The Ministry of Corporate Affairs in India recently released data showing that companies in the country have made significant strides in fulfilling their corporate social responsibility (CSR) obligations in FY21. The number of companies defaulting on their CSR spending commitments has decreased, while more companies are going above and beyond their legal CSR obligations to contribute to their communities.
Legal Changes Encourage Compliance
One reason for the increased CSR spending is legislative changes introduced on January 22, 2021, that incentivised companies to comply with their CSR obligations. Under the new framework, companies and their officers face penalties for failing to meet CSR obligations. However, businesses that choose to exceed spending the mandated 2% of net profits on CSR activities receive flexibility. The changes have also made it easier for companies to spend extra on CSR, allowing them to take credit in subsequent years.
Increased Compliance in FY21
The data released by the Ministry of Corporate Affairs shows that the number of companies meeting the 2% net profit spending requirement for CSR nearly doubled to 1,477 in FY21 compared to the FY19 level. Additionally, the number of profit-making companies that did not spend anything dropped significantly from 10,425 in the previous year to 3,202 in FY21. The number of companies that spent less than the mandated amount also declined to 3,525 in FY21 from 4,760 in the previous year. However, those spending more than the required amount rose sharply to 9,792 in FY21 from 6,964 in the previous year.
Reasons for the Improvement
Experts attribute the increased spending to several factors. Noorul Hassan, a partner at Lakshmikumaran and Sridharan Attorneys, suggests that the pandemic year played a significant role in motivating corporations to meet the exigencies that arose from the health crisis. Many companies spent on healthcare activities in addition to contributing to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations (PMCARES) Fund. The changes in the statutory provisions regarding CSR also contributed to the increase in spending.
The pandemic and lockdown measures imposed by the government in March 2020 led to economic devastation in the country, and businesses took various relief measures during the pandemic, especially in health. The government also expanded the scope of activities defined as CSR, allowing private sector efforts to complement state measures.
In FY21, India Inc. spent over ₹25,700 crore on CSR, indicating a significant increase in CSR spending. The decrease in the number of companies defaulting on their CSR commitments and the rise in companies exceeding their legal obligations are encouraging signs. The legislative changes, combined with the pandemic year’s exigencies, contributed to this trend, and businesses seem more willing to contribute to the community’s needs.