The Cabinet has, earlier this week, approved certain amendments to the Companies Act, 2013. While these amendments will make their way through Parliament before they become law, they seem to be the final step from the government to ensure that Indian companies above certain specified thresholds have no option but to spend at least 2 percent of their average net profit over a period of three years towards CSR.
Under the Companies Act, 1956 (which has since been replaced by the Companies Act, 2013), CSR was a ‘nice to have’ – Indian companies tended to see CSR as something their shareholders (especially foreign shareholders) asked them to carry out. Alternatively, CSR was seen as a way of ‘giving back’ to the community for companies that had received bad press (for example, if they ended up polluting half a river).
As a result of the Companies Act, 2013, Indian companies woke up to the requirement of carrying out their CSR obligations – but what if they did not? The only consequence was that their directors would have to inform their shareholders why such obligations could not be carried out. The Ministry of Corporate Affairs tried to intervene, and even sent notices to a few companies. However, the question remained unanswered - what could the Ministry of Corporate Affairs do? It perhaps could not sit in judgment over the reasons given by the directors and the law did not happen to have a provision that allowed it to impose a penalty.
This brings us to the current round of amendments. This time, and for the first time ever, it is contemplated that if Indian companies do not meet their CSR obligations, the Ministry of Corporate Affairs may have the ability to impose a penalty. While the bill in question is yet to become law, and its contents are still not in the public domain, it would seem that, if implemented, the loop would be complete, and the defaulter would be suitably punished.
Except, of course, for the catch - and there is always a catch. By imposing a penalty, the government has effectively converted CSR, which was always supposed to be a voluntary act, into a mandatory one. If the proposed amendments pass through, it will mean that every Indian company (above the specified thresholds) must make such CSR expenditure.
Some would argue that this means that over and above all of the usual taxes that an Indian company must pay, there is now a new 2 percent ‘tax’, ‘surcharge’ or ‘cess’ – whatever one may call it. Some others would argue that taxes, surcharges or cess(es) are payable to the government, whereas CSR expenditure is not sent to the government. However, why does a government charge a tax, surcharge or cess? From a high-level perspective, to run the country, improve infrastructure and make society livable. CSR’s original intention was to help improve the lot of the less fortunate among us. Now, every Indian company must, whether it wants to or not, assist the government in its obligations to the general public.
These amendments to the existing law are part of a larger international trend, wherein corporates are increasingly being seen as instrumentalities that should aid and assist governments in their endeavours. Given that corporates have ‘taken’ from society (either by depleting natural resources, or by impacting the environment), it seems reasonable that corporates should ‘give back’ to society as well. This is a noble thought and governments need all the help they can get. The question is - should a government nudge companies to do what they can in public interest or start bludgeoning them to pay up? It seems that the latter is the preferred option.
Sujoy Bhatia is Partner at J Sagar Associates. Views are personal.