India CSR Amendments 2021 Impact on Business Sentiment

INDIA CSR AMENDMENTS 2021 IMPACT ON BUSINESS SENTIMENT

o the new CSR amendments foster transparency and accountability, or are they unfeasibly prescriptive? Experts offer insight into the divided business sentiment across industry sectors, weeks since its introduction.

On 22nd January 2021,    

the Ministry of Corporate Affairs notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.¹ These amendments have further structured and expanded on the 2014 rules.

3 key shifts have ruffled feathers across India Inc.

One, the amendments have altered fundamental facets of the CSR policy. They limit the discretionary authority that companies previously exercised concerning their internal control and responsibilities in their CSR activities.²

Two, the MCA has broadened CSR's definition to include research and development for vaccines, medicines, medical devices, and overseas training of Indian sports personnel representing state or union territories at a national or international level.

And three, the overhaul also excludes contributions to political parties, activities benefiting company employees, and sponsorship-based activities that derive any market benefits for products or services.³

Here's a snapshot of a couple of other amendments.⁴

· Non-compliance with the CSR rules and regulations has been reduced from a criminal offense to a penalty obligation.

· Impact assessments by independent agencies for companies with CSR obligations of ₹10 crores and above or projects with outlays of ₹1 crores and above are mandatory.

· Every company board is required to disclose the composition of the CSR committee, policy, and projects on their company's website. They must also provide the CSR policy's approach and direction and formulation of the action plan.

· All companies must transfer unspent allocated funds to an Unspent CSR Account. Any excess CSR expenditure can also be carried forward to the following three years.

· Companies are permitted to engage 'international' organizations to design, monitor, and evaluate their CSR activities.

· CSR funds can be used to acquire capital assets; however, a company cannot directly own these assets.

· 'Administrative Overheads' now only include expenses incurred for "general management & administration" of CSR functions.

· On-going projects can be a program for a maximum of 4 years, including the year of commencement.

The argument in favor of actionable governance comes from diverse quarters.

The National CSR Summit 2021 hosted by Brand India in New Delhi, spurred numerous significant discussions regarding this shift from directional to mandatory CSR policies. This will affect how companies implement their CSR activities, assess their impact, and focus on quality and value creation within CSR.

The event was attended by eminent dignitaries. Dr. K.K. Upadhyay, Chairman of the DNR Foundation, Mr. Atul Singh, Vice President - CSR, Emami Group, and Dr. Lopamudra Priyadarshini, General Manager - Sustainability & Community Relations, Aditya Birla Group⁵.

The general consensus of sentiment was one of cautious optimism towards these new amendments that many hoped will positively influence CSR impact and hold the right people accountable for their contributions.

Ms. Ranjitha Lakshmanan, District Advocate, and Director YALI Foundation welcomed the new amendments as a historic decision.

Mr. Tamil Maran, District Executive Officer, TNRTP, stated that these changes will encourage both corporate and NGO CSR undertakings to adhere to professional standards of implementation and execution.

Mr. Aditya Shankar, Supreme Court Advocate, who referred to CSR as an important discretion in the Indian Constitution, opined that these amendments will foster transparency, flexibility and create opportunities for more impactful projects to be implemented.⁶

Mr. Hemant Kumar, the Group General Counsel for Larsen and Toubro Ltd. spoke with Legal Era that he believes the slew of amendments have, for the most part, brought in clarity concerning several ambiguous aspects about CSR. These amendments are expected to introduce a greater measure of accountability towards the deployment of CSR Contribution and to ensure that we move towards an outcome and impact-oriented CSR regime. Hence, he asserts that the amendments are indeed a positive move.

Hemant makes a special note of the amendments whereby companies are now permitted to conceptualize and engage in CSR activities that have an outlook of up to 48 months. Companies can also now adjust any amounts spent more than the CSR Contribution against future CSR activities – up to 3 immediately succeeding financial years. He believes, "That could prove to be beneficial, especially in the current times where companies have spent more than the mandated CSR contribution during the pandemic. The true success of mandating CSR lies in achieving outcomes that have a demonstrable impact on society. That being the case, the onus on the Board and the CSR committee is now greater – they are effectively tasked with ensuring that the CSR Contribution reaches the intended beneficiaries and has the desired impact on society."

Mr. Badrinath Durvasala, Managing Director Legal at Essar Group in Mumbai shared with Legal Era his enthusiasm about the societal impact of the annual action plan initiated under the new CSR provisions. He finds this path-breaking and leap frogging to tackle the current pandemic of unprecedented magnitude engulfing India & the world. To quote him, "The legislation is thought-provoking, prospective, an enabler in the facet of public good, objective setting besides being laced with accountability in the hands of corporates. It is a wish and hope of the citizenry at large, engraved in the form of legislation, creating an avenue of rescue and rejuvenation in the hands of India Inc.!"

