In 2014, India became the first country to create a statutory obligation for companies to spend a part of their profits on Corporate Social Responsibility (CSR) initiatives. The rationale for this was that companies should give back to society. Schedule VII of the Companies Act, 2013 (the Act), lists the permissible activities which can be undertaken by companies to fulfil their CSR responsibilities.
Over the years, there have been several amendments made to the provisions relating to CSR. Initially, the CSR provision was introduced in the Act as a Comply or Explain (COREX) provision. In case a company was not able to spend the mandatory minimum amount on CSR, it could explain the reason(s) for the shortfall to their shareholders, through the Board Report. Over the years, the COREX approach has been abandoned, and if a company is not able to spend the minimum mandatory amount, it has to give the reason for the shortfall, and the amount of shortfall has to be deposited in a separate account called the Unspent Corporate Social Responsibility Account. This amount then has to be used for activities relating to CSR in the following year.
Spending less than the minimum required amount on CSR is perceived as an indication that the Board and the CSR Committee are giving inadequate attention to this responsibility of the company. While the reasons for this are valid in some cases, some reasons seem more like excuses. Where companies undertake projects where the spend is spread across multiple years or where companies release amounts for CSR based on completion of a phase of the CSR project, and this results in an unspent CSR amount, it seems to be a valid reason. This is because the company is trying to spend money on projects that are either value adding or sustainable. There were also some Covid lockdown related delays, or delays due to factors outside the control of the company, such as change in Government policy or natural calamities, which are genuine reasons for not spending the mandatory amount.
As against this, there are various “reasons” given, the genuineness of which is questionable. Some of these include
- Lack of proper projects
- Inability to have the required infrastructure to deliver a project
- Under utilisation of funds in identified projects
- Ongoing discussions with NGOs for new projects
- Operational constraints
- Activities not covered under the relevant section of the Companies Act, 2013
It is considered a good practice for CSR Committees to hold 2-3 meetings in a year so that they can assess the status of various CSR projects of the company. In the case of companies which have not fulfilled their responsibility towards CSR, the shortfall could have been avoided if CSR Committees had insisted on midcourse corrections. These could be in the form of finding new projects, changing the implementing agency, or increasing the number of focus areas, if the company is unable to identify projects. The provision for transferring the unspent amount of CSR to the designated account was presumably introduced since a number of companies would give reasons for shortfall, and not spend the amount in subsequent years.
Companies derive considerable benefits from society for carrying out their business activities. It is only fair that they consider society as an important stakeholder for their operations, and do not take the CSR responsibility lightly.