•  The New Companies Bill makes it mandatory for companies to earmark atleast 2 percent of their average net profits for the preceding three financial years, for implementing a Corporate social responsibility (CSR) strategy.
  • The bill is applicable to companies with a net worth of Rs. 500 crore or more, a turnover of Rs 1,000 crore or more and a net profit of Rs 5 crore or more during any financial year.
  • Thus the bill makes it compulsory to not just earmark the funds but also form a CSR committee (of board members consisting 3 or more directors out of which atleast one is an independent director), formulate a CSR policy , allocate the amount to different activities and monitor the implementation from time to time. Further, the CSR policy is to be disclosed on the company website.
  • With regard to implementation, only project based investments, and not mere donations, will be accepted as CSR which involve innovative social inventions/initiatives that factor in hazards, risks and vulnerabilities. Baselines surveys, social impact assessment and meticulous evaluation including documentation is mandatory along with training and re orientation of the staff.
  • The CSR amount unused/unlapsed in a particular year will be carried forward to the following year. CSR budget itself hence is non lapsable.
  • With regard to failure to spend the requisite amount, the bill states that the company shall have to provide sufficient reasons for not spending the allocated CSR budget. While no specific penalties are contemplated in the Bill with respect to CSR, sections 450 and 451, provide for general penalties for flouting the rules and repeat offences.
  • An estimated 2,500 companies fall into this “mandatory” CSR-reporting category.
  • CSR activities in the first year would be between Rs. 9,000 crore and Rs. 10,000 crore spent in social welfare.

Implications for the Companies

The new bill has two important provisions with regard to CSR. The first is that the board is mandated to ensure that the company will spend on the CSR.

Second being that they have to give an explanation regarding the spending. So, effectively although there is no mandatory obligation on the company, but a responsibility is cast upon the board members.An explanation that is unsatisfactory can empower the regulator to question the roles and duties of the directors making it not just a provision on paper but an obligation on the board, which they may not be able to get away from easily.

The idea has also been to make the spending transparent and more than just ad hoc philanthropy. By mandating a CSR team, with 3 directors including one Independent Director, a CSR strategy, ensuring implementation and monitoring of results are all in the direction of pushing companies to develop a management level approach by targeting operational risk mitigation through CSR, as an effective tool. They may be further propelled to understand ground realities, leading to an amalgamation of stakeholder interests with the company’s long term goals. This will be an optimal concept, enhancing welfare of all the concerned entities.

CSR Strategy
Central Tenets of a CSR Strategy

Challenges Ahead

  • The first and most important challenge is that of political pressure by local politicians especially for PSU’s to spend in their constituencies. The mandatory spending and the essential baseline suveys along with social impact assessment will lose its meaning if the initiatives cant be directed in areas which need them the most with regard to mitigation of operating risks.
  • Another concern is that a mandatory spending is nothing but tax. Hence, mandatory CSR increases the country’s already high corporate tax, implicitly. It stands at 32.5% which itself is higher than the global average of 24.09 %. The figure for other countries, China, Vietnam and Indonasia stand at 25%. Thailand and Turkey are at 20%, South Africa 28% and Nigeria at 30%. Increase in the corporate tax may hamper the country’s ranking as an investment destination, leaving India at a competitive disadvantage in the global marketplace.
  • An added issue is the monetization of the Returns on Investment (ROI) for the company’s initiatives. This is because CSR based initiatives may have a huge gestation period and so calculating returns on investments like scholarships for deprived sections or benefit to the environment by adoption of cleaner fuels etc. may be lengthy propositions.
  • Companies may be forced to do some reshuffling within the organization which could lead to diversion of its manpower away from the core activities. Because of lack of expertise, this will further pave way for CSR consulting in huge proportions. Hence, the process of empanelment of expert agencies into the CSR framework of an organization, must be eased.
  • Finally, though the Companies bill is a great step forward, efforts must be made to clear the haze around the kind of activities that may be taken up by companies under CSR to prevent the initiative from getting mired by emergence of corruption with companies trying to ‘greenwash’ their profitable activities under the garb of CSR.
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3 comments until now

  1. Shailesh @ 2013-08-21 11:51

    Nice article esp. the challenges section is quite intriguing. However, the article is ambiguous whether the bill clause on CSR is mandatory or obligatory?

  2. Dear Shailesh,
    Thank you for reading the article and posting your comment. With regard to the new Companies Bill, what stands true is that the CSR spending is ‘mandatory’ which means ‘required by law or the rule’. The new bill requires the companies to set a CSR budget out of their profits and spend it in planned socially beneficial projects. As per the bill, unspent portion of the budget will keep accumulating until three years, after which they will be required to give an explanation.
    However, the bill doesn’t just stop there but goes a step ahead by declaring that companies with dissatisfactory explanations may be penalized. The nature of these punishments have not been decided yet, however, the inclusion of such an arrangement where action will be taken against organizations defaulting on their CSR commitment makes this spending mandatory, compulsory and/or a legal obligation.

  3. Will this take away the glory from those companies that were actively engaged in voluntary CSR activity all these years (and contributing immensely to their workforce recruitment pool)?

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