India has consistently been a fastest-growing economy in the world. However, for a developing nation, it is important to trickle down this economic growth in an even manner to meet atrocities, inter alia, poverty, malnutrition, rural-urban divide and challenges in education and health sector. A series of legislative initiatives have been undertaken against the idea that corporations should act as partners in the social development process of the country by strengthening the social responsibility of companies.
With this objective, Corporate Social Responsibility (“CSR”) was introduced under the Companies Act, 2013 (“Act”) to discharge social responsibility through innovative ideas and management skills. What started as a novel philanthropic concept, has emerged as a fundamental corporate governance practice to ensure that the socio-economic development is placed at par with profit maximization objective of the companies.
Over the years, there has been a transition in the concept of CSR from charity to responsibility. In this regard, it is important to note that India became the first country to mandate CSR through statutory provisions i.e. Section 135 of the Act read with the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”). According to the aforesaid provisions, prescribed companies are required to (i) formulate a CSR committee and CSR policy; (ii) earmark 2% of the average net profits during the three immediately preceding financial year for CSR initiative; and (iii) disclose the CSR spending in the board report for the concerned financial year.
At this juncture, it is important to analyze how does a company implement spending of the CSR amount in a particular year.
- Implementation agency: Position under CSR Rules
- Even after seven years of the Act, CSR eligible companies cite various reasons for not spending their prescribed CSR amount, such as delay in project identification, delay in implementation plans and lack of prior expertise. Therefore, implementation agencies are an effective mode for the execution of CSR projects since they possess presence in the target areas, local connect, knowledge and experience in executing social projects in an effective manner.
- The CSR Rules empower the board of directors to undertake the CSR activities of a company through implementing agencies such as (a) a company established under the Act for charitable purposes; or (b) a registered trust; or (c) a registered society.
- Further, the aforesaid implementing agency shall (a) be established by the company undertaking CSR activities, either singly or along with any other company; or (b) be established by Central Government or State Government or any entity established under an Act of Parliament or a State legislature; or (c) have an established track record of three years in undertaking similar programs or projects.
- Recommendations of High-Level Committee (“HLC”)
The HLC in its report on CSR has addressed certain issues with respect to implementation agencies which are as follows:
- Eligibility of international organizations:
HLC observed that the international organizations which are currently ineligible to act as an implementation agency unless they are (i) registered under the Act for charitable purposes; or (ii) a registered trust; or (iii) a registered society in India, should be engaged as partners for designing CSR projects, monitoring and evaluation as well as capacity building of CSR-eligible companies and implementing agencies.
- Registration of implementation agencies:
The HLC observed that one of the recurring issues for companies to not undertake CSR activities was lack of identification of suitable implementation agencies. In this regard, the HLC recommended registration of implementation agencies with the Ministry of Corporate Affairs along with a reporting requirement so that there emerges an authentic and reliable list of implementation partners for companies to select from.
- Implementation agencies: Way forward
The Ministry of Corporate Affairs has released the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 (yet to be notified) (“Draft Rules”) proposing amendments to CSR Rules. The summary of amendments proposed by Draft Rules in the CSR Rules with respect to implementation agencies are as under:
- Wider ambit of implementation agencies:
Under the Draft Rules, CSR activities can be undertaken by the company itself or through (a) a company established under the Act for charitable purposes; or (b) any entity established under an act of Parliament or a State legislature.
As against the CSR Rules where the CSR activities could only be implemented by (a) a company established under the Act for charitable purposes; or (b) a registered trust; or (c) a registered society, the Draft Rules have widened the ambit of implementation agencies by including every entity established under an act of Parliament or a State legislature.
- Insertion of definition of ‘international organization’:
The term international organization has been introduced in the Draft Rules to mean an organization notified by the Central Government as an international organization under the United Nations (Privileges and Immunities) Act, 1947.
- Inclusion of international organization:
The Draft Rules have introduced the involvement of international organizations with respect to CSR activities for (a) designing, monitoring and evaluation of the CSR projects or programs and capacity building of company’s personnel for CSR and for this prior approval of Central Government is not required; and (b) implementation of a CSR project with the prior approval of Central Government.
Although this is a welcome initiative, however, an additional condition of obtaining prior approval from Central Government is required to be met with for involvement of international organizations that have institutional memory, international foot print, best practices and a proven record of delivery.
- Registration of implementation agencies:
In line with HLC’s recommendations, the implementation agencies shall file form CSR-1 with the concerned Registrar of Companies for registration along with prescribed fees. Further, the aforesaid form CSR-1 has also been circulated as part of the Draft Rules.
CSR is about ensuring that the company can grow on a sustainable basis, while ensuring fairness to all stakeholders. In the prevailing situation in India, it is difficult for one single entity to bring about change, as the scale is enormous. In this regard, companies have adequate funds and their successful correlation with implementation agencies that have expertise, strategic thinking and manpower to facilitate extensive social change, is the need of the hour. The Draft Rules are a ray of hope in regulating these implementation agencies and ensuring a greater transparency by formulating the registration process. Further, the inclusion of international organizations is a welcome initiative as these organisations have abundant technical resource and greater experience on international footing. Effective partnerships between companies and implementation agencies is likely to place India’s social development trajectory on a faster track.
[The authors are Executive Partner and Associate, respectively, in Corporate Advisory practice of Lakshmikumaran & Sridharan, Gurugram]