India's new CSR regulations make philanthropy compulsory for companies

New CSR rules replacing comply-or-explain regulations with a mandatory regimen have raised the stakes for large corporations

Indian corporations have never been more answerable for their social responsibility as they are now, ever since the government notif­i­ed the new rules in January 2021 un­d­er­lining the big theme that corporate social responsibility (CSR) is manda­t­ory and a statutory obligation, making India the first country to have done so.

In 2014, Section 135 of the Companies Act made it mandatory for every company with a net worth of at least Rs 500 crore, turnover of Rs 1,000 crore or more, or a minimum net profit of Rs 5 crore during the immediately preceding financial year to spend at least two per cent of the average net profits, made during the three immediately preceding financial years, on CSR activities.

Going a step further from simply prescribing the amount the companies must spend and requiring them to explain why if they did not, the corporate affairs ministry also put a mechanism in place to ensure the sum is spent in an appropriate and accountable manner and the money unspent is not ploughed back into the company or the coffers of the promoter.

The shift from the “comply-or-explain” regimen to mandatory activities and their disclosures has been a matter of debate between the stakeholders and policymakers.

The recent amendments to Section 135 have added penal provisions for non-compliance, such as fines of up to Rs 25 lakh, additional compliance requirements and disclosures for CSR activities.

“The whole concept of CSR is based on the concept of benevolence, and having a stringent implementation mechanism may compromise such a concept and make CSR equivalent to a tax,” said Arvind Sharma, partner at Shardul Amarchand Mangaldas & Co.

When the law was still being drafted, a senior government official had said CSR was not charity but an obligation for companies to give back to society. The stringent laws were also driven by the fact that many companies were funnelling their CSR expenditures back into their accounts or even abusing the CSR provision for money laundering.

Globally, most countries have taken a voluntary approach to CSR spending.  In fact, many countries in the world such as Norway and Sweden, which have voluntary CSR, had started with a mandatory provision.

“In the initial years, the CSR spent was based on a comply-or-explain basis to encourage companies to undertake CSR activities on a voluntary basis. Sufficient time has elapsed now and still there are many companies which are not complying with the provisions,” said Sanjeev Singhal, partner, SR Batliboi and Co LLP.

Experts believe that India needs to go through a compulsory CSR regime to become more accustomed to the idea before the rules are eased.

“The objective of the policy is to drive companies to take CSR a little more seriously. Till such time as most companies begin to comply and spend the money for the purposes outlined, it should remain mandatory,” said Rumjhum Chatterjee, group managing director, Feedback Infra and co-chair of CII (Confederation of Indian Industry) CSR Committee.

According to the latest rules, companies carrying out CSR activities are required to file a form to generate a unique registration number that can be used to track the project.  

The rules notified by the corporate affairs ministry have decriminalised the provision for CSR rules, but have increased disclosures for companies. Every company having an average CSR obligation of Rs 10 crore or more in the three preceding financial years will have to undertake an impact assessment study of its projects through an independent agency.

“Over the last two years, many prickly issues have been addressed. Many companies were spending money for philanthropic reasons much before it became law. It is not just about spending the money but making a difference on the ground; making an impact,” Chatterjee said.

A company has to display CSR activities on its website for public access, the rules say. It also has to transfer any capital asset created or acquired through CSR money to the beneficiaries of the project, or a Section 8 company, which is a company that promotes welfare activities, or a public authority.

“The success of the new CSR rules will depend on how well the newly introduced legislative reforms are implemented,” Sharma added.

According to corporate affairs ministry data, CSR expenditure has increased from Rs 10,066 crore in FY 2014-15 to Rs 18,655 crore in 2018-19 with a cumulative total of Rs 79,000 crore having been spent throughout India.

Any unspent CSR money has to be transferred to any of schedule VII funds or an unspent CSR account. The idea, industry experts said, is to ensure companies spend the money on a project that would actually benefit society.

As Chatterjee put it, “India has huge inequalities in society and there is much to do about our environment. It is  not possible or fair for the government to tackle it alone. It would also take many, many years to see the results. The reason CSR law was brought in was to make industry an equal and responsible stakeholder in the development process.”

The ministry had set up a high-level committee on CSR in 2018 chaired by then secretary, Corporate Affairs, Injeti Srinivas. “The amendments to law aim to strengthen the CSR ecosystem, by improving and strengthening disclosures and by simplifying compliances. It also aims to address the inadequacies of the present CSR architecture by removing ambiguities, bringing in objectivity, and by simplifying language,” the corporate affairs ministry said.