARES Fund and the ministers of Defence, Home Affairs and Finance are ex-officio Trustees of the Fund.

Besides this, three more persons are to be appointed to the Board of Trustees (though no such appointments have been made yet). The Prime Minister has the power to nominate these three trustees. For all intents and purposes, then, the PM CARES Fund is run by the central government.

It is estimated that the pledged donations to the Fund crossed Rs. 6,500 crores barely a week after it was set up. While Bollywood actors, cricketers, and prominent businessmen have pledged to support the Fund, several concerns have emerged over the modalities through which contributions are being sought. 

 On 16 April, the Jharkhand high court granted bail to a former Member of Parliament and five others on the condition that they deposit an amount of Rs. 35,000 each into the PM CARES Fund, and show the proof of payment before the court. The Resident Doctors Association (RDA) of AIIMS has alleged that the AIIMS administration has diverted Rs. 50 lakh to the PM CARES Fund, even though the money received from Bharat Dynamics was earmarked for the procurement of Personal Protective Equipment (PPE).

Notably, the PM CARES Fund is also stifling contributions being made to other organisations in the non-profit sector, many of which pay attention to local needs that often get ignored while implementing broad-based relief measures.

These concerns notwithstanding, there is another fundamental issue with concentrating a majority of the resources in a fund controlled by the Centre—that of reducing the capacity of states to effectively respond to the pandemic.


The CSR conundrum


As per Section 135 of the Companies Act 2013, every company with a net worth of Rs. 500 crore or more, or a turnover of over Rs. 1,000 crores or more, or a net profit exceeding Rs. 5 crore during the immediately preceding financial year is required to spend at least 2% of its average net profits (made during the three immediately preceding financial years) in pursuance of its Corporate Social Responsibility (CSR).

Schedule VII of the Act delineates the gamut of activities on which companies can spend their CSR budget. These include eradicating hunger and poverty, promoting education and gender equality, ensuring environmental sustainability, and so on. Indian companies spend around Rs. 15,000 crores on CSR annually, according to official estimates.

On 10 April, the Ministry of Corporate Affairs (MCA) issued a set of FAQs (F. No. CSR-01/4/2020-CSR-MCA) clarifying the eligibility of CSR expenditure related to COVID-19 activities. This document stated that contributions made by companies to the PM CARES Fund shall qualify as CSR expenditure under item no. (viii) of Schedule VII of the Companies Act.

However, contributions made to the ‘Chief Minister’s Relief Fund’ or the ‘State Relief Fund for COVID-19’ (run by several states) shall not qualify as admissible CSR expenditure. The logical consequence of this position is that corporations would be deterred from contributing to state relief efforts, and would instead redirect their CSR money to the PM CARES Fund.



States’ protest


This concern is evidenced by the response of several politicians from different states. CPI(M) General Secretary Sitaram Yechury said it was an attempt to “corner all CSR monies for his (Modi’s) personally named fund and deny states—who are in the frontline of combatting COVID-19—these funds.” West Bengal Finance Minister, Amit Mitra wrote to the Union Finance Minister, Nirmala Sitharaman asking her to allow contributions made to the Chief Minister’s Relief Fund or any fund dedicated exclusively to tackle COVID-19 to be counted towards CSR spends of companies.

As per the letter, the West Bengal State Emergency Relief Fund, set up under the overall umbrella of the Chief Minister’s Relief Fund and dedicated to combating COVID-19, had received encouraging response from people and businesses, before the clarification released by the MCA played spoilsport. According to Mitra, the move “will severely jeopardise” the states’ efforts to raise resources to combat the pandemic.

One may argue that companies can still contribute to the States’ Disaster Management Authorities to combat the COVID-19 pandemic since the same still qualify as CSR expenditure. However, evidence has shown that the MCA clarification has cautioned companies against contributing to state relief efforts, instead of incentivising them to contribute to the PM CARES Fund.

The very optics of the central government refusing to extend CSR benefits to contributions made to state relief funds has had the effect of granting primacy to the PM CARES Fund. This is precisely why the state governments of Kerala, Rajasthan, Punjab, West Bengal, and Maharashtra have raised the demand for classifying donations to the state relief funds as CSR spending. 



The primacy of states in dealing with the pandemic


Another argument in favour of prioritising the PM CARES Fund over different state relief measures is that the concentration of funds enables better resource management and allocation. But this argument is seemingly undercut by the central government’s unwillingness to transfer contributions from the PM CARES Funds to the existing Prime Ministers National Relief Fund (PMNRF). If the aim is a consolidation of resources, then it is unclear why a new fund was set up in the first place when the PMNRF already had an unspent balance of Rs. 3,800 crore as of December 2019.

Alternatively, transferring the resources from the PM CARES Fund to PMNRF also achieves the aforesaid aim of consolidation, but the central government seems disinclined to pursue that path. Most crucially, what is being overlooked in the argument about concentrating funds in the hands of the central government is the important role that state governments have to play in handling the COVID-19 pandemic.

This includes monitoring the implementation of the lockdown, stepping up production of hand sanitizers and face masks, having food delivered to schoolchildren reliant on mid-day meals, making arrangements to provide shelter, ration and financial assistance to families of daily-wage workers, setting up mental health helplines, and so on. States are at the forefront of combatting the pandemic and diminishing their financial capacity is likely to have pernicious effects.


