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How the shoddy construction of the CSR Regime has led to its Malfunctioning

Authors:

Suyash Shrivastava & Ritika Bhati

Third-year law students at Indore Institute of Law

 

Corporate Social Responsibility (“CSR”) functions on the idea that corporate houses earn huge sums of money from society and thus, in turn, it becomes their duty and responsibility to spend a sizeable amount of their profits to ameliorate the ills of society. India became the first country to have a legislated CSR provision when Section135 was inserted into the revamped Companies Act, 2013 (“the Act”).


I. What is Section 135?


The provision mandates the contribution of at least 2% of the average net profit of the preceding 3 years for every company registered under the Act, with (a) a net worth of 500crores or more, (b) a turnover of 1000crores or more, or (c) net profit of 5 crores or more. Further, a company fulfilling any of these conditions must also constitute a CSR Committee, and the contribution is required to be in consonance with Schedule VII of the Act. Recently, the government issued a clarification stating that no such committee will be required to be constituted if the payment obligation is less than 50 lakhs.


There were already a large number of companies, especially big corporate houses like the Tata Group, Reliance Industries, and Infosys, which were contributing a chunk of their profits to society – however, now, to meet the newly imposed conditions for CSR, their contributions must fall under one of the heads that are mentioned under Schedule VII of the Act. In essence, only the activities set out in Schedule VII will be considered as CSR. While the provision seems fair when viewed from a distance, a closer look indicates that there is a slew of discrepancies when analyzed meticulously.


In order to understand why some entities, find it onerous to comply with the provision, consider the plight of a company which has been incurring losses in the preceding two financial years, and in the last financial year has just crossed the five-crore profit threshold. Now, in addition to paying taxes, the company now needs to pay an additional 2% to comply with the law, after which the entity is allowed to utilize the remaining funds to nurture the business. Some experts term the CSR provision as an additional tax on the companies under the cloak of societal welfare.


II. Struggle for Non-Industrialised States


As per the recently released data by the government for the years 2020-2021, companies spent INR 20,360cr on CSR commitments, which is at an all-time high and also suggests that more companies have complied with the law. Maharashtra, Gujarat, and Andhra Pradesh have retained their top spots in the list, while the northeastern states like Tripura, Assam, and Mizoram, were at the bottom. Apparently, the data presents a gloomy picture, as per which the states which have a greater number of industries or, in general, companies registered with them receive higher CSR funds than those with less, this means that states which are already resourceful and economically strong receive a substantial portion of the entire CSR funds, while the less developed get the meager amount at their disposal to cater the problems.

The root cause of such improper distribution of funds lies in the provision itself, as the proviso to sub-section 5 of the section explicitly states that while disbursing the funds, preference shall be given to the “local area and areas around it where it operates”. Thus, it becomes an easy way for the companies to get rid of the imposed condition by simply spending the amount in nearby areas or providing the same to an NGO, which in turn spends the amount in the nearby areas, effectively leaving the parts of the country desperately desiring for funds as empty-handed. Instead, a legislative should be introduced, wherein the states which are most desirous of the funds shall get the priority.


III. NGOs: A Tool for Defying the Objectives of CSR?


Since the introduction of the provision, many companies have managed to evade the law by parking the amount of contribution towards CSR with such NGO’s which work hand in glove with them. The modus operandi is simple to understand, a company provides funds to an NGO which works towards any of the services as mentioned under Schedule VII of the Act, for instance, education. As and when the NGO receives the funds, it retains an already stipulated amount as commission and funnels the rest of the amount back to the company through any of the unauthorized modes. Such kind of network becomes difficult to trace by the authorities.


Moreover, there have also been instances where NGOs have assisted foreign entities in laundering of the moneys to be used for CSR or the company has itself cooked the books and made use of the available CSR fund for regular business expenditure, thus successfully evading the statutory obligation.


IV. Way Forward


Needless to say, the intent behind the provision was the welfare of the society, but the way in which the law has been formulated thwarts such intent. In a short span of roughly 8 years, the provisions pertaining to CSR have been amended several times. Along with that, the Ministry of Corporate Affairs (“MCA”) frequently issues clarifications and FAQs, which further weakens the spirit of the law.


The looming concern is the ineptly drafted Schedule VII of the Act, as it enumerates exclusive categories of activities through which the obligation can be realized; instead, a holistic approach towards including categories by the draftsman could have better served the purpose. To quote an example, disaster relief was not even a part of the Schedule till 2019. Another case which can be quoted is, an eligible company is allowed to provide funds to the PM Relief Fund but not to the CM Relief Fund. The question being that if the function and beneficiaries of both these funds, i.e., general public at large, are same, then no logical explanation can be attached to validate such distinction. In order to provide a clear understanding and liberal interpretation to the text under the Schedule, MCA must re-draft the Schedule after deliberations with the stakeholders.

Moreover, it is imperative to tighten the grip over the NGOs and maintaining a meticulous record of their money trail, as a substantial amount of the CSR fund of the entities is disbursed through NGOs involved in the social sectors only. However, in reality the scenario is quite the opposite as recently the Hon’ble Finance Minister has admitted that MCA does not keep records of organizations working in the social sector. As the same includes NGOs, it becomes an easy source to undermine the objectives of the provision.


V. Conclusion


The insertion of CSR provision was one of the major changes that were introduced through the Act. The primary objective was to involve the business entities in the welfare aspect of the country. On the contrary, since its inception many entities have managed to use loopholes in the law and evaded the obligation imposed by the state. Among others, availability of few avenues under the Schedule, and the weak structures of the money allocation system, have been contributing factors towards the malfunctioning of the CSR regime. Unless the lawmakers involve the stakeholders and cure the defects surrounding the regime, the prime objectives of CSR will never be realized.


 

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