Legal framework governing CSR (Corporate Social Responsibility) in Nepal

Corporate Social Responsibility (“CSR”) refers to the voluntary initiatives or mandatorily undertaken by corporations to address societal and environmental concerns beyond their profit-driven objectives. It also represents a strategic approach adopted by organizations and corporations with the aim of enhancing the socio-economic and environmental conditions within the communities in which they are situated.

In Nepal CSR is obligatory for industries, as regulated by the Industrial Enterprise Act (IEA), and for banks and financial institutions (BFIs), as directed by Circular no. 11/073/74 dated January 25, 2017 (2073/10/12) issued by Nepal Rastra Bank, the Central Bank of Nepal. However, it's worth noting that there is currently no compulsory CSR laws in place for insurance corporations and other non-industrial sectors.

i) For Industry
Legal obligations for CSR funding are established by following laws:

a) Industrial Enterprise Act, 2020 (“Industrial Enterprise Act”);

b) Industrial Enterprise Rule, 2022 (2078) (“Industrial Enterprise Rule”).

ii) For Bank and Financial institutions

While banks and financial institutions (BFIs) are subject to separate regulatory laws, the Regulating Body of Banks, Nepal Rastra Bank (NRB), has issued directives to BFIs in accordance with Circular No. 11/073/74, dated January 25, 2017 (2073/10/12), as issued by Nepal Rastra Bank, the Central Bank of Nepal.

A medium level industry (industry with the fixed capital exceeding NPR 15,00,00,000 but not exceeding NPR 50,00,00,000) or large industry (industry with the fixed capital exceeding NPR 50,00,00,000), or a cottage or small industry (industry with the fixed capital not exceeding NPR 15,00,00,000) with an annual turnover exceeding NPR 15,00,00,000, is required to allocate a minimum of one percent of its annual net profits during each fiscal year for the explicit purpose of fulfilling its CSR.

The funds designated for CSR must be directed towards specific sectors as outlined in Rule 43 of the Industrial Enterprise Rules. This allocation is to be executed through the formulation of an annual plan and program. Industrial Enterprise Rules has elaborated the following 8 broad areas where those funds can be utilized in coordination with local level governments.

a) Natural disaster prevention and rescue related activities.

b) Providing medicine and health equipment to community health organizations, conducting heath awareness programs, health camps and other health related activities.

c) Preservation and conservation of Nepali art, cultural heritage and monuments.

d) Skill development and income generating programs for people with low income, from backward areas, rural women, differently abled, minority groups and marginalized society.

e) Scholarships for community schools and Universities, distribution of educational equipment & materials and other activities related to development of education sector.

f) Pollution control, waste management, tree plantation, preservation of water source, alternative energy promotion and other environment conservation activities.

g) Conducting campaign against social disorders, discrepancies and backwardness.

h) Construction of drinking water, road, drainage & sewage, patipauwa, old age home, sports ground, religious site, community health building, other community building, orphanage, park, meditation centers, bus park, bus stand, and construction and repair & maintenance of other physical infrastructure for social welfare.

Please note that CSR funds cannot be employed in activities that could directly generate profit or beneficial to the industry.

A minimum of 50% of the allocated CSR funds must be utilized in the regions impacted by the industry.

The Act stipulates that the sum expended by industries to fulfill the CSR obligation is eligible for deduction when calculating income tax.

Industry must provide information regarding the CSR initiatives undertaken during each fiscal year along with the corresponding expenditures on these initiatives, to the relevant industry registration authority within six months following the conclusion of the fiscal year. The devised plans and programs for CSR are to be executed in collaboration with local authorities to ensure effective coordination.

According to Section 43 (7) of the Industrial Enterprise Act, in case an industry fails to fulfill its corporate social responsibilities outlined in section 54, the Ministry has the authority to levy a penalty as recommended by the industry registration body. This penalty would amount to 1.5% of the industry's annual net profits. Furthermore, if an industry neglects its corporate social responsibilities for a duration extending beyond one fiscal year, the Ministry is required to impose an extra fine at a rate of 0.5% of the annual net profits for each subsequent year.

A distinct CSR framework is in place for Banks and Financial Institutions (“BFIs”). BFIs categorized under Class A, B, and C are required to allocate a Corporate Social Responsibility (CSR) fund, with a minimum contribution of 1 percent of their net profit.

10.1 Categories for Utilizing CSR Funds (Unified Directive, 2020)

The following list are the areas that Bank and financial institutions can utilize CSR funds:

a) Social Initiatives: These encompass diverse projects such as education, healthcare, responses to natural disasters, environmental conservation, promotion of cultural aspects, rural infrastructure enhancements, empowerment of socially marginalized groups, activities ensuring consumer protection, installations like bus stop waiting sheds, street lighting, public restrooms, and more.

b) Financial Literacy: BFIs are mandated to allocate 5 % of the CSR fund to various programs promoting financial literacy. These efforts are directed towards educating women and disadvantaged sections of society about financial services to enhance their access to financial resources. 

c) Direct Aid: Financial assistance can be extended directly to individuals in extreme poverty, particularly for education and healthcare needs. Alternatively, contributions can be made to organizations dedicated to supporting those in dire circumstances.

d) Advancing SDGs: Allocation of funds towards endeavors that contribute to the achievement of Sustainable Development Goals (SDGs).

e) Health Preparedness: Expenses incurred for safeguarding employees against COVID-19 and similar pandemics through prevention, control, and treatment measures.

f) Child Care Facilities: Establishing Child Day Care Centers for the benefit of employees within BFIs.

g) Charitable Donations: Contributions to orphanages and homes for the elderly, excluding those that operate on a professional basis.

h) Support for Financial Inclusion: Funding activities aligned with the Open Bank Account Initiative, 2019, up to an expense limit of Rs 100.

10.2    Additional compliances

As per the NRB Circular, BFIs are prohibited from using the funds for branding purposes, though they can reference their name. Furthermore, BFIs must not confine fund usage to specific geographical areas or topics. The funds should not be used for personal or political gain in any form. BFIs are obligated to establish internal procedures for CSR fund implementation.

10.3 Execution and Accountability

BFIs are mandated to develop and execute a distinct manual that encompasses aspects such as sector identification, proposal evaluation, fund operation, and management processes. Additionally, they are obligated to disclose information pertaining to their CSR fund and its associated expenditures in their annual financial statements.

The Nepal Rastra Bank Act 2002 (2058) stipulates both fines and imprisonment as penalties for non-adherence to the NRB Circulars.

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