CSR reforms brought by Companies (Amendment) Act, 2019: A boon or a bane?
Article by Shauree Gaikwad,
The Companies (Amendment) Act, 2013 introduced the concept of mandatory Corporate Social Responsibility (“CSR”) in India. India is the first Asian country to have come up with a legislation to implement mandatory Corporate Social Responsibility activities and the second country in the world to do so after the United Kingdom. According to CRISIL, in the last fiscal year 2018-19, the amount spent by companies on CSR activities was Rupees 9,977 crore, a Rupees 1,612 Crore jump from Rupees 8,365 crore spent in the fiscal year 2017-18. Even with this drastic increase in companies’ contribution to CSR activities, was introducing a stricter CSR regime as well as serious consequences for not complying the need of the hour?
Laws related to Corporate Social Responsibility under the Companies (Amendment) Act, 2019
Under the Companies Act, 2013, Section 135 deals with Corporate Social Responsibility. Section 135 makes it mandatory for every company having a net worth of more than Rupees five-hundred crore or more or having a net profit of more than Rupees five crore in a financial year to constitute a board as well as a policy to carry out CSR activities. Furthermore, Section 135 makes it mandatory for these companies to spend at least 2% of their net profits on CSR activities. The Companies (Amendment) Act, 2019 amended Section 135 as well as, added 4 more sections to the existing sub-section and sections of Section 135. They are:
· Section 5(ii) and Section 6 classifies between unspent CSR fund related to ongoing projects and unrelated to ongoing projects respectively and has different ways to deal with the same.
· Section 7 charges a hefty fine ranging from Rupees fifty hound to Rupees Five Lakhs and/or imprisonment for a term extended up to three years.
· Section 8 empowers the Central Government to issue directions for the compliance of CSR norms as given under Section 135 of the Companies Act, and the companies need to comply with the same.
In addition to Section 135, Schedule VII defines activities which can be carried out as CSR activities and which mostly include eradication of poverty, hunger, gender inequality, along with improving employment rate, child mortality, environment and maternal health etc.
The Irrationality of Tightening of Section 135 by the Companies (Amendment) Act, 2019
The concept of mandatory corporate social responsibility aims to direct companies to fulfil their economic, social and environmental needs towards the country and its people, but is it their corporate social responsibility to do so in the first place? It can be argued that the only social responsibility that any public company has, is to give dividends to the shareholders by generating profits. When profits have been successfully generated and dividends have been given to the shareholders, a company’s corporate social responsibility is essentially, put to an end. This ideology has also been supported by the economist Milton Friedman, who believed that a company has fulfilled its responsibility towards the society when it generates profit. CSR activities kept aside, a company already spends on research activities to develop technology and either improve or come up with new production techniques, which is not only enough to generate them profits but it's also good for humanity as a whole as it helps us to progress scientifically and technologically.
The corporate executives who run the companies are meant to come up with business strategies that grow their business and generate profits, not come up with CSR policies that save them from imprisonment and hefty fines. A company’s will to work towards and provide for social welfare of the people should not be a result of the fear of strict penalties in case of non-compliance of the same. Tightening the CSR norms which already mandatory in nature, thus making it have serious consequences such as jail time, is definitely not the way ahead to go in order to ensure companies fulfil their social responsibility towards the State and its people. A better way to ensure that companies actively fulfil their corporate social responsibility would be to provide attractive tax incentives which vary according to the type of activity carried out. The company executives should not be coerced to find a way to improve the social conditions of the State with the threat of facing serious penal consequences as policy making and resource allocation is the Government’s job. Instead, the Government should increase the corporate tax or impose a CSR tax for the companies making profits of more than five crore rupees and later it should come up with schemes and ways to spend the tax revenue generated. The only newly added subsection that is in consonance with the above mentioned view of increasing corporate tax or imposing a CSR tax is sub-section 6 which necessitates transfer of unused CSR funds to the Prime Minister's National Relief Fund or any other fund set up by the Central Government. Rest of the additions made to Section 135 with the hope of it making companies increase their CSR activities as well as increasing the number of companies which carryout CSR activities, are innately flawed in its philosophy and a misunderstanding of capitalism. And therefore, in my view the CSR reforms brought by the Companies (Amendment) Act, 2019 are more of a bane than a boon.
Acknowledging the Irrationality
Soon after the Companies (Amendment) Act, 2019 was passed, the newly passed CSR law was highly debated on various news channels and well as newspapers. Soon after the Finance Minister Nirmala Sitharaman promised corporate entities to look into the matter. As a result, a High Level Committee on CSR gave its recommendations. They are:
· Non-compliance with CSR norms be made a civil offence and moved to a penalty regime.
· Make CSR expenditure as tax-deductible in order to provide a tax incentive for the companies who spend on CSR and allow companies to carry forward the unspent balance for a period of 3-5 years.
· Develop a CSR exchange portal to connect contributors, beneficiaries and agencies, promoting social impact companies.
· Conduct third-party assessment of major CSR projects.
Along with the above-mentioned recommendations made by the High Level Committee, they also said CSR should not be treated as a resource gap funding for existing government schemes. Instead, a special designated fund should be created for the transfer of unspent CSR money beyond three to five years.
The recommendations given by the High Level Committee on CSR was a drastic change from the CSR law put forth by the Companies (Amendment) Act, 2019. This move was appreciated and found to be a huge relief by the corporate entities. Also, by giving these recommendations, the High Level Committee acknowledged that the new CSR law was a bane than a boon and set forth to correct the new CSR law by suggesting ways to improve and incentivise it.