Too much of regulation may kill the spirit of CSR

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The Companies Amendment Act 2019 introduced mandatory fulfilment of Corporate Social Responsibility, thus making India the first country to mandate private philanthropy. Though similar policies around ethical corporate behaviour exist globally, India’s Section 135 was the first example of legally mandating CSR spending. In the six years of its introduction, CSR spending in India grew 47%. In July 2018, 272 companies were served notices for various kinds of non-compliance. This became a cause of concern since a tick-box approach has long been followed.

Considering the current new coronavirus outbreak, will a mandatory CSR expenditure requirement do any good? The revenues of corporates and the country are going to take a huge hit this year and in the coming year. The mandatory provision in such chaos could lead to a rift between the corporates and the government. It may be noted though that amid the COVID-19 outbreak, the ministry of corporate affairs has notified that companies’ contributions towards fighting the pandemic will be considered as CSR spending. Funds may be spent on various activities related to COVID-19 such as promotion of healthcare including preventive healthcare and sanitation, and disaster management.
Corporates have often taken help from NGOs to run various projects like cleaning local areas or establishing schools. The recent amendments introduced by the government could result in several practical problems related to CSR spending.

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The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020, which are open to public comments have introduced a significant change in the agencies that can undertake CSR activities. Under the existing rules, the Company may by itself or along with any other company carry out CSR activities, through a Section 8 company, registered trust or a registered society. However, the proposed draft rules permit the activities to be conducted by the Company only through a Section 8 Company or any entity established under an Act of Parliament or a state legislature and no longer through a registered trust or registered society.

It seems that the intention of the government is to encourage regulated entities so that it can monitor CSR better, however, this could lead to a havoc among trusts and societies and as a result, a lot of trusts and societies will be forced to convert into a Section 8 company. In India, a majority of CSR activities are undertaken through trusts and societies and a smaller number of corporates use Section 8 companies as a vehicle for implementation of their CSR activities. Therefore, the proposed restrictions on Corporate India from choosing trusts and societies as an implementing agency for their CSR activities may not only backfire but also deter them from coming forward with their support in these tough times. Even in case of a Section 8 company incorporated for channelising CSR expenditure, the proposed rules require the registration of the company with the central government by filing Form CSR 1 with the registrar of companies.

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The proposed rules also mandate the board’s satisfaction that the CSR funds have been utilised for the purpose they have been set out for and in order to regulate the same, CFO certification to that effect has been made mandatory. To further tighten the grip on CSR and for better accountability, the CSR Committee has now been charged with an additional responsibility of formulating and recommending to the board, an annual action plan in pursuance of the CSR policy.

Another amendment is the introduction of the concept of having an impact assessment where every company having CSR spending of Rs 5 crore or more in three immediately preceding financial years needs to undertake an impact assessment for its CSR projects and disclose the same in the annual report on CSR. Such impact assessment should have a significant increase on the actual monitoring and implementation of the project on the ground, thus leading to a more meaningful CSR programme, with the people who need it getting the benefit. Further, disclosures of such projects on the website of the company have been made mandatory to ensure transparency including making annual reporting requirements stricter to ensure better corporate governance.

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A few relaxations have been provided by the government, like the requirement of a company to have an established track record of three years in undertaking similar programmes or projects. The move is welcome as it will ease the requirements of a company towards its CSR obligations.

Further, as per the proposed draft rules, unspent CSR funds are to be transferred to a National Unspent Corporate Social Responsibility Fund. The Rules for the same, however, have not been notified yet and the manner and the authority for administration of the fund shall be in accordance with such guidelines as may be prescribed by the central government from time to time. Whether, the new mandate of the government to transfer the unspent amount to such funds undermine the true intention of the CSR provision is a question that remains unanswered.

Is the mandatory CSR a harsh punishment with a pandemic looming large? Will the gap between the companies and the government be bridged? The government expects the companies to have expertise and capacity in executing CSR activities while the corporates are struggling to understand the requirements. Restrictions on trusts and societies will be an added burden on the corporates and could become another reason to pass the funds to the government. Will this erode the spirit of CSR is yet to be seen, but a better dialogue is the need of the hour — more so in light of the present state of the economy.

(Anubha Agarwal is a Senior Associate at Corporate Law Group, a New Delhi-based law firm.)