India Proposes to Mandate Corporate Social Responsibilities Expenditure Without Exceptions

by Sunita Paudyal 03 Dec. 2019

Global companies operating in developing countries greatly contribute to the respective countries’ economies. However, the processes that make companies successful may have unintended public and environmental health effects. In this respect, most large companies in developed regions have accepted and embraced that sustainability is the key to running a successful business. As a result, these companies voluntarily integrate sustainability into their business models—they do so to get an edge on the competition, to preserve their brand reputation or public image and, in some cases, to highlight that their company values coincide with Corporate Social Responsibility (CSR).

CSR is generally voluntary; however, India was the first country in the world to mandate CSR spending. India mandated Section 135 of the Companies Act in 2013. The Act requires profitable companies to invest a small percentage of their profits in CSR initiatives. However, the law has loopholes that allow companies to avoid spending the required amount on CSR initiatives. However, Section 21 of the Draft Companies (Amendment) Act 2019 proposes a new provision, mandating that companies spend the required amount in CSR initiatives and violation of this provision can result in stringent penalties.

Since the CSR spending requirement applies to profitable companies and requires companies to invest in environment and society where they operate and profit, companies should consider this an opportunity to give back to the community and environment they benefit from.

Current obligation on CSR spending

The Companies Act 2013 mandates companies spend at least two percent of their average net profits made during the three immediately preceding financial years on CSR initiatives. This applies to companies that have a net worth of Rupees (Rs.) equal to 500 crores (USD 72 million) or more; or a turnover of Rs. equal to 1000 crores (USD 144 million) or more during the immediately preceding financial year.YES

Affected companies are also required to prepare a CSR policy. This policy must include environmentally sustainable activities such as promoting water security, developing green technology and renewable energy and conducting socio-economic activities. Examples include employment enhancing vocational skills, eradicating extreme hunger and poverty and improving mental health. Companies are required to invest their CSR spending in activities specified in their CSR policy.

Even though the CSR spending is mandatory, spending the required amount in totality or part can be avoided if valid reason is provided to authorities; this is a loophole in the regulation.

Explanation of the future provisions

The Draft Companies (Amendment) Act 2019 issued on July 25, 2019 aims to fill the current regulatory gap on CSR spending and would mandate companies to spend their CSR funds with no exception.

The Amendment proposes two options if there are unspent funds at the end of the financial year:

1) The amount allocated to CSR initiatives that is not yet designated for any ongoing CRS projects is transferred to the Prime Minister's National Relief Fund for the promotion of education and to ensure environmental sustainability within six months of the expiry of the financial year.

2) Any due amount that is designated for an ongoing CRS project will be transferred, within 30 days of the financial year, to a special bank account opened for that financial year. The bank account will be named “Unspent Corporate Social Responsibility Account” and companies will be required to spend the total amount in the account for CRS initiatives within 3 financial years from the date of the transfer. If companies fail to spend the amount within the given deadline, they must transfer the amount to the Prime Minister's National Relief Fund within 30 days from the date of completion of the third financial year.

Stringent penalties for contravening companies

Any company that contravenes the CSR spending requirement will be punished with a fine anywhere from Rs. 50,000 (USD 726) to Rs. 25,00,000 (USD 36,289). Every officer of the violating company who is in default will be punished with imprisonment for up to three years or with a fine between Rs. 50,000 to 5,00,000 (USD up to 7,258) or both.

Conclusion

Due to the increasing importance of CSR and India’s new proposal, companies can benefit immensely in the long run—both from complying with new requirements when they become final and from giving back to their communities. India has gone one step ahead by making these initiatives mandatory, ensuring that companies that benefit from the community and infrastructure around them give back to that same community and environment and bring about a symbiotic relationship with their surroundings.

Companies in India, and global companies subject to Indian regulations, should stay up to date on this proposal and should consider the myriad of ways effective CSR can positively impact their public image, customer loyalty, employee satisfaction and overall productivity.