He went on to add that there are twin advantages the way the amendments are brought in. The key imperative is in engaging international organizations from the stage of designing to a state of finality in evaluation of the CSR programs. These enablers facilitate a global perspective on how to align with the global best practices to serve the society at large and beyond Indian terrain and earn international recognition. The other big push is to carry forward the excess CSR expenditure to the next three years, which allows the corporates to take up sustaining initiatives, without limiting to budgetary constraints as the excess spend for an year can be set off for future years. These twin paradigm shifts, he feels propels the real CSR mind-set, from a compliance mode to committed public good mode, which delivers a huge advantage to Indian corporates.

Anubhav Kapoor, the Director of Legal Affairs for Ford India Private Limited, finds the mandate for CSR Impact Assessment a significant new aspect and hopes that such a requirement will result in a more meaningful assessment of the project and measure contributions by companies towards the society. He asserts his view to Legal Era that, "Impact assessment will also prove as an important tool for the board members to better plan CSR project and focus on project design when they are being conceived and approved by them."

Vineet Vij, the Group General Counsel for Tech Mahindra is upbeat that the amendments will create an impetus for the Corporates to utilize CSR funds towards facilitating social change. He shared his views with Legal Era that bringing the overall CSR Policy of a company under the supervision of the Board coupled with stringent monitoring of CSR implementation and accountability would only strengthen the larger objective of serving the society with greater thoughtfulness and dedication.

Making a special note of the amendment decriminalizing non-compliance of CSR rules and regulations and criminal offense being reduced to a civil wrong only with financial penalty obligation, he is reassured: "That provides much need respite from continual undue influence that in hindsight dreaded corporates by penalizing them despite the contributions done to the society, he said."

Vineet Vij also shares a couple of contextual observations and experiences in the current pandemic times. "Tech Mahindra has always followed the core philosophy of commitment, upliftment, and contribution to the society and the recent amendments to include research and development of medicines, vaccines, medical devices are indeed a very welcome step.

Taking due cognizance of the sudden acute crunch of oxygen devices and plants in the country, MCA recently notified and elaborated that creating health infrastructure for COVID care, the establishment of medical oxygen generation and storage plants, manufacturing and supply of oxygen concentrators, ventilators, cylinders and other medical equipment for countering COVID-19 would qualify as eligible Covid-related CSR expenditure. Tech Mahindra through its CSR arm Tech Mahindra Foundation quickly started work on this front and as part of our CSR vision, we have been on the forefront in partnering with NGOs to enable hospitals to become self-sufficient by setting-up up oxygen plants besides deployment of oxygen concentrators and oxygen cylinders to help resolve the oxygen crisis in India."

Vineet Vij reinforces, "Of course, the amendments regulate the way how the CSR activity should be undertaken by the corporates but with the sole objective to bring more transparency, clarity, and uniformity in the entire process. We are hopeful that the government with cohesion and consultation will address the apprehensions of India Inc. owing to these amendments and, with the due passage of time and with more and more corporates committing themselves fully to contribute in their CSR roles, we firmly believe that India's CSR regime will be playing a very significant role in nation-building."

Some have reservations regarding ambiguous instruction and prescriptive benevolence.

As per the CSR amendments, upcoming CSR expenditures that exceed the allocated amount can now be carried forward to the following three years. However, experts note a lack of clarity in rules regarding excess expense before the amendment and how that expense could be factored into the overall CSR policy.

Harish Kumar, a partner at L&L Partners, suggests that "The government may consider allowing corporates which have in good faith incurred excess CSR expenditure in the past to set it off against future CSR expenditure requirements."

Kumar also emphasized that the changes would require private trusts to embark upon the process of becoming registered as public trusts or discontinue serving as implementing agencies for CSR. This was a considerable overhaul "given that a sizable amount of CSR is being contributed through their private trusts by many companies, including blue-chip companies." These changes could impact private trusts like Reliance Foundation, Bharti Foundation, and DLF Foundation, among others that manage CSR disbursements for affiliates and subsidiaries.⁷

Bharat Vasani and Varun Kanan from Cyril Amarchand Mangaldas maintain that the CSR mandate under section 135 was founded on the 'comply, or explain' principle, which was intended as a voluntary undertaking towards the greater good. They assert that the prevalent corporate sentiment in response to the new rules suggests that they have become "rather too prescriptive", leaving companies little room for flexibility in their efforts to implement meaningful CSR programs.⁸

