The paper provides insights into India’s history and provisions of Corporate Social Responsibility (CSR). CSR has transformed from philanthropic to more strategic initiatives. There has been a rise in CSR expenditure in India since it was mandated in the Companies Act of 2013. The paper analyses CSR compliance and its regulations after the latest amendments to the Companies Act.
India is the only country to mandate CSR spending, whereas developed countries like the USA and China allow voluntary corporate CSR expenditures. The paper then sheds light on China’s and France’s CSR models and compares them with India’s. The paper discusses the challenges India faces and the way forward.
- History and provisions of CSR in India
Corporate Social Responsibility (CSR) refers to the idea that corporate companies should contribute financially to the community through initiatives to promote sustainability, gender equality, education, health, etc. CSR in India is based upon Gandhi’s idea of “trusteeship,” where wealthy people are supposed to be trustees of trusts that look after the welfare of the general public.
CSR has deep roots in India; earlier, it was philanthropic, but now it is being modelled into strategic CSR. Before the 1850s, wealthy individuals willingly donated to build temples, schools, and hospitals. During various freedom movements, philanthropy played a vital role in supporting the freedom struggle. After the independence, corporates started to form trusts that brought various initiatives for rural upliftment. A chunk of donations came through family trusts; NGO sponsorships needed to be improved.
India is the only country to mandate CSR. CSR policy is formulated under Section 135 of the Companies Act, 2013 and came into force in April 2014. The act requires that if companies qualify conditions:
- a net worth of at least ₹500 crores, or
- an annual turnover of at least ₹1000 crores, or
- generate a profit of ₹5 crores or more
The company has to spend at least 2% of its average net profit for the previous three years on CSR initiatives. The act mandates companies to form a CSR committee with at least three boards of directors, including one independent director. The presence of an autonomous will bring diverse perspectives to the table and ensure more democracy. The CSR committee must draft a CSR policy with initiatives following the 7th schedule of the Companies Act of 2013. The committee must recommend the policy and its expenses to the company’s board and monitor the CSR policy from time to time.
The board of every company must take account of recommendations put up by the CSR committee and ensure that activities as in the CSR policy are acted upon. The company must disclose its CSR policy and put it on its website. If the company is unable to spend the desired amount, it must specify the reason for underspending in its annual report. The company shall prefer local areas where it functions to carry out CSR activities.
Schedule VII of the Companies Act of 2013 allows companies to carry out CSR activities in the following sectors:
- Eradication of extreme hunger, malnutrition, and poverty
- Promotion of education
- Promotion of gender equality and empowerment of women
- Environmental sustainability
- Vocational training to increase employment
- Reduction in child mortality and improving maternal health
- Reduction in malaria, HIV, AIDS, and other diseases
- Social business projects
- Prime Minister’s National Relief Fund or any other fund set up by the central or state governments
- Other such sectors, as prescribed by the act
- CSR spending in India over the years
Prior to the CSR policy, many firms voluntarily made donations for community development and to ensure environmental sustainability. The year 2013-14 proved to be a turning point. The implementation of the Act led companies to spend on CSR activities, and a steady rise in CSR expenditure was observed. From ₹10,066 cr in the fiscal year 2014-15, CSR expenditure has risen to ₹25,715 cr in the fiscal year 2020-21.
In the fiscal year 2011-12, around 500 companies disclosed various initiatives to enhance society and the environment. The number significantly rose to 1,470 in 2012-13. In the fiscal year 2014-15, out of 10475 liable companies, 7334 disclosed their CSR initiatives. The number of eligible companies kept rising until 2018-19 and started to fall. In 2018-19, the total number of eligible companies was 25,179, which fell significantly to 18,012 in FY 2020-21.
Reliance Industries Limited is the highest contributor for FY 2020-21, incurring ₹922 crores as its CSR expenditure. Reliance has been the top contributor from 2014-15. The top contributors in FY 2020-21 were Reliance Industries, followed by Tata Consultancy Services (TCS), Tata Sons Private, HDFC Bank, and Oil and Natural Gas Corporation.
The sector receiving the highest spending in FY 2020-21 was healthcare, with ₹7182 cr, due to a need to combat the sudden outbreak of COVID-19 in 2020. Education was the top recipient in previous years; it received about ₹6600 cr in FY 2020-21. Maharashtra received the highest share of CSR expenditure, ₹3426 cr, in FY 2020-21.
- CSR compliance in India
The CSR compliance rate is low in India. As indicated in the graph, the compliance rate was as low as 59% in 2014-15; it has increased since, but steadily.
