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Companies Act Revision Gives Indian CSR Requirements a Bite

The Government of India has gotten serious about mandated Corporate Social Responsibility (CSR) by corporates.  After floating regulatory changes in November 2018, India’s upper house passed a bill last week that cemented major amendments to the CSR framework.  While the level of required contributions – 2% of average net profits – remains the same, the revision introduced significant new penalties for both companies and executives who fail to meet this target.

Previously, companies that missed the 2% threshold were simply required to disclose the reasons for their non-compliance in the annual directors’ report.  The lack of any real penalties limited compliance, which five years after the law’s passage still hovers around 60% for Indian companies. It also frustrated GOI officials like Finance Minister Nirmala Sitharaman, who saw the law as facilitating companies seeking to “give an explanation and get away with [spending less than 2%].”[1]

The revised law now mandates fines for both companies and executives who fail to meet both the 2% threshold and subsequent spending requirements, although the severity of the penalty – INR 50,000 ($725) to INR 2.5 million ($36,250) – could vary significantly.  More concerning for Indian corporates is the specter of jail terms of up to three years.

These more stringent penalties attracted the notice of industry, and have already generated some pushback, including a representation to the government from the Confederation for Indian Industry (CII).  The rules are most likely to create challenges for small and medium enterprises (SMEs), who typically lack the CSR-focused staff or structures that support efficient distribution of social impact funds.

But for most large companies – 2/3 of whom already meet the 2% threshold, with many more committed to using the funds within a year[2] – the revised law should require only tweaks to existing CSR practices.  The new law allows companies to roll over funds, as long as those funds are used within three years for ongoing CSR projects.  Alternately, companies with no ongoing CSR projects at the end of a fiscal year can transfer unspent money to funds set up by the central government. These provisions make the law’s “bite” far less significant.

Ultimately, the new law is strongest as a signal of the Government of India’s focus on CSR and the role it expects the private sector to play.  While it will undoubtedly accelerate a move towards compliance by some companies, it’s not clear whether it will have a broader impact on the private sector’s approach to engaging India’s social issues.  Will it accelerate giving?  Or simply convince companies to spend extra time and energy focused solely on legal compliance?

For more detailed information on revisions to the Companies Act 2019 and India’s CSR framework, read the latest analysis by Khaitan and Co: https://www.lexology.com/library/detail.aspx?g=78ea6b60-2ca3-4400-9b0e-42eb7792112e 

 

The U.S.-India Business Council works with both a select group of non-profit organizations and the corporate partners who support and fund impactful programs across India.  We help our members connect to develop new initiatives and funding sources, and use USIBC events and social media platforms to highlight members’ CSR-focused work.  For more information about USIBC’s work on CSR, please contact Carolyn Posner.