Pandemic spurs Indian firms to boost CSR spending, compliance

The encouraging trend of companies complying with their CSR obligations and many going beyond comes after legislative changes kicked in on 22 January 2021. The changes in the legal framework, a carrot-and-stick approach, introduced penalties for companies and their officers that fail to meet their CSR obligations, as well as offered flexibility for businesses that choose to exceed spending the mandated 2% of net profits on CSR activities.

Data showed that the number of companies meeting the 2% net profit spending requirement for CSR almost doubled to 1,477 in FY21 from the FY19 level. Meanwhile, the number of profit-making companies that were required to spend but did not spend anything dropped to 3,202 in FY21 from 10,425 in the previous year. 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. But those spending more than the required amount rose sharply to 9,792 in FY21 from 6,964 in the year before.

Experts offered several reasons for the improvement in companies spending on charity. According to Noorul Hassan, a partner at Lakshmikumaran and Sridharan Attorneys, in 2021, the pandemic year, corporations came forward to meet the exigencies that arose from the health crisis and spent on healthcare activities in addition to contributing to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations (PMCARES) Fund. “Also, the statutory provisions regarding CSR was changed in 2021, including allowing business to spend extra for which credit could be taken in subsequent years. All these have likely contributed to the overall increase in CSR spending in FY21.”

FY21 witnessed economic devastation following the first harsh lockdown India imposed in March 2020 to fight the pandemic.

Also, businesses took various relief measures during the pandemic, especially in health, even as the government expanded the scope of activities defined as CSR so that private sector efforts complemented state measures.

In January 2021, the penalty provision—at least ₹1 crore for the defaulting company and at least ₹2 lakh for each defaulting officer—was given effect. As part of that, the ministry also allowed companies to spend more than the mandated 2% of their net profits on CSR.

The extra spending could be set off against the spending obligation in future years. This also enabled businesses to help fulfil the community’s needs.

Companies with a net worth of ₹500 crore or more, a turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more are required to spend 2% of their average net profit of the preceding three years on CSR activities. In FY21, India Inc. spent over ₹25,700 crore on CSR.