Even as the government tries to ensure corporate social responsibility(CSR) spending is mandatory for companies, there is no provision to penalise those not adhering to this. Experts say the fact that companies may be able to explain why they couldn’t meet the requirements takes away from the objective of the amendment.
Among other changes, the Amendments to the Companies Bill, 2011, recently cleared by the Cabinet and expected to be tabled in the winter session of Parliament, aims at making it mandatory for companies to spend two per cent of their average profits in the three preceding years on CSR. However, companies are allowed to explain the shortfall and there is no fine or penalty if they do not abide by the law.
The CSR clause proposes every company with a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more, in any financial year constitute a CSR committee, comprising at least three directors on its board. Of these, at least one director would have to be an independent one. According to an industry expert, a net profit of Rs 5 crore is a very low benchmark compared to the benchmarks for net worth and turnover.
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According to Mehul M Modi, senior director, Deloitte Touche Tohmatsu India, even if funds were collected according to the mandate of the law, it is doubtful these would be instrumental in creating infrastructure. “The concept is good, but implementation is the key. If not implemented earnestly, it might lead to mere bureaucratic interventions, with most of the money going to specific constituencies of ministers,” he said.
The Bill also lists the specific activities that qualify as CSR initiatives. For instance, eradicating extreme hunger and poverty, promoting education and gender equality, empowering women, reducing child mortality, improving maternal health, combating the human immunodeficiency virus and the acquired immune deficiency syndrome, malaria and other diseases.
Ensuring environmental sustainability, employment-enhancing vocational skills, social business projects and contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Centre or state governments for socio-economic development, as well as funds for the welfare of Schedule Castes, Scheduled Tribes, other backward classes, minorities and women, are defined as CSR initiatives. Experts say it is unfair to expect a corporate entity to spend on such activities. “CSR should mean an ethical attitude, through which companies must observe the highest standards while dealing with stakeholders — customers, suppliers and shareholders,” says Modi.
“It should not mean a company, while spending two per cent of its profits on activities listed by the government, is cheating its stakeholders, fudging its accounts and ignoring hazards,” said another analyst, while talking about corporate governance. Some, however, feel this is a good start and more stringent norms may follow. “There may not be any penalty, but it is a small step and enforcement aspects may follow later,” says Pradeep S Mehta, secretary general, CUTS International. Harinderjit Singh, partner, PricewaterhouseCoopers, agrees. “No listed company would like to put a statement as an explanation in its annual report. It is more about moral responsibility and reputation. Independent directors would also insist a company must spend,” he says.