By Ananya Agrawal
What started off as a voluntary contribution by business houses, has now become an imposition post the Budget Session, 2019 of Parliament.[1] It passed the Companies (Amendment) Act, 2019 (‘the Amendment’),[2] withholding one provision for further review. The amendment sought to criminalise the non-compliance of Corporate Social Responsibility (‘CSR’) provisions, attracting a jail term of up to 3 years for the defaulting company’s officials.[3] Expectedly, this has caused havoc in India Inc.[4] The committee headed by Mr. Injeti Srinivas, the Secretary for MCA, had suggested non-compliance of CSR to be made a civil offence, shifting to the penalty regime.[5] Not only is this amendment a complete negation of the committee but also, a massive leap from the mere slap on the wrist that the corporates would get for non-compliance of CSR norms until now.
In this blog post, I shall first, begin by exploring how CSR provisions came to be introduced in India. Then I shall delve into the present situation of CSR spending in India, prior to the introduction of the amendment. I will further explore the viability of the amendment, assessing the larger impact on the general public. Secondly, I would discuss the demands raised by corporate bodies. In the end, I conclude by suggesting a method for a better implication of the CSR law on society.
Speak to any foreigner, even many Non-Residents of India, and they will paint the ‘Real India’ image for you. At the backdrop of huge corporate houses and glass structures, one encounter’s the copious shanties which form the center of organised crime, malnutrition, and poverty. What the West perceives as a country of snake charmers or engineers, India has a dubious reputation. From Indira Nooyi to Priyanka Chopra, Indians sit at the helm of affairs in the International sphere. However, one forgets the other half which forms the vulnerable marginalized society who remain below the poverty line, working hard just to make ends meet. India, with an economy nearing 3 trillion rupees,[6] being a focal point in the global market, has seen an exponential rise in setting up of corporate houses.[7] Since liberalization in 1991, the Indian government has been adamant on encouraging industrialization. From concessions on land and infrastructure to special economic zones, big companies have received all aid and support they need from the government to set shop in India.[8] In return, to encourage corporate philanthropy, they initiated CSR,[9] which mandates every company making a profit of 50 million rupees to spend at least 2% of their annual profits on social causes.[10] This legislation took the corporate sector by a storm, with critics treating it like another tax.[11] Despondently, there were ways to evade this ‘tax’.
CRISIL reported the total CSR spending in four financial fiscals to 2018, amounted to 50,000 crore rupees.[12] On the other hand, the unused amount of what was directed was 60,000 crore rupees during the same period, underlining a strict need to improve the ongoing framework.[13] Multiple excuses were hurled by corporates for the same, ranging from not being able to identify adequate projects to not reporting CSR at all.[14]
The 2019 Amendment has resulted in strong corporate backlash. They suggest that this amendment goes against the sentiment of the initial law,[15] since public service cannot be criminally imposed. It is an emotion which should emerge out of personal will and motivation. However, I agree with the opinion that criminalising corporations may lead to greater deterrence as compared to civil sanctions since it creates the possibility of removing the ‘criminal’ from society completely.[16] To elaborate further, it works on the concept of offering ‘a carrot or a stick’. If bribing the corporations with attractive incentives does not prove expedient, threatening them with a prison term will definitely do the job. The Supreme Court of India assessed corporate criminal liability in Iridium India Telecom Ltd. v. Motorola Inc.[17] It held that requisite mens rea can be attributed to a company. This provides an underline jurisprudential reasoning to fixing liability on a company. If liability is fixed on those at the helm of affairs of the company, one can expect the top management to take strict actions for fruitful implementation of CSR activities. Such accountability would ensure that the society at large is benefitted, fulfilling the real motive behind the legislation. It addresses misconduct while setting a precedent for others to follow suit.
Another problematic demand by corporates is asking for 100% tax exemption on the amount of money spent on CSR. The current provision paves two attractive ways for companies to save money. They could either claim 50% exemption on tax for the amount spent as CSR under Section 80G of the Income Tax Act, 1961,[18] or transfer the dedicated CSR amount to the accounts specified, i.e., the ‘PM’s Relief Fund’ in Schedule VII of the Companies Act, 2013 (‘The Act’).[19] In relation to the tax exemption provision, statistics point out that in case such a demand is granted, the current cap of 2% will diminish to 0.67% of the total profits each company has to set aside for CSR.[20] In my opinion, the government does not want to impose CSR as another tax on companies. Rather, it is giving an opportunity to transfer excess money from the haves to the have-nots. The government has enough corpus to do the needful for the people at large, but this provides a possibility for corporates to transform their perception from being exploiters of commerce to being facilitators of development.
Furthermore, in relation to the transfer provision, there lies a problem in the option given to companies to transfer the requisite amount to funds prescribed under Schedule VII of the Act.[21] The reason is two-fold. There are tangible and intangible benefits which arise out of CSR provisions. The tangible benefit is the monetary aid which a company provides but the intangible aspect, which is quite easy to overlook but is equally important, is the human resource available with a corporate enterprise. Take a situation wherein a company mandatorily pays off a cheque to the PM’s relief fund, turning a blind eye as to how that money is spent thereon. Instead of being solely dedicated to the cause, this fund money could account for their worker’s salaries, accommodation, transport, and other overhead costs.n the other hand, if the same company dedicates 5% of their employees’ time, over and above the monetary contribution to work on social issues, it would ensure creative and fresh flow of ideas, adequate resources, substantive research without operating costs being borne out of the CSR fund. This situation ensures better outputs for the society at large along with ensuring true philanthropic work by the riché.
