CSR: Not Mandatory After All

A couple of months ago, the Ministry of Corporate Affairs (MCA) announced its intention to include a mandatory provision for corporate social responsibility (CSR) in the Companies Bill. The issue of regulating CSR using the stick of a mandatory provision was the subject-matter of critique, including on this Blog.

The Government appears to have taken an about turn now doing away with the mandatory nature of the provision. It instead seeks to regulate CSR through a “comply-or-explain” approach, by requiring companies to disclose their CSR initiatives and thereby inserting pressure through a process of moral suasion. Although this approach seems more appropriate compared to a mandatory provision, it is not free from ambiguities. As this Economic Times editorial notes:

At first glance, the government seems to have done a U-turn on imposing a mandatory 2 per cent expenditure from company profits on corporate social responsibility. The Companies Bill reportedly won’t have this provision. Look closer, and it’s a case of “mandating without mandating” as an industry voice describes it. The reworked proposal, it’s said, asks firms to have a formal CSR policy targeting a 2 per cent spend, and to furnish details of funds going to social causes in annual reports. In other words, while keeping up a technical pretence of not legally arm-twisting India Inc, the Centre seeks to exert heavy moral pressure by stipulating disclosures if not actual expenditure. To quote the corporate affairs minister, CSR spending won’t be “voluntary” or “mandatory” but “somewhere in between”! Why this grey area, unless the government wants leeway to play guilt-inducing big brother?

The present observations are based on announcements by the MCA. There will be greater clarity only when the text of the provision in the Companies Bill is made available.

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.

1 comment

  • True this sems like moral suasion, but if it is, it is futile.

    Most Corporations want to "signal" that they value the communities they profit from, and therefore would have an optimum "CSR spend" proactively.

    Left to themselves, that could have been in fact more than 2% in some cases; The irony is, now we might see CSR-spends converging on the 2% and resting there, because of the expresive function of law.

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