Initial Experience in Implementing CSR Law in India

While corporate social responsibility (CSR) was for a long time considered a voluntary matter, to be exercised by companies in the interests of stakeholders, it is increasingly acquiring legal status, with several efforts to formalise CSR obligations. Some countries have incorporated facets of CSR in their basic corporate laws as a means to exhort companies to fulfill their obligations towards non-shareholder constituencies. However, nowhere has CSR acquired as much legal status as in India, where recent efforts to reform company law culminated in legislation that is relatively prescriptive about the obligations of companies to act in a manner that benefits society.

The concept of CSR has found its place in the Indian Companies Act, 2013 (the “Companies Act”), whereby every company of a certain size is to announce a CSR policy. Large companies are required to spend a stipulated amount, i.e. at least two percent of their average net profits made during the three immediately preceding financial years, in pursuance of their CSR policy towards specified activities. During the legislative process, there was an intense debate as to whether the spending requirements must be made mandatory, but in the end due to a compromise the law adopts a “comply-or-explain” approach. Hence, while there is no obligation to mandatorily spend the prescribed share of profits towards CSR, there is a requirement for companies that do not comply to explain the reasons for non-compliance. These requirements, enshrined under section 135 of the Companies Act and in the Companies (Corporate Social Responsibility Policy Rules), 2014 (the “CSR Rules”), came into effect on April 1, 2014.

In a paper titled “Analysing the CSR Spending Requirements Under Indian Company Law”, I examine the dichotomy between the mandatory and “comply-or-explain” approaches by utilising the initial experience of the implementation of the CSR requirements in India. This experience informs us (at least partially) of the utility – and the limits - of the hybrid, “comply-or explain” approach that has been taken by the Indian legislature under the Companies Act. Although the legislation is still in its early stages of implementation, such an analysis will enable an early review of the utility of its CSR provisions.

In undertaking this study, the paper relies upon existing empirical studies relating to CSR spending in India both before and after the enactment of the Companies Act, as well as a series of hand-collected data involving CSR reporting by companies in the Nifty 100 index maintained by the National Stock Exchange of India. The hand-collected data containing CSR reporting covers two financial years, namely 2014-15 and 2015-16, the first two years in which the new CSR provisions in the Companies Act and the CSR Rules were implemented.

This study indicates that CSR expenditure by Indian companies has gradually increased over the years. It has spiked in the years after the CSR provisions were implemented, which is indicative at the outset that these provisions have had a positive impact in motivating companies to incur CSR spending. At the same time, there are a large number of companies that have not complied with the CSR requirements, with several of them not incurring any spending at all towards CSR activities. This may be understandable given the nature of the hybrid “comply-or-explain” approach adopted by the Companies Act. But, what is striking is that non-compliant companies have been rather lackadaisical about disclosure, or “explanation”, of non-compliance, with most of them engaging in boilerplate disclosures and some even failing to make any disclosure at all. A qualitative assessment of the reasons for non-compliance suggest that the “comply-or-explain” rules have not operated in the manner the hybrid approach may have intended.

Unless the disclosure norms are strengthened by a combination of measures such as elaboration of the types of disclosures required, robust enforcement thereof and through other measures such as third party verification, the CSR spending requirements are unlikely to achieve their desired goals. In all, while the CSR spending requirements have engendered a wider culture of corporate philanthropy in India in comparison with the period prior to the enactment of the Companies Act, they have arguably failed to achieve the goals set by the legislation, at least in the initial years of implementation.

Umakanth Varottil is Associate Professor of Law at the National University of Singapore.