Since the COVID-19 outbreak began, Corporate Social Responsibility (CSR) has been making rounds in both news reports and academic circles. This renewed focus on CSR has been due to the overarching societal expectations of business, that the corporate sector shall be helping the society to heal in this pandemic.
The unique ‘experiment’ of CSR was started with the enactment of Companies Act, 2013. It was called unique in the sense that India became the first country to legally mandate Companies to spend monies under CSR. Companies which crossed certain financial benchmarks are mandated to spend at least 2 per cent of their net profits.
The CSR Draft Rules: Another Nail in the coffin?
The Companies Amendment Act, 2019 (“Amendment Act”), inserted inter alia, penal provisions for non-compliance of CSR regime. Experts view this move as detrimental. Christopher Hodges, Professor of Justice Systems, University of Oxford, notes that compliance in ethical issues of business should be based on mutual trust and collaboration between regulators and the industry and any punitive action for non-compliance could be counterproductive
Contrary to the recommendations of a 2018 report of a high-level committee on CSR, The Amendment Act mandated the depositing of unspent CSR amount either in a Fund under Schedule VII or in a special account to be opened by the company if such unspent amount relates to an ongoing project. The High-Level Committee report suggested that transferring the CSR monies in Central Government funds to ensure compliance does not serve the intended purpose of CSR.
In furtherance of the amended CSR regime, the MCA on 13th March 2020, issued the Draft Corporate Social Responsibility Rules, 2020 (“Draft Rules”) for inviting comments from the public.
The Draft Rules mandate ‘CSR Implementation’ either by the Company itself or via three modes, firstly, through a ‘not-for-profit’ company incorporated by the principal company; secondly, by partnering with any statutory body formed by the Central or the State government and thirdly, by engaging international organisations for planning & implementation.
Mandating implementation of CSR activities through the company itself or through a not-for-profit company by the Draft Rules seems to be well-intentioned. It is aimed to bring transparency by curbing shell NGOs and trusts, which are engaged by companies in round-tripping of funds earmarked for CSR. Since Charitable Companies incorporated under Section 8 of the Companies Act are subject to similar obligations and compliances of limited companies, it shall bring a majority of CSR activities under the regulatory purview of MCA. However, it may be argued that the legal structure of a company is not best placed to serve the aims and purposes of CSR.
NGOs are important stakeholders in bringing social change. Most NGOs are legally structured as societies and trusts. Globally, NGOs are collaborating with leading companies together to herald social and environmental change. For instance, Coco Cola and World Wildlife Fund have been working together for almost a decade to conserve fresh water resources. A blanket ban on NGOs and trusts won’t serve the purposes of CSR. Regulation is one thing; blanket ban is another.
Apart from these, partnership with statutory authorities may compel the companies to carry out those financial obligations which were essentially government’s, thereby transforming them into secondary exchequers. The draft rules restrict the administrative expenses to 5% of total earmarked funds. An incidental effect of such a provision read along with the penal & coercive enforcement mechanism is that it would disincentivise companies from active planning and implementation of CSR to a passive one. After all, why would a company invest its resources both pecuniary and human in CSR, when it has the option of simply depositing the earmarked amount into a Fund, terming it ‘unspent’? The latest data from the MCA’s CSR portalsuggests that the government exactly intends this to happen.In FY 2017-18,a whopping74.37% of total number of companies either didn’t spend a single penny or spent less than mandated.
The Draft Rules once implemented may transform CSR into a mandatory tax, reducing it to an item of checklist of compliances, which must be paid to conduct business. By doing so, it does not inculcate valuesof doing business in a socially and ethically responsible manner.
The way forward
CSR was implemented not to monitor but to have an enabling and encouraging environment for corporates to conduct business in a socially responsible manner.The case in India remotely seems so. In an era of neoliberalism wherein impetus should be on collaboration between government and private entities, a regulatory model based on coercion and penalty does not fit in. Adopting the right set of incentives and adhering to experts’ opinions is the key to increase the socialisation of businesses. Hopefully, the law on CSR shall be rationalised as part of the broader reforms to boost ease of doing business under the Atamnirbhar BharatAbhiyan.
(The writer is a IV YEAR, B.A., LL.B. (Hons.) student at National University of Study and Research in Law, Ranchi and the views expressed in the article are his own.)