Relevance: Mains: G.S paper II: Government bills and Acts
The Companies (Amendment) Bill, 2019 has found space in the wave of several Bills being passed by Parliament by way of some so-called smart floor tactics by the government. In a major step towards regulating the Corporate Social Responsibility (CSR) Policy, Section 135 has been amended, evidently to strengthen the compliance practices and punish company officials for non-compliance.
This seems like a bold step by the government to make companies adhere to rules. However, what are the possibilities of the amendment affecting a company’s CSR spending in actuality? Will stricter norms facilitate a meaningful CSR programme for affected communities? What does ‘unspent amount’ really mean? Most importantly, let us understand how companies are likely to adapt to the new norms from previous experiences.
According to the policy, a company is supposed to earmark 2 per cent of the average net profits of the last three financial years or more lately, immediately preceding financial year (if the company hasn’t completed three financial years since its incorporation).
The new policy revolves mostly around curbing the cases of unspent CSR amounts and pushes companies to spend these. The underlying assumption is that spending funds within a set duration would make companies more responsible, which would in turn result in positive social programmes.
Although allocation and expenditure of funds to mitigate social and environmental impacts is necessary, there is a strong possibility that the amendment will add to the already faulty spending on activities that are meant for just one time and, in many cases, cater to political compulsions with limited focus on communities and their representation in committees.
With regards to the amendment, simply put, unspent CSR amount can be of two types: One, unallocated and therefore unspent and two, allocated and unspent.
For amount that is unallocated and unspent, companies are naturally supposed to allocate these to a fund under Schedule VII within a period of six months. For amount that is allocated to a project and is unspent, the companies, according to the new policy, need to forward these funds to an Unspent Corporate Social Responsibility Account within 30 days of the end of the financial year.
This money needs to be spent within three years. In case the company fails to spend this amount, it has to be reallocated to any of the funds under Schedule VII. Violations by companies may cost them between Rs 50,000 and Rs 25 lakh and, for officials concerned, imprisonment of up to three years and / or a fine of Rs 50,000-5 lakh.
First, in all likelihood, most CSR funds are going to find their way in to the Unspent CSR Account because mere allocation wouldn’t suffice. It relatively is an exhaustive task to formulate an appropriate CSR policy / project and allocate budgets, identify relevant executing agencies, conduct due diligence and needs assessments and finally disburse amounts for implementation, all within a financial year.
The threat of being penalised would mean stricter timelines, which could mean inadequate planning, and more importantly, inadequate assessment methods and limited comprehension of the view points of affected persons.
It would, hence, be more relevant on focus on how the funds will maximise community benefits. Besides, most CSR practitioners would agree that funds for a particular programme / project typically run from one financial year to the other.
The Ministry of Corporate Affairs’ (MoCA) CSR data portal provides ample information on CSR trends. Data of the last four years makes it clear that the CSR allocations of companies have dropped to Rs 8,365 crore in 2017-18 from Rs 10,066 crore in 2014-15. The only considerable increase was in 2015-16, after which the allocations have dropped.
Moreover, during this time, companies have spent majorly on education, the differently abled and livelihoods (an average of Rs 14,512.5 crore), followed by health, eradicating hunger, poverty and malnutrition, safe drinking water and sanitation (an average of Rs 11,215.25 crore).
Although positive, information and reports on the resultant impacts remain limited and scattered in individual reports. Drawing from this, interestingly, a key element in the CSR policy revolves around the sustainability of projects, meaning the initiatives should run in the project / programme mode. This remains unclear.
The obvious intent behind this notification is to make projects / companies more compliant in their spending. However, what the new policy misses out on, quite similar to its previous version, is laying out provisions for capturing the actual impact of CSR projects.
The policy fails to draw a concrete roadmap towards what it wants to achieve. Quite the contrary, a large number of allocations have been directed towards funds that have been shaped and maintained by the government for welfare purposes. The impacts of these allocations therefore remain unclear and merely contribute to the government exchequer.
Between the time the CSR policy was rolled out in 2014 and now, government funds such as Swachh Bharat Kosh has received Rs 742 crore, PM’s National Relief Fund Rs 663 crore, Clean Ganga Fund Rs 64 crore, whereas Any Other Funds have received the highest — Rs 1,244 crore.
The policy therefore isn’t coherent enough on issues of how funds are spent by companies and what the impacts are, especially on affected communities. CSR contributions to the Statue of Unity are case in point.
This is not to say that companies are not to donate to government funds. It, however, is pertinent to revisit the idea and practice of CSR. Setting of mere timelines and punishments would probably prompt the exact opposite of what is desired.
Since CSR money is already a part of profits made by a company, there is no question of monetary returns, except demonstrating one’s responsibility towards the society and environment.
These responsibilities begin not only after profits are made, but from the way businesses make profits and contribute sustainably to human development. One of the ways this can be done is by strengthening and detailing out reporting that is available to the public. For example, merging CSR and Sebi’s Business Responsibility Reporting.
Penalising companies and officials could only push them to tick the CSR box and adopt cheque signing approaches. In conclusion, there are no correlations between stricter norms and meaningful CSR programmes.
It is time the discourse shifts away from companies’ responsibilities and moves to community priorities. As the government states, enacting CSR was the world’s largest experiment. For now, this experiment remains directionless.