Section 135 of the Companies Act mandates that “every company having a net worth of ₹500 crore or more, or a turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more,” to spend at least two per cent of its net profits on Corporate Social Responsibility or CSR. Each of these companies has to form a CSR Committee of its Board, which will help the company formulate a CSR policy and recommend activities. It will also create a monitoring mechanism of the implementation of the policy.
Initial reports, though, show that many of the frontline companies have failed to comply with this directive. A newswire reported in July that “nearly two-thirds of the top listed companies have failed to spend the minimum 2 per cent of profits on social responsibility activities in the first year.” Half of the 30 companies listed on the Sensex had disclosed their CSR spending by then, but 10 of them had failed to meet the two per cent-criteria. These companies included marquee names such as HDFC Bank, ICICI Bank, Dr Reddy’s and Bajaj Auto. The notable exception was Reliance Industries, which had gone beyond the limit and spent ₹761 crore, the highest.
This week, a leading daily quoted its study of 48 Nifty companies and said that only 14 of them managed to spend two per cent of their profits. Overall, these companies spent ₹4,252 crore during the fiscal 2015; that is 1.6 per cent of their net profits.
Surely, the call to do good hasn’t seen many takers.
First time
There are many reasons for this dismal performance. This is just the first year of the Act’s implementation, and for many companies this is a new space to be in. The daily report, cited above, quotes Idea Cellular’s annual report, which mentions that the company is preparing its CSR policy and is evaluating areas and activities for its CSR spend. Idea Cellular didn’t spend a single rupee on CSR. According to the Government regulation, the ‘eligible’ activities under CSR include eradication of hunger, promotion of education, gender equality and development of vocational skills.
Many of the companies in India are family-owned and the CSR work for them till now meant the charity shown by the promoters. The new regulation calls for a structural change — from the Board, down to the departments. This takes time, resources, a lot of brainstorming and a search for suitable partners to implement the programme. So if a company doesn’t do its part in the first year, it is understandable.
Penalty
But is the poor compliance also because of the not-so-severe penalty? This report by IIM-A’s Satish Deodhar lists the penalties for non-compliance. It says:
“… if a company contravenes the provision, i.e., if the Board of Directors’ report does not include details about the policy developed and implemented by the company on CSR initiatives taken during the year… then the company shall be punishable with fine which shall not be less than ₹50,000 but which may extend to ₹2.5 million.” It adds that responsible officers can face imprisonment for up to three years or with a fine varying from ₹50,000 to ₹5 lakh.
Therefore the punishment is not for non-compliance of the regulation, but for not explaining why the company couldn’t spend its part of the CSR money. As Deodhar says, “Not spending in itself is not punishable.” He does add that a section of the Act has provisions for omnibus punishment, but it is vague and open to interpretations.
A heavy fine or a severe punishment may not be in good spirit when it comes to asking companies to have a large heart. You can’t make people good by threatening to punish them. But by that reasoning, the Act itself loses its purpose. Many have questioned the need for a law to enforce CSR on companies. CSR is best when it is voluntary and the intent is to do good rather than fulfil a mandate.
But in the present circumstance, we have a law that makes CSR compulsory and the Government should make it clear that it means business.
According to estimates, at least ₹25,000 crore will be spent on socially relevant activities if companies comply with the law. The Act should be given more teeth to ensure that this money is released and well used. Otherwise, a company that might have to spend ₹100 crore in CSR, will not hesitate to pay a fine of ₹25 lakh.