Ambiguities and Consequences of the New CSR Provisions
The global approach to Corporate Social Responsibility (CSR) has been changing in nature and scope. It varies across time, countries, companies, industries and different economies. Some of the world’s most responsible companies, mostly based in the United States and Europe, not only demonstrate responsible behaviour in their business operation but also towards improving the quality of life of the communities surrounding their areas of operations. However, the approach taken by these companies for fulfilling the social responsibility is sensed to be morphing between purely philanthropic to systematic to strategic activities.
Indian government with an aim to promote social responsibility among the corporates, designed the National Voluntary Guidelines and brought the CSR rules as a part of the Companies Act in 2013. Thereafter, to improve the effectiveness and to plug the loopholes in the execution of the CSR rules, various amendments have been introduced by the government.
The latest amendments in the provisions of the Act, passed by Rajya Sabha on 30th July 2019, may change the way CSR is being perceived and practiced in India.
In that case, a clear shift from the erstwhile CSR approach of voluntary compliance to mandatory compliance is implied by the new provisions of section 135 of the passed bill. By emphasizing the role of companies, the government seeks to re-situate the CSR status to a wider context in India.
The new provisions of the CSR Act aimed at mandating companies to spend the CSR funds and minimizing the unspent amount. The reasons for the underspend of CSR funds vary from difficulty in finding implementation partner, long gestation period before achieving the targeted impact to high administration costs. Also, companies with low CSR budget will now have to comply, which were not hitherto conducting CSR activities due to high administrative costs. This will lead to expansion of the applicability of the legislation bringing a greater number of companies under the mandate.
The new provisions have not been crystalized in the bill and have no effective date. This is due to the recent recommendations released by the High-Level Committee (HLC) on 7th August 2019. They seek to facilitate implementation of CSR in a more efficient, transparent and competitive manner.
Few ambiguities of the new CSR provisions to ponder over are
- Ownership of Escrow: The fact that a CSR initiative involves multiple stakeholders that work together, the new provisions of the bill, with no effective date, provide limited sense of ownership of the Unspent Corporate Social Responsibility Account (escrow account).
- Modalities of the unspent funds: The administrative overheads of the unspent budget, unutilized funds from implementation partners and inclusion of previous financial year’s funds are some points that should also be taken into consideration.
- Modalities of the project: A clear indication for company to allocate CSR funds for long term projects can be sensed from the provisions which ask companies to commit funds in escrow account up to three years. However, provisions again provide limited sense on the modalities for the projects running for 3+ years’ time periods.
The inculcation of new provisions may be seen as further unloading of government’s responsibilities on the private sector. The Government is reconsidering the amendments in the light of recommendations by the HLC. For now, it appears that the government intends to realign the onus of the Indian companies.
Critiques argue that companies already play a pivotal role in the country’s development by paying taxes to government and providing dividends, goods, and services to various stakeholders. By the new provisions, the companies will be burdened with additional responsibilities. Hence, the new provisions could be a challenge for the companies in terms of shouldering more responsibilities or as an opportunity to address social problems.