As per Section 135 of the Companies Act 2013, if a company fails to spend the prescribed amount, it has to specify the reason for underspending in its annual report. It weakens the idea of “mandatory” CSR spending of 2% of net profits. Companies try to get away by specifying one or two vague reasons. Sometimes, their data does not match the CSR portal information or is limited. In FY 2019-20, out of a total of 22,953 liable companies, 10,425 incurred zero expenditure. These companies were either prescribed a zero spend due to negative profits in the preceding financial years or a positive spend but incurred zero spending. Four thousand seven hundred sixty companies spent less than prescribed, 804 companies spent precisely as specified, and 6964 companies spent more than prescribed. In FY 2020-21, the number of companies with zero CSR expenditure fell to 3227. Common reasons specified by the companies include delays in permissions from local authorities, the inability of implementing agencies to ramp up the projects, the inability to find suitable projects, the appropriate enforcing agency, a lack of prior experience, multiyear projects, etc.
Significant amendments have been made to the Companies Act in 2019 and 2020 to raise CSR compliance in India. The Companies Amendment Act of 2019 allows companies to transfer unspent funds to a particular account opened by the company called the Unspent Corporate Social Responsibility Account. If this unspent amount relates to any ongoing project, it must be consumed within the next three financial years. Failure to do so will lead to the transfer of unspent CSR to a fund specified in Schedule VII within thirty days from the completion of the third financial year.
India earlier followed the “comply or explain” CSR model, where companies failing to spend the prescribed CSR expenditure needed to specify the reasons for the same in their annual reports. There was a need to penalize the defaulters of unspent CSR; otherwise, companies get away by stating unclear and generic reasons. The Companies Amendment Act of 2020 is in place to overcome this challenge that has changed the CSR model to “comply or get punished.” The amendment states that the company shall be liable to a penalty of twice the amount required to transfer to the Fund specified in schedule VII from the unspent CSR account, or one crore rupees, whichever is less. Defaulting officers of the company shall be liable for one-tenth of the amount transferred to the Fund specified in Schedule VII or two lakh rupees, whichever is less.
- China’s model of CSR
Article 5 of China’s Company Law (2006) discusses the contribution of businesses to society. The article states, “In its operational activities, a company shall abide by laws and administrative regulations, observe social morals and commercial ethics, persist in honesty and good faith, accept supervision by the government and the public, and assume social responsibility.” The idea of CSR has evolved in China over the years. Between 1999 and 2005, only 22 CSR reports were published. The disclosure of reports rose to 1600 in 2006-2009. Three stages are identified for the development of CSR in China:
- The first stage started in the mid-1990s and continued into the early 21st century. During this period, globalization was occurring at a fast pace in China. As the West adopted various anti-sweatshop and environmental movements, multinational corporations chose suppliers who adhered to such regulations. Such supplier standards are called codes of vendor conduct. With the rise in compliance with codes of vendor conduct and awareness of labour and environmental issues among Chinese companies, CSR gradually became internally accepted and was no longer presumed to be an externally imposed notion.
- The second stage marked the period from the early 21st century to 2004, when the concept of CSR started gaining traction. Chinese academic institutions, NGOs, and international organizations began introducing CSR into China’s framework and conducting extensive studies and discussions. At this stage, the government started to play a crucial role in the development of CSR. The Ministry of Labor, Ministry of Commerce, and Chinese Enterprise Confederation set up CSR investigation committees to investigate CSR and the way forward in China.
- The last stage began after 2004 when measures were taken to promote CSR. The Chinese government and industries realized that CSR effectively builds a harmonious society, protects labour rights, and ensures sustainable development.
CSR in China includes the prohibition of forced or child labour, discrimination, harassment, abuse, regulation of working hours, environment protection, occupational health and safety, consumer protection rights, employment rights, and assisting the healthy development of the country.
When Sichuan Province suffered an earthquake of 8.0, killing approximately 70,000 people, companies responded and donated significantly for the recovery. Sichuan suffered another earthquake in 2013, and many MNCs supported it. Samsung donated about $8.5 million, and Apple donated about $7 million.
Most CSR in China is conducted by state-owned enterprises that set an example for private enterprises. In 2008, the State-owned Assets Supervision and Administration Commission (SASAC) published 20 official CSR instructions for state-owned enterprises. The SASAC also formulated a CSR indicator system that is included in every SOE’s annual CSR evaluation system.
There is a different case in India, where non-PSUs contribute the most to CSR. In FY 20-21, non-PSUs accounted for about 83% of the total expenditures.
The CSR Research Center under the Chinese Academy of Social Sciences was established in 2008 to evaluate CSR performance. The Research Center assesses and ranks social and environmental performance based on 150 indicators. Chinese companies have shown a gradual rise in CSR performance.
When the government holds power in the nation’s businesses, it is evident that companies wish to gain support from the government. It is reflected in various cases; for example, in 2004, when China’s state forestry administration launched the “National Forest City” program, many companies diverted their CSR funds toward tree planting. As a result, most CSR initiatives are short-term and align with current government policies.
