Evaluating The Impact Of India’s Mandatory CSR Spending Law

by | Sep 20, 2023 | CSR

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India, a land of timeless heritage and bustling innovation, made global headlines in 2013 with a bold stride: becoming the first nation to mandate Corporate Social Responsibility (CSR) spending. But this wasn’t merely a statutory obligation for businesses; it was a clarion call to blend profit with purpose. Now, with billions of rupees funneled towards social and environmental initiatives, the question beckons: But has this law truly made a difference? Let’s dive into the real impact of India’s groundbreaking Mandatory CSR Spending Law.

Overview of India’s Mandatory CSR Spending Law

CSR was introduced into the Companies Act of 2013 under Section 135.  In a historic move, India etched its name on the global corporate map in 2013 by becoming the first nation to legally mandate Corporate Social Responsibility (CSR) spending for select companies. Through an amendment to the Companies Act in April 2014, CSR was not just encouraged but made obligatory. Businesses can invest their revenues in education, societal improvement, sanitation, and disaster assistance as part of their CSR compliance.

Understanding CSR: More Than Just Philanthropy

Corporate Social Responsibility, often abbreviated as CSR, goes beyond mere charity. It’s an acknowledgment of a company’s duty towards:

  • Society: Recognizing the resources and infrastructure utilized.
  • Customers and Suppliers: Ensuring fair practices and value delivery.
  • Shareholders: Upholding transparency and ethical wealth creation.
  • Employees: Ensuring welfare, growth, and a healthy workplace environment.

India’s Mandatory CSR Spending Law has helped employees and organizations form better bonds, raise morale, and make employees and employers feel more connected to the world around them. Recent developments in 2021, as India faced the second wave of the COVID-19 epidemic, have set the stage for dramatic shifts in how businesses see social responsibility and collaborate with the social sector. As vital as CSR is for the community, it also benefits companies.

India’s CSR Mandate: The Nitty-Gritty

Here’s a closer look at the specifications of the 2013 Companies Act concerning CSR:

1. Who’s Bound? The mandate applies to companies with:

  • A net worth exceeding INR 500 crore.
  • An annual turnover surpassing INR 1000 crore.
  • Net profits over INR 5 crore in the preceding financial year.

2. The 2% Rule: Such companies are required to channel at least 2% of their average net profits from the last three years into CSR initiatives.

3. CSR Activities: The law isn’t vague; it explicitly lists permissible CSR undertakings, which encompass sectors such as education, healthcare, rural development, and more.

4. Committee & Transparency: Companies need to constitute a dedicated CSR committee overseeing the proper execution of initiatives. Furthermore, the law mandates these firms to disclose CSR expenditures in their yearly reports.

Impact of India’s Mandatory CSR Spending Law

1. The law has led to a significant increase in CSR spending in India. In 2021-22, Indian companies spent INR 23,142 crore on CSR activities, up from INR 9,400 crore in 2013-14.

2. The law has also helped to raise awareness of CSR among companies and the public.

3. The law has positively impacted a range of social and environmental issues, such as education, healthcare, poverty alleviation, rural development, environmental protection, and disaster relief.

4. During the COVID-19 pandemic, the Ministry of Corporate Affairs declared that enterprises’ expenditures to combat the COVID-19 (coronavirus) epidemic will be deemed genuine CSR activity. Profits may be used for COVID-19-related activities such as donations to the PM-CARES Fund and healthcare promotion, particularly preventative healthcare, sanitation, and disaster management.

Overall, India’s mandatory CSR spending law has had a positive impact on the country. It has led to a significant increase in CSR spending and has raised awareness of CSR among companies and the public. The law has also had a positive impact on a range of social and environmental issues. However, there are some challenges with the implementation of the law, such as

  • Ensuring that CSR spending is effective and that it reaches the intended beneficiaries.
  • Predetermined sums must be utilized for CSR projects like learning, racial equality, poverty, and hunger.
  • Increasing trust in the Company by shareholders, employees, and society.

To overcome these challenges, businesses in India are progressively incorporating CSR efforts into their overall business plans. Companies increasingly have dedicated divisions to oversee CSR activities, develop CSR policies and strategies, set separate CSR targets and budgets, and increase compliance and report filing.

The Companies (Amendment) Act of 2020’s Impact on CSR

India's Mandatory CSR Spending Law

1. Setting off excessive CSR spending: Excess CSR spending must be carried forward. As a result, a third provision has been added to Section 135, sub-section 5. Suppose the corporation spends more than 2% of the Company’s typical net profits made during the three following fiscal years. In that case, it can set off the additional amount towards its obligation for spending in this sub-section for the total number of prescribed financial years in the manner provided. In other words, businesses that spend more than the allowed 2% on CSR during a fiscal year may carry it over as credit for meeting CSR responsibilities in the following fiscal year.

