How Modi Tighten disclosure norms for Corporate Social Responsibility (CSR Policy) spending to its new India under Companies (Amendment Act),2019
A high-level panel on CSR is likely to propose increased disclosures to bring transparency in spending on these activities. India Inc may soon have to make higher disclosures on their corporate social responsibility (CSR) spending, a government official said.
A high-level panel on CSR is likely to propose increased disclosures to bring transparency in spending on these activities.
All companies with a net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more are required to spend 2% of their average profit of the previous three years on CSR activities every year.
“There is a view that disclosures need to be enhanced,” the official told ET, adding that this was needed to facilitate a “social audit”, or an examination of CSR spending.
These could include disclosures on amounts spent on foundations or trusts related to companies and spending in the local area of the company relative to that in other areas. The move comes in the backdrop of reports of companies spending CSR funds on trusts related to the group.
“The government has permitted companies to spend money in certain areas but the disclosure that is required is whether the expenditure is being done in foundations or organizations of your own company or related to your company,” said Pavan Vijay, founder of legal and corporate advisory firm Corporate Professionals.
There has been a lot of criticism about companies spending large parts of their CSR budget far from their local areas, Vijay said. Companies are required to give preference to local areas and areas around their facilities for spending amounts earmarked for CSR under the Companies Act.
At present, companies are required to disclose only their CSR policy and the composition of the CSR committee. The report will also make recommendations to deal with implementation issues related to CSR expenditure.
The committee is expected to moot creation of an online exchange portal from where companies can pick projects pitched by district-level government officers and connect with implementation agencies that have been registered with the government, another government official said. The panel is expected to submit its report next month, said the official, who is privy to the talks.The government may also begin publishing an annual report on CSR spending by companies
CSR amendments under the Companies (Amendment) Act, 2019
Until now, 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 introduced 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 INR 50,000 (US $700) to INR 25 lakh (US $35,000) whereas the defaulting officer of the company may be liable to imprisonment for up to three years, or a fine up to INR 5 lakh (US $7,023), or both.
The government, however, is reviewing these rules after the industry objected to the strict provisions, especially with respect to the jail terms for CSR violations, and is yet to operationalize them.
The methodology of CSR
CSR is the procedure for assessing an organization’s impact on society and evaluating their responsibilities. It begins with an assessment of the following aspects of each business:
The most effective CSR plans ensure that while organizations comply with legislation, their investments also respect the growth and development of marginalized communities and the environment. CSR should also be sustainable – involving activities that an organization can uphold without negatively affecting their business goals.
Organizations in India have been quite sensible in taking up CSR initiatives and integrating them into their business processes.
It has become progressively projected in the Indian corporate setting because organizations have recognized that besides growing their businesses, it is also important to shape responsible and supportable relationships with the community at large.
Companies now have specific departments and teams that develop specific policies, strategies, and goals for their CSR programs and set separate budgets to support them.
Most of the time, these programs are based on well-defined social beliefs or are carefully aligned with the companies’ business domain.
CSR trends in India
Since the applicability of mandatory CSR provision in 2014, CSR spending by corporate India has increased significantly. In 2018, companies spent 47 percent higher as compared to the amount in 2014-15, contributing INR 7,536 crores (US $1 billion) to CSR initiatives, according to a survey.
Listed companies in India spent INR 10,000 crore (US$1.4 billion) in various programs ranging from educational programs, skill development, social welfare, healthcare, and environment conservation, while the Prime Minister’s Relief Fund saw an increase of 139 percent in CSR contribution over last one year.
The education sector received the maximum funding (38 percent of the total) followed by hunger, poverty, and healthcare (25 percent), environmental sustainability (12 percent), rural development (11 percent). Programs such as technology incubators, sports, armed forces, reducing inequalities saw negligible spends.
Taking into account the recent amendments to CSR provisions, industry research estimates CSR compliance to improve and range between 97 to 98 percent by FY 2019-20.
Examples of CSR in India
The Tata Group conglomerate in India carries out various CSR projects, most of which are community improvement and poverty alleviation programs. Through self-help groups, it has engaged in women empowerment activities, income generation, rural community development, and other social welfare programs. In the field of education, the Tata Group provides scholarships and endowments for numerous institutions.