CSR reporting in China is not mandatory and does not impose any penalties if companies fail to disclose Environmental, Social, and Governance (ESG) information or if a country provides poorly framed reports. Article 5 of the company law is a matter of debate among scholars. It does not specify any remedies for noncompliance. Some scholars argue that CSR provision is an ethical obligation and only exhortatory. While some scholars argue that CSR provision is mandatory, the article declares CSR as a fundamental legal principle.
Whereas in India, disclosure of CSR expenditure is mandatory for all liable companies. Corporations are required to specify reasons for underspending in their annual reports. The new amendments introduced in the Companies Act discuss provisions for penalties if companies underspend the prescribed expenditure.
- France’s model of CSR
France promotes CSR through legislation; the French parliament has adopted various laws with stringent regulations. CSR initiatives in France are beneficial to curb rising gender pay disparity and human rights violations, mitigate climate risks, reduce carbon emissions, and ensure sustainability. French laws are also aligned with EU Council laws.
Several articles in the French Commercial Code discuss CSR as a duty of companies. Articles 225-35 and 225-64 state that corporate and management boards must address social and environmental issues concerning their managerial duties. Article 1835 of the French Civil Code states that companies must include a “fundamental purpose” in their bylaws, justifying the company’s contribution to society. Article L210-10 allows companies to use the label “mission-led companies” if they adopt a fundamental purpose, create a mission committee, and carry out various initiatives. It helps companies build their reputation, positively helping their businesses.
It is similar to the CSR policy in India, where liable companies are supposed to prepare a CSR committee that looks after various CSR initiatives taken by the company.
In 2018, France enacted the Gender Pay Equity Law to bridge the pay gap between male and female employees. Companies with at least 50 employees are subject to the law. A gender pay equity score is calculated based on various indicators. Companies have to keep the score at least 75. If the score is below 75, companies have three years to rectify the situation; otherwise, a penalty of 1% of their total payroll is imposed. Companies have to publish their gender pay equity score, which needs to be submitted to the Minister of Labor’s Economic and Social Database. Failure to disclose the information results in a penalty of 1% of their French payroll.
In 2017, France implemented the EU Non-financial Reporting Directive (NFRD). A statement of non-financial performance must be submitted by the companies, meeting the following conditions:
- Companies listed on a regulated market have an average of 500 permanent employees and a balance sheet of at least €20 million or a net turnover of at least €40 million.
- Companies not listed on a stock market have an average of 500 permanent employees, a balance sheet of at least €100 million, or a net turnover of at least €100 million.
Companies must address the consequences of their activities on the environment, sustainability practices, the circular economy, the fight against food waste, the promotion of diversity, actions taken for disabled employees, and employee working conditions in their non-financial statements.
France follows the “comply or explain” model under the NFRD. This information needs to be present on the company’s website. If a company’s turnover or balance sheet exceeds €100 million, the statements must be reviewed and certified by an independent third party.
India used to follow the “comply or explain model,” but with the latest amendments, the model is “comply or get punished.” The companies are now liable for penalties if they fail to spend the prescribed amount within a specified period.
- Challenges faced in India
One of the biggest challenges that CSR in India faces is the consolidation of funds only in the local areas, weakening the idea of developing all parts of the nation. The Companies Act states that the companies “may” prefer local regions. The companies have interpreted it as being mandatory rather than a directory. It has led to the transfer of CSR funds to already industrialized localities; instead, there must be a transfer to underdeveloped and populous states. Most funds are allocated to states like Maharashtra, Gujarat, and Tamil Nadu. In FY 2020-21, Maharashtra received an amount of ₹3426 cr and Gujrat received ₹1443 cr, Mizoram received only ₹ 0.97 cr, Assam received ₹167 cr, and Punjab received ₹137 cr. The distribution of the funds is skewed; not all parts of the nation can reap the benefits of CSR. Companies need to be encouraged to adopt CSR programs that consider all states. The report of the high-level committee also supports these findings. The committee found that the least developed states receive the least funds. The activities listed in Schedule VII are beyond territorial limitations, and initiatives like welfare schemes for war widows, senior citizens, and the armed forces have nothing to do with geographical location. The committee recommends that companies balance local preferences with national priorities.
Another challenge is that India is allocating funds to different development sectors. Companies choose spheres that provide them with more visibility and enhance their reputation. Companies spend more on education and healthcare, which generate more tangible benefits. It has led to the overlapping of CSR programs. Most firms are targeting the same sphere and coming up with similar initiatives. Healthcare was in focus in FY 2020-21, which was required to combat COVID. In FY 2019-20, however, “education, differently abled, livelihood” received ₹9632 crores, “health and sanitation,” ₹6836 crores, and sectors such as “technology incubator and armed forces,” ₹115 crores, “slum area development,” ₹42 crores, and “encouraging sports,” ₹303 crores.