Diluting federalism


Notably ‘public health and sanitation’ are matters falling exclusively within the legislative competence of the states [Entry 6, List II, Seventh Schedule of the Constitution of India]. Admittedly, the subject of constituting funds to tackle the challenge of the pandemic is not an issue of legislative competence. But the fact that states are vested with the exclusive authority to legislate on health-related issues is a good indicator of the crucial role that our Constitution-makers envisaged for states with respect to matters pertaining to public health.

Therefore we must ask, on what basis are we diminishing the capacity of states to raise money through their separate COVID-19 relief funds? The rationale offered by the MCA FAQs is that the ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ are not included in Schedule VII of the Companies Act—and therefore not eligible for CSR contributions. But several concerns can be raised against this reasoning.

Firstly, the MCA FAQs claim that contributions made to the State Disaster Management Authority would count as CSR expenditure under item no. (xii) of Schedule VII of the Companies Act. Now, item no. (xii) reads “disaster management, including relief, rehabilitation and reconstruction activities”.

But if “disaster management” can be interpreted to include contributions to the State Disaster Management Authority, it is unclear why “promoting healthcare including preventive healthcare” [item no. (i) of Schedule VII of the Companies Act] cannot be so interpreted to include contributions to the various Emergency Relief Funds set up by different state governments exclusively to combat the COVID-19 pandemic?

It is reasonable to construe “promoting healthcare” as including efforts—both by NGOs and State Governments—to check the pandemic. This would be consistent with the circular issued by the MCA on 23 March 2020 (No. 05/01/2019-CSR) wherein it was stated that item nos. (i) and (xii) of Schedule VII are “broad-based and may be interpreted liberally” when considering spending CSR funds for COVID-19.

Secondly, even if one were to assume that the aforementioned interpretation of item no. (i) of Schedule VII is not reasonable, why was it not possible for the central government to promulgate an ordinance amending Schedule VII of the Companies Act—so as to specifically include the Chief Minister’s Relief Funds and State Relief Funds for COVID-19 within the ambit of CSR activity. There is nothing in law which would prevent such an Ordinance form being promulgated.  

It may, therefore, be concluded that the central government had both the means and the opportunity to extend CSR benefits to contributions made to the various state funds constituted to combat the COVID-19 pandemic. The fact that the central government chose not to do so should be seen as a deliberate omission, as opposed to a compulsion arising out of existing legal constraints.


The positive role of the central government to strengthen federalism  


Notably, the traditional federal conundrum of choosing between greater central control or enhanced state autonomy has undergone a shift with the emergence of the doctrine of ‘cooperative federalism’. This doctrine requires the union and the states to work in harmony towards achieving larger goals of good governance and overall development. The Supreme Court, in the case of Government of NCT of Delhi v. Union of India, has unequivocally held that the union and the states need to embrace a collaborative/cooperative federal architecture for achieving coordination.

In collaborative federalism, the union and the state governments should express their readiness to achieve a common objective and work together to achieve it. Both the centre and the states must work within their spheres and not think of any encroachment. But in the context of the exercise of authority within their spheres, there should be a perception of mature statesmanship so that they share the constitutionally bestowed responsibilities.

However, we are yet to define the extent of the centre’s responsibility towards upholding features of federalism which is a basic feature of the Constitution. Indisputably, the Parliament cannot alter or efface features of the basic structure. But is the centre’s responsibility towards the basic structure only of a negative nature, that is, the centre must not act in contravention of the basic structure; or can it be said that the centre also has a positive obligation to uphold tenets of the basic structure of the Constitution? Gary J. Jacobson argues in The Wheel of Law, that the union government has the power to take positive action to uphold the basic structure.

In S.R. Bommai, Ramaswamy J. noted, “Secularism . . . is a part of the fundamental law and basic structure of the Indian political system to secure to all its people socio-economic needs essential for man’s excellence and his moral well-being, the fulfilment of material prosperity and political justice.”

Jacobson reads this as the government “being invited to act in furtherance of the basic features of the Constitution, not simply to refrain from acting in situations where fundamental rights have been threatened or violated.” We can, therefore, argue that the union government has the obligation to take positive action to uphold the basic features of the Constitution, one of which is federalism.  

By deliberately omitting to classify contributions made to state relief funds as CSR activity, the union government has failed in its responsibility to act in furtherance of the basic structure.

Kerala Chief Minister Pinarayi Vijayan summed up the argument succinctly when he said in a press conference that “In a federal set-up, the relief funds set up by the states for a public purpose cannot be excluded from the eligibility criteria when the same is available for a central fund set up with similar objectives and aims.”

It is submitted that by not covering contributions made to state relief funds within the ambit of CSR activity, the union has cut off a major source of capital that would’ve significantly enhanced the capacity of states to combat the pandemic. This goes against the ethos of cooperative federalism and the responsibility of the central government to undertake positive action to uphold the tenets of the basic structure of the Constitution.


[Parth is a LL.B. student at the Faculty of Law, University of Delhi]