Demystifying the CSR Act

— Shashwat DC

If there is one topic or term that can be said to be a hot-potato across boardrooms in India, it surely is CSR or corporate social responsibility. Through the amendment of the Companies Bill, the government introduced a new section, which kind of made CSR mandatory.

In one sweep, every company having net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during any financial year shall spend at least 2% of average net profits of the company made during the three immediately preceding financial years.

And the CSR is not chalk and cheese as spending the 2%, any company that matches the criterion has to constitute a CSR committee of the board consisting of 3 or more directors, of which one shall be an independent one. Next the board would formulate a policy that will define the actual spending in lieu range of activities that are allowed under the Schedule VII. The CSR will function in the project mode, namely, one off events or projects cannot be undertaken in an ad hoc manner. Once the year has passed, the corporate will formulate and submit a report of its CSR activities. In case, it has not spent its 2% sum, it has to give a reasoning for why it did not do the same.

Thus, the emphasis is not as much on spending, as it is on reporting. And while in the Companies Act, especially in the CSR section there are no explicit mention of the penalities and punishments, experts are of the opinion that it has been smartly integrated. Accordingly, penalities for not spending on CSR (by not reporting), any company can be penalised from Rs. 50,000 to 50 lakhs. Meantime, the CSR head, the board of director can face prison upto 3 year, and a fine from Rs. 25000 to 5 Lakhs. Thus, this is a law that has its bark and its bite as well.

It is estimated that some 17000 companies in India map to the criterion listed, and over a period of year spend around Rs. 20000 crores. Considering the huge amount of money, the social sector is abuzz, especially the NGOs, to get a piece of the yummy pie. But it won’t be an easy cakewalk. There are stringent procedures that have been laid down in terms of selection fo NGOs, they need to have a track record and cannot function on one of programes, but year long association in terms of projects and impacts. One of the very interesting provision is to provide support and finances to IIM and incubators in premier institutes.

Overall there are some 470 sections in the New Companies Act, of which CSR is just 1, with 5 sub sections and 12-14 rules. It is a fairly simple and obvious provision. And while there are many queries, concerns, and apprehension with the bill, the CSR policy will actually sift the landscape and segregate those companies that do nothing from those that take active partnership in nation building exercise.

Recently, the government came out with a clarification, namely stating that the Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The term liberal here is a loaded one, giving a lot of leeway to pursue its own activities, as long as the ones that are not allowed are not pursued.

In the end, much like the Gandhi’s idea of trsusteeship, CSR attempts to instill the same ethos in the corporate sector through the CSR provision, whether it will flourish or fail, we will have to wait till another day.