Movement Towards Mandatory CSR

A few weeks ago, we discussed the Government’s proposal to introduce mandatory provisions regarding corporate social responsibility (CSR). A press release issued yesterday by the Ministry of Corporate Affairs suggests mandatory provisions for CSR will be included in the new company legislation. The release states:

In response to the overwhelming concerns shown by the Standing Committee of Parliament on Finance (SCF), which thoroughly examined The Companies Bill, 2009, on the extent of Corporate Social Responsibility (CSR) being undertaken by corporates and the need for a comprehensive CSR policy, the Ministry of Corporate Affairs have agreed that the Bill may now include provisions to mandate that 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 a year] shall be required to formulate a CSR Policy to ensure that every year at least 2% of its average net profits during the three immediately preceding financial years shall be spent on CSR activities as may be approved and specified by the company. The Directors shall be required to make suitable disclosures in this regard in their report to members.

In case any such company does not have adequate profits or is not in a position to spend prescribed amount on CSR activities, the directors would be required to give suitable disclosure/reasons in their report to the members.

While welcoming the Ministry’s acceptance of the Committee’s suggestion to bring Corporate Social Responsibility (CSR) in the statue itself, the Committee feels that separate disclosures required to be made by companies in their Annual Report by way of CSR statement indicating the company policy as well as the specific steps taken thereunder will be a sufficient check on non-compliance.

If effected, this would not only be a significant change under Indian law, but would also make Indian corporate law somewhat unique regarding the manner in which CSR is treated. Most other jurisdictions treat CSR either through broad exhortations of policy under company or other legislation or by specifically requiring corporate actors, primarily boards of directors, to take into account the interests of non-shareholder constituencies and broader stakeholders while making corporate decisions. In that sense, no absolute obligations are imposed on companies under the law in other jurisdictions to carry out CSR activities.

The only other example of mandatory CSR we are aware of is Saudi Arabia where companies are required to pay amounts “equal to 2.5% of income and capital” to the revenue department, which will then distribute the amounts to the needy around the country. While this operates more like a government levy on corporate profits, in India the proposal at least leaves it to the discretion of individual companies to determine the manner in which the amounts are deployed.

The new mandatory regime for CSR is likely to attract its share of detractors. However, the success (or otherwise) of such a requirement will lie in its actual functioning. For example, there could be questions on the manner in which companies would decide the precise uses for which they would spend the monies, how they would resolve conflicting demands among stakeholders, what checks and balance would be employed to ensure that the funds are not misused, and how incentives may be created such that the funds are deployed for the most appropriate circumstances.

(Update – September 13, 2010: Our guest contributor, Somasekhar Sundaresan, has expressed similar views in this Business Standard column)

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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