BY ROOPAM DADHICH and PRANSHU GUPTA, Fourth-YEAR Students AT NALSAR University of Law, Hyderabad
The Ministry of Corporate affairs (‘MCA’) has allowed the inclusion of corporate expenditure utilised for the purposes of fighting COVID-19 pandemic under Corporate Social Responsibility (‘CSR’) spending requirements. Expenditure incurred on activities such as sanitation, pandemic management, preventive healthcare, etc, would now be covered under the same. A greater part of the CSR spending of the top 300 companies of India has been distributed to Covid-19 alleviation measures, a majority of which was donated to the PM CARES Fund. This post briefly discusses the evolution of CSR regime in India and how it may take a revolutionary turn in times of COVID-19.
Evolution of the CSR Framework
Prior to passing of the Companies Act, 2013 (‘the Act’), the Central Government passed guidelines for the companies to allocate funds for creating a voluntary CSR policy. The intention behind this was to gradually make the corporate sector embrace the CSR guidelines voluntarily. Later, a stronger body of rules was presented by SEBI in its circular in 2012 in which it became mandatory for the top 100 listed companies in BSE and NSE to report the business responsibility.
According to the Companies Bill, 2011, corporate bodies to which the CSR arrangements applied were required to establish a CSR council to detail a CSR approach. The council would have the function of utilising the funds for CSR activities which were to be affirmed by the board. At the point when it came to CSR spending, proviso 135(5) of the 2011 Bill stated that companies under this section will make every attempt to spend at least 2 per cent of its average profits of the past three years on CSR exercises.
At the underlying phases of this discourse by the Standing Committee, it seemed that the CSR spending would be made a mandatory affair under which the companies violating this rule would be made liable under penal provisions. However, such a recommendation got a lot of criticism from the corporate world which was fervently against any such kind of legislation. The opposition from the corporate sector prompted a semi compulsory methodology whereby companies are pegged to the 2 percent rule without being under any commitment to exercise it. Disclosing the reasons behind non-spending was instead made mandatory.
There has been an amendment in 2019 in the 2013 Act which bought several changes to the CSR provisions by penalising non-compliance of the CSR policy. Spending funds accumulated for CSR exercises in a financial year became necessary. All the unspent funds are to be transferred to a special account which is to be absorbed for the completion of its CSR goals within three years. If the company fails to utilise the sums, it has to transfer the same to the government for social welfare schemes. Punitive measures by imposing fines and imprisonment are also added if the company is in default or is unable to make a CSR policy.
Since the change in 2019, the companies have fervently opposed the alterations made to the CSR provisions because of the addition of stringent punitive measures. Considering the opposition, the Government has appropriately concluded that it would not notify the alteration to section 135 of the Act, and that it will rather review the scenario in the time being.
Analysing the Impact of the CSR Regime
Observing the quantitative parts of CSR expenditures, surveys show that before the authorisation of the Companies Act, 2013, the sums included for CSR were very insignificant. In light of the moderate, yet relentless, development of CSR exercises in India, both as far as CSR policies and disclosure are concerned, the presentation of an administrative order towards CSR move can be said to invigorate further development and thus subsequently has been endorsed by analysts.
However, a major critique of CSR prerequisites is that there are no reasonable criteria to examine the sufficiency and propriety of CSR spending. More importantly, there was no proper system for the study of the disclosures in the Act, until the 2019 amendment where CSR spending was made mandatory. While corporate have surely not done their fair share with regards to indulging themselves in social ventures under CSR, having being compelled to make a contribution to central funds for non-compliance is very much same as a corporate assessment. It only acts in a creation of one more formality for the corporate. The corporate sector takes it as a mandatory expenditure which does not really lead to any profitability, and thus it is a 2% tax spent by the companies themselves and not given to the government.
From the viewpoint of compliance, some companies precisely allocate 2 percent of their average profits, whereas some companies who used to spend more than 2 percent of their average profits before the law, have now started to bring it down close to the 2 percent mark. While from one perspective this might be characteristic of consistence, it may then again likewise be reminiscent of mechanical adherence equal to a “check the box” frame of mind.
Thus, providing tax deductions for CSR activities may change the outlook of the corporate sector for social commitment. Moreover, imprisoning company officials for default appears to be somewhat over the top for what is supposed to be a civil liability. Further, it is crucial to take note of the point that a mere fund allocation does not really fulfill a social obligation.
The Government should explore different suggestions apart from tax deductions for CSR spending, for example, carrying forward the unspent sums up to three budgetary years and making a CSR exchange portal. The base of CSR exercises should further be expanded to incorporate activities such as sports advancement, senior residents’ and specially-abled persons’ welfare, etc.
CSR in COVID-19
The MCA through its notifications and a circular has clarified that any expenditures made towards COVID-19 would come under the ambit of CSR activity under schedule VII of the Act pertaining to disaster management, healthcare, and sanitation. Further to encourage such activities the MCA also exempted all donations made towards PM CARES Fund under the Income Tax Act, 1961. The result of which is that a lot of companies have donated a heavy sum in the PM CARES Fund as part of their CSR obligation including Tata trusts, Reliance Industries, Wipro, JSW Group, etc.
The pandemic also brings opportunities for those with an acumen and mindful approach towards CSR. For instance, manufacturing companies in the UK have undergone a transformation in their factories as they are now also producing protective equipments, ventilators, sanitizers, etc, and mostly making a donation of these items instead of selling them. Vodafone provided free unlimited data to most of its customers in the UK. Supermarkets have allotted specific opening time only for health workers and old people, and are continuously distributing food items to NGOs. Companies have also waived off their commercial airtime to contribute more for the cause. Even some banks have waived off interests on loans for a period of time.
The drastic consequences of the pandemic on the Indian economy will be unprecedented. Thus, it marks a crucial event which has the potential of significantly changing the nature of CSR. Even though the pandemic has driven many companies on the verge of a breakdown, it have also presented a completely new set of opportunities which could be further harnessed for the interests of corporate as well as the society.
An authentic and genuine CSR from a company will lead to a stronger relationship with the general public since people will develop great expectations from these companies and their brands with respect to the special efforts made by them to fight the pandemic. Customers can take pride in the fact that the brands they trust are contributing in these difficult times by donating health equipments or helping financially. The relationship nurtured between a stakeholder and a company during this pandemic would indeed be more meaningful as compared to that of ‘normal’ times.
Post-COVID, there will be an acceleration in CSR in the long run since the corporate world will eventually understand that their survival in the long run depends on accomplishing a balance between revenue and cordiality among different stakeholders. The important question is not about investing in CSR or not, but more regarding the manner in which to invest to derive benefits mutually from the interdependent society. The common learning we all can take from the pandemic is that everyone is embroiled in this man-made disaster together. This will definitely raise the expectations of the stakeholders from the corporate being more responsible. Thus, we can imagine the post-COVID era to be an era where those firms are thriving who has a stronger commitment with society and effective CSR agendas.
The 2019 amendment brings in a greater risk of rigidity which eventually alters the real purpose of CSR. However, the effects of this amendment would be interesting to observe in the current COVID-19 environment where corporate responsibility has become an indispensable affair in tackling the drastic repercussions of the pandemic.