The Government amends CSR provisions to boost R&D-Here’s how!

On September 20, 2019, the Union Minister for Corporate Affairs and Finance made an announcement to expand the scope of corporate spend under existing Corporate Social Responsibility (“CSR”) norms.

Existing CSR norms

As per Section 135 of the Companies Act, 2013 (“Act”), every company having a

a.  net worth of Rs 5,00,00,00,000 (Rupees Five Hundred Crores only) or more, or

b.  turnover of Rs 1,00,00,000,000 (Rupees One Thousand Crores only) or more , or

c.  net profit of Rs 5,00,00,000 (Rupees Five Crores only) or more,

during the immediately preceding  financial year, shall be required to constitute a CSR Committee of the Board of Directors. The company shall have to spend at least 2% of the average net profits of the company generated during the 3 (three) immediately preceding financial years, on approved CSR activities, in every financial year.

As per Section 135, the activities to which companies are required to devote their funds for the purpose of CSR are mentioned in Schedule VII of the Act. It includes activities for the eradication of hunger, poverty and malnutrition, promotion of health care, sanitation, making available safe drinking water, promotion of education including special education and employment enhancing vocation skills, promotion of gender equality, empowerment of women, and contribution to technology incubators located within academic institutions which are approved by the Central Government.

Change

The funds may now be allocated to incubators engaged in conducting research in the fields of science, technology, engineering and medicine, aimed at

promoting Sustainable Development Goals (“SDGs”). Earlier, companies were allowed to grant money to incubators set up within academic institutions, which were approved by the Central Government. Now this has been expanded to include incubators funded by the Central Government, State Governments, or any agency or public sector undertaking of the Central or State Governments, public funded universities, Indian Institutes of Technology (IITs), national laboratories and autonomous bodies.

Quick View

In the past few years, spending on research and development (“R&D”) activities in India has been less than 1% of the Gross Domestic Product (GDP). With this change allowing companies to fund research from their CSR pool, companies will be motivated to render their support to innovation. This is of particular importance as Indian companies have a track record of usually spending a lot more on CSR activities than investing in research and innovation. Data shows that only 34 of the 50 companies listed on the National Stock Exchange of India invested in R&D in 2018-19. On the other hand, pharmaceutical companies tend to invest more on research than they do on CSR activities. For instance, Sun Pharmaceutical Industries spent Rs 19,770,000,000 (Rupees One Thousand Nine Hundred Seventy Seven Crores only) on R&D but only Rs 3,90,00,000 (Three Crores and Ninety Lakhs only) on CSR in the financial year 2018-19. This change is intended to help bring together the two objectives of rendering support to innovation and research while promoting social good.

This change also has the potential to promote public-private partnerships in the field of scientific discovery and innovation, which is not common in India, encouraging companies to fund initiatives that will not only benefit startups but also promote growth in the industry.

What is missing, however, is that the entire burden of spending on R&D has been imposed on the private sector. To ensure holistic and effective development, it is essential for Government spending in research to be increased. Another point that the Government has failed to take account of, is that the limitation of spending on incubators funded by the Governments or public sector undertakings, greatly restricts the ability of private incubators to access such funding. Providing a form of certification to allow private technological and business incubators to be able to access such funding will be beneficial in the effective implementation of such a change.

Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.