Mandating SMEs to undertake CSR goes against govt’s own commitment towards their growth

Updated: August 18, 2019 7:20:00 PM

The recent amendment to the CSR provisions, though yet to be brought into effect, has struck at the heart of such a goal, swapping its nature from “responsibility” to “mandate”.

CSR, corporates, companies, high level committee, nirmala sitharaman, finance ministry, reduce stress on companies, corporate social responsibilityThe predicament of the amendment is that it places small and medium enterprises (SMEs) on the same footing with the other corporates.

By Harish Kumar

The thrust of corporate social responsibility (CSR) laws in India (codified since April 2014) was to create a conducive environment for corporations to contribute towards the development goals of India. At implementation stages, it was proclaimed that CSR aims to provide corporates with an opportunity to consider their ethical ‘responsibility’ towards the society in which they operate. However, the recent amendment to the CSR provisions, though yet to be brought into effect, has struck at the heart of such a goal, swapping its nature from “responsibility” to “mandate” (so to sound as coercion). 

In fact, the amendment goes on to make CSR a criminal law by providing for imprisonment up to three years for defaulting officers. It has turned the ‘comply or explain’ principle on its axis by requiring the companies to transfer unspent CSR amount to a special account and to spend it within three financial years, failing which, the amount shall mandatorily be transferred to the identified central government’s funds such as the Prime Minister’s National Relief Fund and Clean Ganga Fund etc. Such diversion of funds has a characteristic of a government levy (say tax, duty or cess etc.) as it eventually passes on the responsibility of judicious deployment of such transferred funds on the central government.

Significantly, it is also difficult to comprehend the need for rush for the amendments particularly when the High-Level Committee (HLC) on CSR constituted in 2018 has not yet submitted its report. It is unclear why the government opted to proceed with amendments in CSR provisions without hearing what a committee constituted by its own ministry had to say, nonetheless, the amendments have not yet been made effective, fortunately.

The predicament of the amendment is that it places small and medium enterprises (SMEs) on the same footing with the other corporates and mandates SMEs also to contribute to CSR activities. Recognizing the pivotal role which SMEs play in the Indian economy, the government has time and again been taking measures to mitigate the challenges, particularly the credit gap, which SMEs face. This is evident from various benefits in terms of collateral-free loans, tax benefits, subsidies etc., that are bestowed upon SMEs.

Obliging SMEs to undertake CSR would be against the government’s own drive to support SMEs. On the contrary, SMEs should be made the beneficiary of the CSR spend of the large corporates. Interestingly, the 2019 ‘Report of the Expert Committee on Micro, Small and Medium Enterprises’ recommends that the government should incentivize large enterprises in mentoring and guiding to MSMEs, as a part of their CSR activity. 

The government also fails to recognize the liquidity challenges that SMEs, in particular, may face due to mandatory CSR spend. While, due to accounting treatment, SMEs may come within the ambit of CSR on profitability criteria, they are not likely to comply with the requirement of immediate transfer to a special account due to paucity of enough liquidity. 

While CSR has the potential to involve companies in uplifting a country’s social and environmental status, the government needs to ensure that the spirit of responsibility is not shadowed with the requirement of compulsory CSR spend.

(Harish Kumar is Partner Designate at L&L Partners. Views expressed are the author’s own.)

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