Mandatory CSR: Coercion and Criminalisation are Inconsistent with the Voluntary Act of Giving

In 2013, India became the world’s first nation to enact statutory provisions related to corporate social responsibility (CSR) for eligible companies. Under Section 135 of the Companies Act, 2013, eligible companies were required to constitute a CSR Committee of the Board which would be responsible for drafting a CSR policy and recommending the amount to be spent on activities outlined under it. Failure to spend the minimum statutory amount necessitated the recording of reasons in the Board’s annual report. No penalty was mandated under the original section 135.

With the enactment of the Companies (Amendment) Act, 2019, penal provisions for non-compliance were introduced. Penalties, applicable to companies as well as every defaulting officer, comprised stringent monetary fines and/or imprisonment for a maximum period of three years. Unused CSR funds would need to be deposited into a government escrow account.

The amendment also widened the ambit of eligible companies to which mandatory CSR provisions would be applicable. Newly-established companies, despite not being in existence for three immediately preceding years, would need to comply with CSR provisions in case they fulfilled the other criteria laid down under section 135.

Coercion and criminalization are concepts which are deemed inconsistent with the voluntary act of giving. From policymakers to philanthropists and business leaders to think-tanks, concerns have been expressed by a wide spectrum of people.

Making CSR provisions mandatory has forced many companies to rethink their approach – they now consider CSR as a ‘box to be checked’ rather than an exercise involving the identification of impactful activities for genuine social welfare. India’s corporate sector, whose contribution to social causes has been steadily increasing, considers criminalization for non-compliance a disregard of its initiatives and charitable activities.

The effect may be opposite of what the legislation intended to achieve. Large corporations, which often spent more than the minimum mandatory amount as part of their business strategy, are now treating CSR activities as forced compliance and planning their activities accordingly. Philanthropists have expressed concerns that making CSR contributions mandatory may encourage companies to find workarounds, some of which could be illegal. They also contend that by enacting such a law, the government is indirectly transferring its social responsibilities to the corporate sector.

Diverting social responsibilities to the corporate sector may impact the modus operandi of non-profit organizations. Corporate funding of such organizations is giving rise to apprehensions that social welfare projects may become transactional, with a greater focus on short-term, measurable output rather than transformative change which requires several years of effort and investment.

There are concerns that companies, under the influence of senior government functionaries, will make contributions to preferred charities and NGOs. Many of these seemingly non-profit organizations are managed by relatives or close associates of government officials, giving rise to apprehensions of kickbacks or financial benefits to the latter. Moreover, large companies tend to contribute funds only to well-known non-profits, thereby ignoring smaller and localized charities which are involved in providing the poorest communities with basic necessities such as clean drinking water and affordable healthcare solutions.

Companies typically have little or no expertise in undertaking social welfare activities, particularly at the grassroots level. Their inability to identify the right projects results in CSR amounts remaining unspent. To fulfil the requirements of the Companies Act, companies may select a not-for-profit partner on whom sufficient due diligence has not been performed, or whose credentials have not been thoroughly verified. There is no surety that the funds contributed by the companies will be utilized in meaningful social projects. Compulsory contributions, therefore, may not translate into development and welfare.

Mandatory CSR expenses are also seen as an indirect and additional corporate tax. Given India’s high corporate tax rate, levying an additional tax for CSR activities would have been viewed unfavorably and projected the country as an unattractive investment destination.

The mandatory CSR expense and penalties for non-compliance changes the nature of the levy to that of a tax. This goes against the very principles of voluntary social responsibility and the philanthropic intent behind CSR activities. In recent years, companies which have demonstrated high levels of social responsibility have attracted higher interest from the investor community. Conversely, companies which have performed poorly on social and environmental parameters have seen substantial decline in their stock prices. Despite this, there is no taking away from the fact that CSR is primarily a voluntary activity.

Despite many shortcomings, mandatory CSR provisions have shaken companies (especially small and medium enterprises) out of their slumber and given a more structured approach to corporate-sponsored social development. Instead of impromptu and unplanned initiatives, eligible companies are required to draft a CSR policy and ensure strict monitoring and reporting of activities under its ambit. It has also led to a higher number of individuals being trained for social development, thereby increasing the available pool of people engaged in such activities.

For corporate-sponsored CSR to have a truly meaningful impact, initiatives need to go beyond routine activities (which a plethora of non-profits are focused on) and focus on long-term welfare activities. Instead of criminalizing companies for non-compliance, they should be encouraged to explore innovative ideas for social development. The government cannot absolve itself of social responsibilities by expecting the corporate sector, which has little or no experience in the domain, to shoulder a higher burden by making CSR mandatory and liable to penalties. This may possibly be one of the key reasons why no other country has made such a provision mandatory.

Gautam Mehra