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Sep 08, 2021
5 min read

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Mandating CSR increases compliance costs and misses its fundamental objective – empathy

The recent changes in the CSR provisions in the Companies Amendment Bill 2019 have proved two points – a) a high compliance burden is a significant grievance of Indian businesses and b) the government is responsive to the voice of industry.

What Changed?

On 25th July 2019, the Government introduced the Companies Amendment Bill 2019 in the Lok Sabha and the proposed amendments in Section 135 brought an uproar from industry. As per this section, companies that have a net worth of at least Rs 500 crore, a turnover of Rs 1,000 crore or a net profit of Rs 5 crore are required to spend 2% of their net profits on CSR programmes as identified by the government under Schedule VII. Prior to the amendment proposed, the Board only had to provide an explanation for unspent amounts in the Annual Report. Now, the amendments proposed that companies a) transfer amounts that have not been allotted to any identified project in a year to government funds specified in Schedule VII like the PM National Relief Fund, b) keep unspent balances on identified projects in escrow every year for use later, and if unspent even after three years, transfer to government funds specified in Schedule VII.

The controversial amendment proposed were as follows: In case of any contravention of the above two provisions,

  1. The company shall be punishable with fine which shall not be less than Rs. 50,000/- but which may extend to Rs. 25,00,000/- and

  2. Every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 50,000/- but which may extend to Rs. 5,00,000/-, or with both.

Introduction of penal provisions marked a paradigm shift from the Government’s earlier “comply and explain” stand to making CSR an effective tax.

Compliance Record On CSR So Far

  • Data from the Ministry of Corporate Affairs, CII CSR Tracker 2017, KPMG Survey 2017, Prime Database reports give some pointers on compliance trends.

  • Unspent funds for the median company fell from 57.66% in 2014-15 to 30.02% in 2017-18.

  • Data on 19,933 companies out of 21,498 eligible companies showed that they spent Rs 13,466 crore on CSR activities. Unspent amounts fell from Rs 1078 crore in FY16 to Rs 141 crore .in FY17.

  • The Finance Ministry’s centralised scrutiny and prosecution mechanism to monitor compliance has given sanction for prosecution in 366 cases for FY 2014-15 and issued 5,382 calls for information notices for FY 2015-16.

  • 95-99% of the companies comply with procedures such as forming a CSR committee, formulating a CSR policy etc.

  • The KPMG survey found non-compliance mainly in expenses disclosure, and ensuring that overheads were within 5% of total CSR spends as mandated.

There is no analysis on the time and effort being spent by companies on compliance with CSR norms and by the government on monitoring the compliance

Current Position

Predictably there was a strong reaction from industry, that is already battling the economic slowdown. The High Level Committee on CSR submitted its report on 3th August recommending that expenditure on CSR be tax deductible, unspent balance be carried forward for three-to-five years, and non-compliance be treated as a civil offence.

While notifying the Bill on August 14th, the CSR proposals were left out. On 23rd August, the Finance Minister reiterated that the CSR provisions were under review, non-compliance would not be treated as a criminal offence.

The Bigger Picture

The Finance Minister has given her assurance that the government is not against wealth creators. In fact, Gandhiji’s perspective of trusteeship, invoked by her in the Parliament, is a powerful argument by which, “we seek not to destroy the capitalist, we seek to destroy capitalism”. In 1931 when he wrote in Young India, the debate on the purpose of a corporation and modern corporate law began in the Harvard Law Review - Adolf Berle argued that profit was the sole purpose of a corporation; E. Merrick Dodd gave a rejoinder the next year arguing that profit-making and social service were together the purpose of a corporation. The shareholder versus stakeholder debate has continued in legal academia since.

ESG - Environmental, Social and Corporate Governance –is already a global trend, extremely significant in developed countries. Hence, social responsibility is an accepted purpose for the modern corporate, valued positively in the market, yet, in India we are in a space where fulfilling CSR norms are mandated with a high compliance burden.

Way Forward

It is necessary to relook the CSR mandate that increases compliance costs. So much official time and effort has gone into this one item, we seemed to have lost its fundamental objective – empathy. The Government should make the CSR obligation voluntary and allow the market to recognise and reward companies that are socially responsible, just like the trend is globally.

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