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.