Business tycoon, philanthropist, and IT czar Azim Premji also stated that he didn't believe "we should have a legal mandate for companies to do CSR." According to him, philanthropy "must come from within and cannot be mandated", and there is a real need to distinguish philanthropy in an individual capacity from a company's CSR initiatives.⁹

Premji, who transformed Wipro from a modest vegetable oil-making company into a mammoth conglomerate and industry leader in IT services, is renowned for his generous contributions to humanitarian causes. Turning in Rs 7,904 crore in donations in 2020 alone, he shares how his views on altruism were influenced by "Mahatma Gandhi's idea of trusteeship of wealth", where "the wealthy must act as custodians of wealth for the benefit of society, and not as owners of wealth."

In sync with Azim Premji's view, Dev Bajpai, the Executive Director for Legal & Corporate Affairs at Hindustan Unilever Limited, and Vice President of Legal for South Asia, Unilever agrees that it is fair to take a view that such societal initiatives like CSR should not be mandated or made prescriptive. But he takes a step ahead and shares with Legal Era that if the non-prescriptive regime does not work, the Regulator has to fall back on mandating. So to balance the compliance requirements with ease of doing business, he makes a pertinent suggestion. "The government should consider a regime where the compliant companies are less hassled by the compliance burden and their compliance requirements are made proportionate to the actual compliance they demonstrate. As increasingly, companies become compliant, the compliance requirements for them can be proportionately reduced. If this principle is adopted, it will provide an incentive to companies to comply in full over some time. It is better to graduate to a graded structure of compliance instead of painting everyone with the same brush."

He goes on to opine succinctly, "The objective should be to reach a level of maturity where the Government only monitors that the activity being undertaken is a notified permitted activity and the amount being incurred is not less than 2% of the average net profits of the company over the last three financial years. This approach will build trust, transparency, and compliance. A start should be made to give confidence to the corporate sector."

Dev Bajpai also brings out another observation which is to let the Corporate Social Responsibility Committee lead this agenda in the Company. He understands, "This Committee has the mandate in law to formulate a Policy, ensure permitted activities are undertaken that are consistent with the Policy and the amount as mandated is spent. The Board should have an oversight role to ensure that the CSR Committee is doing its job. The amended provisions have the effect of requiring the Board to play a more active role in this area despite there being an expert Committee. If required, the membership of Independent Directors can be increased in the Committee, but the CSR Committee should be tasked with meeting the obligations as spelled out in the amendments."

Anubhav Kapoor, the Director of Legal Affairs for Ford India Private Limited, shares his opinion with Legal Era that while making impact assessment mandatory is a good move from the government as it provides some accountability to the bigger ongoing projects, there are a few answers needed. "There are no checks or suggested indicators prescribed for these assessments which makes us wonder, how is the government going to analyze the legitimacy of the Impact Assessment reports? It is still not clear what exactly the outcome will be after an impact assessment. What if the assessment results are poor? Will the government investigate this specifically or would it ask the corporate to shut down the project? Will the authorized spend of five percent of the total CSR expenditure or fifty lakh rupees, whichever is less for Impact assessment be treated as part of the project cost, or will be allowed separately in addition to the allowed expenditure of five percent for administrative overheads? And many more."

He suggests, "While it is appreciated that the new regulations have the effect of reducing the excessive discretion in the hands of a company and the rules will bring some uniformity by laying down the procedures to be followed in certain respects, however, certain aspects introduced in the new regulation like the one stated above does require timely redressal. A statement from the government can remove these ambiguities."

What can we expect?

The changes to section 135 of the Companies Act, 2013 call for active and substantial participation of every organization.

Rabindra Jhunjhunwala and Parag Bhide who is Partner and Principal Associate, respectively, at Khaitan & Co., share with Legal Era that the Amendment Rules have overhauled the existing CSR regime. These rules emphasize compliance with the CSR legislation in letter and spirit and encourage adherence to professional standards of implementation and execution.

They add that while some may feel that the new CSR regime has become rather too prescriptive, these changes will encourage both corporates and NGOs to adhere to professional standards of implementation and execution.

In their words, "As an action point, this will necessitate many companies to closely review and take a hard look at the intent and content of their CSR initiatives to align with the enhanced compliance expectations."

In the current nascent stage of implementation, it may be difficult to predict the sustained impact of these rules. Probably, it is only with the release of next year's CSR reports that we can begin to evaluate the efficacy of these new amendments, identify avenues that require more clarity for guidance, and even the pain points circumscribing execution for businesses.