CSR in India: A Paradigm Shift from Benevolence to Obligation

� La responsabilité sociale des entreprises (RSE) est un effort continu des entreprises pour rationaliser et intégrer des objectifs sociaux et environnementaux plus larges dans les perspectives commerciales de leur entreprise et regarder au-delà des performances financières. Si les entreprises responsables ont toujours existé en Inde, la philanthropie d’entreprise, elle, a toujours été volontaire et influencée par les préférences individuelles des magnats des affaires, les valeurs familiales, les traditions, la culture et la religion.

� La responsabilidad social empresarial (RSE) es un esfuerzo continuo de las empresas para racionalizar e integrar objetivos sociales y ambientales más amplios en su perspectiva comercial y mirar más allá de los resultados financieros obtenidos. Si bien las empresas responsables siempre han existido en la India, la filantropía empresarial o corporativa siempre ha sido voluntaria y ha estado influenciada por las preferencias individuales de los magnates empresariales, los valores familiares, las tradiciones, la cultura y la religión.

A brief background

After Indian independence in 1947, the renowned Mahatma K. Gandhi (respectably referred to as the father of the Nation) regarded the Indian companies and industries as “Temples of Modern India” and urged powerful industrialists to come forward and share their wealth for the benefit of the underprivileged section of the society. Mahatma Gandhi advocated the concept of trusteeship helping socio-economic growth of India, whereby all people having money or property hold it in trust for the society. In this conception, organizations and individuals possessing surplus wealth over and above their legitimate and genuine needs should spend it on community welfare programmes as an aspect of their social responsibilities. This ideology of Mahatma Gandhi sowed the seeds of CSR 1 in India.

Dawn of the Indian CSR Era

It was only in 2014 that India identified, acknowledged and integrated CSR into its corporate legislations with a view to regulate and enhance the far-reaching impact of CSR in a structured and systematic manner. India, for the first time in its history, while replacing its age-oldCompanies Act 1956 by the Companies Act 2013, introduced the concept of mandatory CSR 2 for corporations with 1) a net worth of INR 5 billion ($70 million USD) or more, 2) with an annual turnover of INR 10 billion ($140 million USD) or more, or 3) a net profit of INR 50 million ($700,000 USD) or more (“Companies”). This meant the applicable companies must spend 2 percentof their average net profits of three years on CSR. Prior to 2014, CSR was voluntary and merely an act of benevolence for companies and the only obligation being of disclosure of CSR spending to their shareholders. The

legislation for CSR in the Companies Act 2013 not only provides a specific framework for India’s approach to CSR but also creates an enabling ecosystem for Companies to innovate & integrate CSR strategies within their boardroom agendas and business strategies.

CSR identification, implementation and invigoration

Companies covered by the law are mandated to constitute a CSR Committee of the Board (“CSR Committee”) consisting of 3 or more directors of which at least one director is required to be an independent director. The primary responsibility of the CSR Committee is to formulate and recommend to the Board a CSR Policy 3 indicating the activities to be undertaken, the amount of expenditure to be incurred on the activities and also monitor the company from time to time. In the event the CSR amount to be spent by a company does not exceed $67,150 USD no CSR Committee is required to

be constituted and the functions of the committee can be discharged by the Board of Directors 4 .

CSR permissible activities

The Companies Act 5 lists various permissible activities which can be undertaken by Companies which include amongst others eradicating hunger, promoting education, promoting gender equality, supporting women empowerment, ensuring environmental sustainability, protecting national heritage, establishing measures to benefit armed forces veterans, training to promote rural sports, contributing to national relief funds, or to incubators in the field of science, technology, engineering and medicine, contributing to public funded universities, rural development projects, slum development projects, and disaster management. Additionally, companies are required to give preference to the local area and areas around where it operates for spending the amount earmarked for CSR activities.

A pre-Covid survey 6 undertaken by an international accounting firm highlights the CSR expenditures as follows:

The education sector received the maximum funding (38% of the total) followed by hunger, poverty, and healthcare (25%), environmental sustainability (12%) and rural development (11%). Programs such as technology incubators, sports, the armed forces, that where designed to reduce inequalities, saw negligible spends. Subsequently, in 2019-20 an amount of USD 2849.81 million was spent by companies towards CSR activities.

CSR-prohibited expenditure

The CSR projects, programs or activities that benefit only the employees of the company and their families are not to be considered as permissible CSR activities. Additionally one-off events, such as marathons / awards / charitable contribution/ advertisement / sponsorships of TV programmes, expenses incurred by companies for the fulfilment of any Act/ Statute of regulations, contribution of any amount directly or indirectly to any political party and activities undertaken by the Companies in pursuance of its normal course of business, do not qualify as part of the CSR expenditure requirements. Amid the Covid-19 outbreak, the Ministry of Corporate Affairs has notified that Companies expenditure to fight the pandemic will be considered valid under CSR activities and that funds may be spent on various activities related to Covid-19 such as for the promotion of healthcare, including preventive healthcare, as well as sanitation, and disaster management.

Unused amounts

Until recently, if a company was unable to fully spend its CSR funds in a given year, it could carry the amount forward and spend it in the next fiscal, in addition to the money allotted for that year. The CSR amendments in-

troduced under the Act now require companies to deposit the unspent CSR funds into a fund prescribed under Schedule VII of the Act within the end of the fiscal year. This amount must be utilized within three years from the date of transfer, failing which the fund must be deposited in to one of the specified funds. The new law prescribes for a monetary penalty as well as imprisonment in case of non-compliance. The penalty ranges from $700.00 to $35,000.00 USD whereas the defaulting officer of the company may be liable to imprisonment for up to three years, or a fine up to $7,023.00 USD or both. The government has subsequently made a recent amendment regarding non-compliance with CSR provisions and determined it is a “civil wrong” with effect from 22 January 2021. All CSR related defaults are compoundable i.e., those which can be settled by paying a certain amount of money.

In conclusion

The CSR landscape in India has dramatically changed from being voluntary to mandatory. Additionally, organizations in India are now taking up CSR initiatives and integrating them in their business processes thereby shaping responsible and supportable relationships with the community at large. Globally, whilst corporate philanthropy is a worthy activity in order to make CSR more beneficial to the needs of each society, with focus on eradication of any particular issue in a time bound manner having a mandatory provision for CSR will both help streamline the CSR expenditures but also boost the economy in the long run. ■

Ashu THAKUR Advocate & Solicitor

Founder & CEO, Ashu Thakur & Associates New Delhi, India