Corporate Social Responsibility (“CSR”) in India came into existence with the advent of the Companies Act, 2013 (“Act”). The Act brought a mandate upon companies to contribute a share of profits towards activities furthering sustainable development goals. In the seven years that the CSR provision through the Act has been in effect, its reception and compliance by companies have seen great variance. The very objective of CSR is to promote social development and balance corporate growth with social stability.
India has outwardly become the first country to brought a mandate upon companies with the advent of Section 135 of the Act. This provision was laid down to create opportunities for social enterprises, that create a sizeable impact in the field of the social sector, and to mobilize funds for social development. The Human Development Index (“HDI”) measures development based on three pillars that are: (i) healthy life based on life expectancy at birth, (ii) knowledge based on education index, and (iii) standard of living by GNI index. The HDI 2019 report reveals that India ranks 129 among 189 countries. This manifests that India has a long way to go to achieve the desired level of social development goals. The regular flow of funds to the social sector is a considerable factor to attain social objectives. Mandatory CSR will likely close the required financial gap. However, the Act seems to be unsuccessful to bring obligations on companies for spending the required funds due to lacunae in existing legislation.
This article shares a perspective on the nature of CSR compliance by companies in India, which is witnessing a shift from an explanation-based approach to one that is consequence-based with the emergence of the Companies Amendment Act, 2019 and it elucidates the significance of CSR funds in the country’s developing economy.
Evaluating CSR Compliance in India
Section 135 of the Act prompts an obligation on companies having the net value equals to or exceeds 500 Crore rupees or the net profit equals to or exceeds 5 Crore rupees or the turnover equals to or exceeds 1,000 Crore rupees to undertake the required spend of 2% of net profit of the previous three years. The High-Level Committee – 2018 (“HLC-2018”), chaired by Secretary of MCA, Government of India. It was constituted on CSR to examine the then-existing CSR structure and make suggestions for strengthening the CSR ecosystem, entailing implementation analysis and outcomes evaluation. After a detailed analysis, the HLC-2018 took a stance that the mandate to conduct CSR activities was being construed as not only mandatory but also discretionary. It further stated that “this seemed to emanate from interpreting the second proviso of Section 135 of the Act to mean that specifying reasons for not spending in the Board Report discharges the obligation to undertake CSR activities. This is ostensibly a limited interpretation”.
HLC-2018 has reported that while 21,337 companies were liable to undertake CSR spend in FY 2017-18, 9,753 companies did not file the report on CSR spend for the said year. This implies that approx. 46% of the companies mandated to undertake CSR spend were in non-compliance. The HLC-2018 also enlisted some reasons outlined by the companies for their failure to comply and undertake CSR spend. It includes issues in spotting an appropriate project, selecting an appropriate implementing agency, committing to multiyear projects, lack of prior expertise, etc.
The possible root cause for non-compliance could be the legislature’s conciliatory approach of “comply or explain” with no legal consequences. As per Section 135(5) of the Act, there were sufficient grounds for companies to escape the liability since they were only supposed to state reasons for not spending the CSR amount. This escape clause has created perverse motivation for corporates to bypass the law which defends the companies not to follow the mandate and lead to the discretion on them.
A Shift in CSR Regime: From Discretionary to Mandatory
With the enforcement of the Companies (Amendment) Act, 2019 (“Amendment Act“), the legislature intended to strengthen the norms for CSR spending and make such laws more stringent so that corporates comply with the mandate. As per the Amendment Act, companies have no other option left but to spend the required fund towards CSR activities. Further, if a company has not spent the required amount in any financial year then such a company must transfer the amount at the end of such financial year to certain funds specified in the provisions for socio-economic development within six months. Lastly, Companies are given the only prerogative of transferring CSR funds into an escrow account known as the “Unspent Corporate Social Responsibility Account” for three years if the unspent fund is already allocated to a specific project, after which remaining amounts must be transferred to the government specified funds. Most notably, non-compliance with the abovementioned requirements shall attract penalties on both, the officers as well as the company in default, officers may even go through criminal charges.
The CSR policy in India was introduced as a mandate on companies. But due to the recourse of explaining the reasons for not spending CSR funds, it transitioned into a quasi-mandatory approach under the Act. With the emergence of the Amendment Act, CSR policy in India will certainly experience the prospect of attaining the full mandatory status. The amendments are possibly going to bring about a major shift in the approach towards the CSR regime in India. The position of law giving an option to firms to discharge their obligation to undertake CSR activities by just explaining reasons for an unspent amount in the board report, encountered problems in implementation and letting firms get away from the mandate to comply with such provisions. There was a need for more stringent laws and solutions for the conundrum relating to the unspent amounts for CSR. Thus, the recent Amendment Act brings in mandated CSR spending requirements with a “comply or suffer” approach.
Why is There a Need to Make CSR Mandate Upon Companies?
The Sustainable Development Goals (“SDGs”) were introduced in 2015 by the United Nations. 17 SDGs are included to address the significant development challenges faced by the world. These goals are set to achieve by 2030. The SDGs commonly include development goals related to no poverty, gender equality, zero hunger, quality education, good health, etc.
India has subscribed to achieve the SDGs by 2030. To achieve the said objective, India needs mobilization of USD 0.6 trillion per annum. The country’s financing gap is estimated at USD 565 billion per annum. Thus, the amount of funding required to achieve the goals is huge and it requires a constant flow of capital every year.
CSR has been a driving force and played a significant role in the funding mechanism for the social sector. It is one of the major sources of funding for social enterprises as some of the enterprises, particularly NPO’s, are unable to issue equity or debt to raise funds. Thus, they are largely dependent upon CSR funds and foreign contributions.
The CSR budget consists of both domestic corporations and charitable trusts contributions, and they have combinedly grown at a rate of 12% between financial years 2014-2018. It alone constituted 16% of the total funding raised to the social sector in FY 2018, that is approximately INR 13,000 Cr. While CSR can facilitate close to 13,000 Crores, only 54% of the companies spent the funds. There is an ample number of companies that have not followed the mandate. However, the position will certainly change with the introduction of the Amendment Act and the obligation on companies to mandatorily spend CSR funds will certainly assist to close the gap of required funding among other sources.
The legislature tried to strengthen the provisions related to CSR by introducing amendments to the Companies Act. It has sought to tighten the loophole that was letting companies get away with not spending the mandatory CSR fund of 2% of net profits on CSR activities. With the emergence of the Amendment Act, the corporates will probably see the positive shift from an explanation-based approach towards the non-conciliatory mandate of the legislature. It will benefit not only the enterprises receiving funds for the social sector but also help the government to achieve the desired level of social development goals.
The changing trend in the approach from “comply or explain” to “comply or suffer”. And the legal changes in provisions are the result of a series of legislative efforts, which will call upon corporates to increase accountability, document actions, and report disclosures. All the changes are made to improve the existing position of law and put a stop to all escape routes. Therefore, the enforced amendments are likely to bring a positive change in the CSR compliance rate, inching a step further to achieve the goal to balance corporate growth with social stability.
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