The group also engages in healthcare projects, such as the facilitation of child education, immunization, and creation of awareness of AIDS. Other areas include economic empowerment through agriculture programs, environment protection, providing sports scholarships, and infrastructure development, such as hospitals, research centers, educational institutions, sports academy, and cultural centers.
Ultratech Cement, India’s biggest cement company is involved in social work across 407 villages in the country aiming to create sustainability and self-reliance. Its CSR activities focus on healthcare and family welfare programs, education, infrastructure, environment, social welfare, and sustainable livelihood.
The company has organized medical camps, immunization programs, sanitization programs, school enrollment, plantation drives, water conservation programs, industrial training, and organic farming programs.
Mahindra & Mahindra
Indian automobile manufacturer Mahindra & Mahindra (M&M) established the K. C. Mahindra Education Trust in 1954, followed by Mahindra Foundation in 1969 with the purpose of promoting education. The company primarily focuses on education programs to assist economically and socially disadvantaged communities.
Its CSR programs invest in scholarships and grants, livelihood training, healthcare for remote areas, water conservation, and disaster relief programs. M&M runs programs such as Nanhi Kali focusing on education for girls, Mahindra Pride Schools for industrial training, and Lifeline Express for healthcare services in remote areas.
ITC Group, a conglomerate with business interests across hotels, FMCG, agriculture, IT, and packaging sectors has been focusing on creating sustainable livelihood and environment protection programs. The company has been able to generate sustainable livelihood opportunities for six million people through its CSR activities.
Their e-Choupal program, which aims to connect rural farmers through the internet for procuring agriculture products, covers 40,000 villages and over four million farmers. It’s social and farm forestry program assists farmers in converting wasteland to pulpwood plantations. Social empowerment programs through micro-enterprises or loans have created sustainable livelihoods for over 40,000 rural women.
The government’s plan to appropriate unspent CSR amounts of companies is retrograde
In a clutch of new amendments to the Companies Act, the NDA government has sought to tighten the screws on the CSR obligations of India Inc. The amendments approved by the Cabinet seek to convert the soft provision under section 135, which requires companies to have a Corporate Social Responsibility (CSR) policy overseen by their boards, into a hard-line statutory requirement. Under current law, companies meeting certain financial thresholds are required to constitute an internal CSR committee which formulates policies to ensure that 2 per cent of average profits are spent on CSR. On failure to spend this amount, the board owes an explanation in the annual report. The amended law, in contrast, requires companies to sequester 2 per cent of their profits towards CSR, with unspent balances appropriated to the Central coffers if unspent for three years. Companies will also be penalised for slip-ups in spending this quota and the Centre can ‘direct’ them to spend it.
The amendments are retrograde on several counts. A company’s profits belong to its shareholders and there’s no reason why a for-profit private enterprise should be expected to be good at executing social projects, which is the remit of the elected government. This is indeed why CSR was brought in as a self-regulatory provision. Even if the government expects companies to chip in with its welfare efforts, subjecting their CSR obligations to a yearly quota and a short three-year deadline is counter-productive. Companies taking up genuine projects deserve time to thrash out the most cost-efficient mode of delivering social impact. Those that have no genuine intent merely use the annual quota for tokenism and diversion. As to the large unspent amounts reported by companies, the Centre needs to introspect if it has imposed one too many arbitrary conditions. Apart from a restrictive list of items under Schedule VII which are considered as ‘eligible’ CSR, the rules cap CSR overheads at 5 per cent, discourage employee volunteering and disallow CSR spending as business expenses. Revisiting some of these unnecessary rules may help in better compliance. The government should also realise that, even as it seeks to hold companies accountable to a high bar on CSR, its own track record in utilising its myriad cesses is nothing to write home about.
While there’s no disagreement with the belief that private enterprises ought to be more socially responsible, India Inc can render a far greater service to society by being compliant with tax laws, not cutting corners on labour or environmental laws, paying its MSME dues on time and treating its lenders and shareholders fairly. The government already takes its pound of flesh from India Inc by way of the highest corporate tax rate in the world and there’s no justification for more back-door levies. The global wave towards ESG investing is mounting pressure for companies to be more socially responsible; the government must do its best to encourage this trend in India.