Companies try to align their initiatives to take advantage of tax deductions under Sections 30-36 and 80G of the Income Tax Act of 1961. Section 80G allows deductions for donations to the National Children’s Fund. Companies donate funds to NGOs working under this section and enjoy tax rebates. Though Section 37 of the Income Tax Act of 1961 states that CSR expenditures are not tax deductible, the Central Board of Direct Taxes specifies that CSR expenditures are not incurred for business purposes and cannot be allowed as a deduction. It also states that if the CSR expenditure falls within any of the categories of expenditure covered under sections 30-36, it can be claimed as a deduction. The high-level committees of 2015 and 2018 observed that specific categories specified under Schedule VII are eligible for tax benefits. It will lead to a disproportionate transfer of funds to these categories. The high-level committee in 2018 recommended that all categories under Schedule VII be eligible for a uniform tax deduction.
Another challenge is the misdirection of CSR funds. PSUs are reported to have transferred funds for building the Statue of Unity under the category “prevention of national heritage and buildings of national importance.” However, the Comptroller and Auditor General of India’s Audit Report (2018) states that the diversion of funds to build the Statue of Unity cannot be deemed valid and is not part of the “prevention of national heritage.” It is how PSUs sometimes misallocate funds. CSR funds from PSUs are more likely to be allocated toward government schemes, campaigns, and funds. The high-level committee in 2018 recommended that contributions to central government funds be discontinued as CSR expenditures and the unspent CSR funds lying with the companies beyond three years be transferred to these funds.
Several companies also use CSR funds for private gains. It was observed that colleges and hospitals were set up under Schedule VII, and charges to use them were pretty high. It helped companies reap the benefits and even earn positive profits. The high-level committee of 2018 recommended enhanced and granular reporting of CSR funds used to create assets. The ownership of the assets must rest with the public, and companies can act as custodians to operate them.
There have been instances of fraud. Companies write checks in favour of a charitable trust. The trust then takes out its commission and returns the sum to the companies. It is how white money turns black, and the intermediaries receive their cut. The entire framework of CSR is disclosure-based, and CSR-liable companies must file details of the CSR amount spent in the MCA21 registry. CSR expenditure is added under “Additional Information” in the notes of the financial statements, containing only the quantum of CSR expenditure. The company’s annual report contains detailed disclosures of CSR spending. Only financial statements fall under the purview of statutory financial audits, not the annual report. Hence, CSR reporting is not subject to external audits, leading to a rise in fraud cases.
A case of CSR fraud appeared in Maharastra, where the accused forged documents for a firm and approached NGOs across the country with a proposal to provide CSR funds worth ₹100 cr. The accused forged proposal documents through various documents available on the company’s website. The accused received a sum of around ₹7.5 lahks from one of the NGOs. The NGO paid the sum as a fee to receive CSR funds. The accused was booked under various sections of the Indian Penal Code, including Section 465 for forgery, Section 468 for forgery for cheating, Section 471 for using forged documents as genuine, and Section 66(C) for identity theft.
These challenges pose a threat to efficient CSR expenditure and the collective upliftment of society.
- The companies must be forced to evenly distribute their funds and ensure that underdeveloped states like the northeastern states receive a significant share of CSR expenditure. The government should roll out a draft CSR policy containing the types of projects, fields, and states where funds can be utilized. The government can put this information on a portal from which companies can access it, decide where they need to invest, and ensure uniform distribution.
- The companies must also diversify their spending and evenly distribute it across all sectors. Companies focus on more tangible industries or those that provide them tax benefits. The government can introduce uniform tax benefits or scrap all the benefits, allowing a fair distribution.
- Companies have reported delays in obtaining clearances from local authorities as one of the reasons for unspent CSR. Local authorities must support such initiatives and ensure clearances are passed on time.
- The CSR expenditure must be made under the purview of a statutory financial audit. A social audit could be conducted to identify the misdirection of funds. The high-level committee also raised the issue in 2018.
- The government must define a uniform structure for impact assessment reports. The report should consist of all the qualitative and quantitative parameters of the CSR initiatives and ensure third-party auditing for the reports.
- Companies have stated difficulties in finding a suitable implementing agency. The implementing agencies must get them registered with the Ministry of Corporate Affairs. The agencies must specify the sector they work in and the requirement for funds. This information must be made publicly available to the companies through the National CSR Portal. It will help companies pick genuine and reliable implementing agencies.
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Jumde, Akanksha, and Jean Du Plessis. “Legislated corporate social responsibility (CSR) in India: The law and practicalities of its compliance.” Statute law review 43, no. 2 (2022): 170-197.
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