To conclude, I would like to reiterate the need to remove the provision which allows transferring CSR funds into dedicated accounts. It would avoid a situation wherein, despite an enormous fiscal fund being provided by corporations, the company’s efforts prove misguided. Instead, utilizing a corporation’s human resources would ensure the ‘people’ benefit with a substantial gain in the long run. Further, criminalising non-compliance of CSR will hold companies accountable, ensuring fruitful implementation of the CSR legislation. After all, what you give today, you get tomorrow.
Ananya Agrawal is a second-year B.A.LLb (Hons.) student at West Bengal National University of Juridical Sciences, Kolkata (NUJS, Kolkata)
[1] New bills introduced in Budget Session 2019 of Parliament, PRS http://www.prsindia.org/sessiontrack/bill-legislation/842097, last accessed on 25/08/19.
The Economic Times, Companies to face penal action for not meeting csr rules, available at: ‘https://economictimes.indiatimes.com/news/company/corporate-trends/companies-to-face-penal-action-for-not-meeting-csr-rules/articleshow/70471926.cms?from=mdr, last accessed on: 20/08/19.
[2] The Companies (Amendment) Act, 2019.
[3] §8, Companies (Amendment) Act, 2019.
[4] KR Srivats, Ministry keeps new CSR amendments in abeyance, Hindu Businessline, https://www.thehindubusinessline.com/economy/policy/ministry-keeps-new-csr-amendments-in-abeyance/article29127073.ece, last accessed on: 22/08/19.
[5] Injeti Srinivas committee report on CSR, https://www.drishtiias.com/daily-updates/daily-news-analysis/injeti-srinivas-committee-report-on-csr, last accessed on 25/08/19.
[6] Rashmi Sanyal, India to be $3 trillion economy by FY20, Livemint, https://www.livemint.com/budget/news/india-set-to-be-a-3-trillion-economy-by-fy20-says-sitharaman-1562305651222.html, last accessed on: 21/08/19.
[7] §2(20), Companies Act, 2013: “Defines the term company to mean a company which has been incorporated in the Companies Act, 2013 or any previous company law. It includes the expression of ‘body corporate’.”
[8] Premal Balan & Kalpesh Damor, Adani group got land at cheapest rates in modi’s Gujarat, Business Standard, https://www.business-standard.com/article/companies/adani-group-got-land-at-cheapest-rates-in-modi-s-gujarat-114042501228_1.html, last accessed on: 21/08/19.
[9]Amendment, Supra note 3.
[10] India mandates corporate social responsibility, the 2% bill, Archive, http://archive.gbchealth.org/asset/india-mandates-corporate-social-responsibility-the-2-percent-bill, last accessed on: 21/08/19.
[11]Vatsala Gaur, Jail term for csr violations makes firms anxious, Economic Times, https://economictimes.indiatimes.com/news/company/corporate-trends/jail-term-for-csr-violation-makes-firms-anxious/articleshow/70506775.cms, last accessed on 25/08/19.
[12] India Inc spent 50000 Cr on csr in FY, The Hindu Business Line, https://www.thehindubusinessline.com/economy/india-inc-spent-50000-cr-on-csr-in-fy15-18-but-unspent-amount-higher/article26399672.ece, last accessed on: 22/07/19.
[13] Id.
[14] Navadha Pandey, CSR spending, 16 of firms give no reason for not meeting obligations, Hindu Business Line, https://www.thehindubusinessline.com/companies/csr-spending-16-of-firms-give-no-reason-for-not-meeting-obligations/article8871605.ece, last accessed on 25/08/19.
[15] The Companies Act, 2013.
[16] Jill E Fisch (2007), Criminalisation of Corporate Law: The impact on shareholders and other constituents, Penn Law Review, 91-95. Retrieved from: https://pdfs.semanticscholar.org/6d33/028395d985da8b687098917d77620aa183ac.pdf
[17] Iridium India Telecom Ltd. v. Motorola Inc. (2011) 1 SCC 74.
[18] Income Tax Act, 1961, §80G available at https://taxguru.in/company-law/deduction-of-csr-expenses-under-income-tax-act-1961.html.
[19] The Companies (Amendment) Act, 2019: Introduced in India: Mandatory CSR new provisions, India Briefing, https://www.india-briefing.com/news/companies-amendment-act-2019-india-mandatory-csr-new-provisions-19082.html/, Last Accessed on: 22/07/19.
[20] More corporates outsourcing CSR spending to NGOs, CRISIL, available at: https://www.crisil.com/en/home/newsroom/press-releases/2018/03/more-corporates-outsourcing-csr-spending-to-ngos.html#, Last Accessed on: 22/07/19.
[21] Id.
The Journal of Indian Law and Society 