India’s provision relating to corporate social responsibility (CSR) in the Companies Act, 2013 has attempted to define and measure the concept, and is in this respect something of a milestone. However, by thus providing a definition and measurability to CSR, the concept has lost some of its innate flexibility. In my article forthcoming in the Journal of Comparative Law, I examine how effective the CSR provision has been by assessing corporate responses before and during the Covid-19 crisis. The article finds that the rigidity in the provision has impeded corporate responses to the pandemic. It proposes a solution to address the lack of flexibility in the provision while retaining some benefits of the provision.
How did India’s CSR provision fare in response to the pandemic?
The Companies Act, 2013 introduced section 135, which requires large companies to annually spend at least two percent of their average net profits generated in the preceding three financial years on CSR activities. The section applies to companies that have a net worth of at least INR 500 crore or those that have an annual turnover of at least INR 1,000 crore. The CSR committee of each such companies is then charged with formulating a CSR policy which must indicate the activities to be undertaken by the company and the amount of expenditure to be incurred on the activities, and continue to monitor the company’s CSR policy regularly. This CSR policy is then recommended to the board of directors. Section 135 then goes on to impose obligations on the board. The board of companies required to engage in CSR should, after considering the CSR committees recommendations, approve the CSR policy for the company, disclose the contents of the CSR policy in the annual report and also in the company website, and finally, the activities mentioned in the policy are undertaken by the company. If a company fails to spend the required amount on CSR, its board should explain the reasons for non-compliance in the annual report. Schedule VII of the Companies Act also specifies what would be considered as a CSR activity. There is also an opening for the government to specify other categories of activities to be considered as CSR activities.
While the CSR provision can be seen as something of a milestone since it succeeds in giving CSR a concrete definition and a measurable quality, this has come the cost of flexibility and the issues that arose in the context of Covid-19 have exposed this. Since the Covid-19 crisis hit India, the Government imposed a nation-wide lockdown requiring all non-essential services, including businesses, to close their physical operations, with only remote work allowed to continue. Many big businesses promised not to cut salaries of staff during the pandemic. Apart from this, corporations have also engaged in charitable donations in response to the crisis and other innovative measures. For example, Mahindra Group’s chairman offered to convert its resorts to temporary care facilities and also pledged to create a fund to help smaller companies.
Some of these innovative measures do not fit very well into the narrow legislative definition of CSR in India. Recognising this, the Ministry of Corporate Affairs (MCA) issued two circulars. The first circular stated that companies’ spending in response to the Covid-19 crisis could be classified as CSR. However, the second circular, in answering whether companies’ payment of salaries and wages of employees and workers could be considered CSR under the law, not only says that it cannot be considered CSR, but it also said that “payment of salary/ wages to employees and workers even during the lockdown period is a moral obligation of the employers…”.
Another issue not addressed within this second MCA circular, perhaps because no one asked the question, is that activities that do not involve a certain amount of spending, for instance the Mahindra Group making its resorts available as Covid-19 facilities, would not be treated as CSR under the law. This is problematic because although forgoing revenue is functionally equivalent to spending, it will not be treated in the same manner under the CSR provision. Similarly (and this is more likely to be the case with Mahindra Group’s resorts) while the company might not be forgoing revenue if none is coming to it during the lock down, it is incurring spending that is not “new”, but is effectively philanthropic by incurring costs of operating the resorts rather than simply shutting them down during for the duration of the lock down. These examples lead to the unfortunate conclusion that CSR in Indian corporate law is so narrowly defined that it excludes corporate activity that genuinely has moral and social motivations.
The Proposed Solution
India, like many other countries, has made some amendments to corporate insolvency laws to help companies tide over the Covid-19 crisis. When such modifications have been introduced to help distressed companies survive, it would have been similarly useful to go further and help those companies that are able to contribute to the country’s efforts to deal with the crisis in innovative ways. A simple way to do this would be to introduce a new catch-all category for CSR spending which allows companies to assign a cost to a socially oriented activity, for example, using company property to help the country during a crisis. This amendment could have been introduced with temporary effect like the insolvency reforms, for a period of, say, 12 months. The Government could then assess, based on the quality of CSR activities, if such a catch-all provision should be introduced more permanently.
The obvious concerns with such a catch-all proposal would be that some companies may get away with spending less than the prescribed amount. The corporate responses to the crisis show that rigidity and strict enforcement is not as important as the framers of the CSR provision, might have thought. Besides, in order to exploit the expressive function (the idea that legislative statement has a value distinct from directly controlling behavior) of the provision, it should allow behaviour that is consistent with the spirit of the norm underlying the CSR provision even if this is at the cost of measurability.
Even if the Government has not acted to allow socially beneficial corporate activity within the provision immediately after the onset of the pandemic, the proposal outlined here would be beneficial in the long term. Introducing a catch-all provision as described here would allow companies the option of spending under the narrowly defined categories or under the new catch-all category. In the latter case, shareholders and other stakeholders would still be able to gauge the value of the CSR activity in terms of outcomes rather than amount spent. Thus, there is merit in allowing some flexibility back into CSR. Introducing the catch-all category, as recommended here, in addition to the existing categories of CSR activities will result in net benefits to society.