2. Modifications to the Social Stock Exchange: Companies that spend more than 2% of their profits before taxes on Corporate Social Responsibility (CSR) could soon exchange this additional CSR spending. The High-Powered Committee on Social Stock Exchange (SSE) of market regulator SEBI has also suggested this. Companies that spend more than the 2% limit provided by Section 135(5) of the Indian Companies Act 2013 can sell or transfer this surplus amount to companies that have failed to satisfy their yearly quota under this provision.

3. Noncompliance Penalty: Pursuant to the new Section 135 sub-section 7, if a firm doesn’t comply with the provisions of sub-sections (5) or (6), the business will be responsible for a fine equal to twice the amount that is due to be transferred to the Fund indicated in Schedule VII or the left Corporate Social Responsibility Account, as the situation may be, or one crore rupees, whichever is less. Each corporation officer in default shall be subject to a punishment of one-tenth of the amount needed to be transferred by the corporation to such Fund as set out in Schedule VII, or two lakh rupees, whichever is less.

4. CSR Committee: According to the new sub-clause 9, Where the sum required to be used by a corporation under sub-section (5) does not exceed fifty lakh rupees, the need under sub-section (1) for the formation of the Company Social Responsibility Committee is waived, and the duties of such Committee provided under this section are carried out by the Board of Directors of such Company. Firms with less than fifty lakh rupees to devote to CSR activities are not required to form a CSR committee, so the Company’s Board of Directors can complete CSR requirements.

The Implications: Positive or Negative?

It is critical to comprehend the practical ramifications of this duty. Companies’ answers to India’s Mandatory CSR Spending Law can be broadly classified as those who regarded it as an opportunity and those who saw it as an impediment. Companies in poor countries are frequently careless in their operations, contributing to environmental depletion. This allows companies to conduct business while still participating in CSR initiatives and allows them to contribute to society.

CSR significantly adds to the Company’s positive reputation in the eyes of the general public. ITC’s buddy notebooks frequently contain CSR efforts such as educating pupils in rural areas. CSR engagement with the public can help large corporations establish their most intangible asset: reputation. CSR can also help businesses carve out a niche in foreign marketplaces. Due to their weak resource structure, Indian enterprises are not considered suitable partners. CSR activities can help companies to appear more socially responsible and attract MNCs. As a result, CSR initiatives boost the possibility of corporations developing globally since they become more socially responsible and have better domestic relations in their home country.

These efforts, however, necessitate the Company’s management persuading employees to participate in CSR projects when they are apprehensive. This presents a challenge to the Company’s leaders in terms of motivating employees to participate in CSR activities. CSR has been shown to favorably influence developing countries with poor institutions to ensure long-term economic development. This is because CSR initiatives allow businesses to be more diligent in business activities while contributing to society. CSR initiatives set the path for filling institutional deficiencies in a country where companies and the government work together.

Furthermore, CSR benefits society and the firm by improving the Company’s reputation in the public eye. Firms frequently engage in “Nation Building” initiatives to connect with the public and build a more substantial reputation. Another critical question is if CSR can compensate for a company’s lack of expertise. The answer is that stakeholders trust the corporation more because of its CSR operations and are willing to overlook firm-level incompetence.

Why Does CSR Matter?

Organizational activities impact consumers, shareholders, suppliers, employees, and society. Corporations rely entirely on the community be i for infrastructure, labor, an educated workforce, trains, energy, water resources, and land. As a result, it becomes their inherent duty to give back to society as well. Corporate social responsibility is a global self-regulation business model that helps a company become socially responsible to itself, its customers, and the broader public.

CSR is a reflection of a company’s consciousness of its societal, economic, and environmental impact. Today’s discerning consumers, employees, and stakeholders weigh a company’s CSR initiatives heavily when associating with a brand or organization. A robust CSR program doesn’t just showcase a firm’s societal commitment but also becomes a cornerstone of its brand image and success.

In conclusion, while CSR speaks to a company’s societal commitment, India’s Mandatory CSR Spending Law ensures this isn’t just rhetoric but a tangible, actionable commitment. As important as this legislation is for the community, it’s equally crucial for businesses, proving that sustainable practices and profit can coexist harmoniously.

FAQs

Q1. What is the influence of corporate social responsibility in India?

By eliminating poverty, CSR may assist India’s education system, health, ecology, and long-term development. CSR monies invested in diverse areas are vital to Indian rural industries, health, and the environment since they contribute to India’s economic growth and poverty alleviation.

Q2. What is the impact of CSR legislation?

CSR Impact Assessment assesses a company’s operations and initiatives’ social, economic, and environmental consequences. It enables businesses to evaluate their social responsibility performance, identify areas for development, and assure openness and accountability.

Q3. What are the advantages of assessing CSR impact?

The advantages of CSR Impact Assessment are numerous. For starters, it assists businesses in identifying and prioritizing their CSR projects. Companies may evaluate which efforts have the most significant impact and spend resources accordingly by analyzing the impact of their existing CSR programs.

Also Read: Collaborative CSR In India: How Start-Ups & Corporates Are Partnering For Sustainable Impact

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