The government is preparing to introduce a provision that would prevent industrial enterprises from directly spending money allocated under corporate social responsibility (CSR), a move that has created uncertainty in the private sector.

The government plans to centralise CSR allocations made by industries, and banks and financial institutions (BFIs) by requiring them to deposit the money into a designated fund. The government would then mobilise the money in sectors it prioritises.

The private sector and BFIs argue that the funds should be allowed to be used for the welfare of the local community where the particular industry or business operates.

The proposal has been included in the Balendra Shah administration’s 100-point governance roadmap.

The government’s 100-point agenda states: “Arrangements will be made to centralise the corporate social responsibility funds of industrial enterprises and mobilise them through a fund designated by the Government of Nepal in priority sectors.”

It adds that the required legal amendments and new legislation will be completed within three months.

Accordingly, the Ministry of Industry, Commerce and Supplies has begun internal preparations on the matter. However, the private sector and BFIs have expressed concern over the government’s move.

Anjan Shrestha, president of the Federation of Nepalese Chambers of Commerce and Industry, said the private sector should be allowed to spend CSR funds independently under clearly defined standards.

“The money should be allowed to be used for the welfare of the local community where the particular industry or business operates,” Shrestha told Kantipur. “We are ready to work in coordination with local governments. The state already has many funds that have not been effectively spent in the past. Another fund should not be created for CSR money.”

The concept of corporate social responsibility gained international momentum in the 1990s following the rise of the business and human rights movement, which argued that companies should bear legal responsibility for the impact they could have on citizens in developing countries.

In 2011, the United Nations Human Rights Council unanimously endorsed the “UN Guiding Principles on Business and Human Rights and the UN ‘Protect, Respect and Remedy’ Framework”, paving the way for international legal frameworks and compliance mechanisms related to CSR.

In Nepal, Section 54 of the Industrial Enterprises Act, 2020 requires medium and large industries, as well as cottage and small industries with annual turnover exceeding Rs150 million, to allocate at least one percent of their annual net profit to fulfil CSR obligations.

The Act requires the money to be spent in designated sectors through annual plans and programmes. Details of such spending must be submitted to the relevant industry registration authority within six months after the end of each fiscal year. The amount allocated for CSR is also eligible for tax deductions.

It allows investment in skill-based and income-generating programmes for low-income groups, disadvantaged communities, rural women, persons with disabilities, minorities and marginalised communities.

On May 5, 2025, the ministry issued the “Professional Social Responsibility Implementation Procedures-2025”, stating that the goal was to make CSR obligations toward communities, consumers, workers, the environment and other stakeholders more systematic, transparent, predictable and result-oriented while strengthening the industrial ecosystem.

The procedures not only identify sectors where CSR funds can be spent but also require at least 50 percent of the amount to be used in areas directly affected by industries, in coordination with local governments.

Industries are required to prepare and submit work plans to the concerned authority, including details of the minimum amount allocated, the sectors where the money will be spent, the programmes and activities, estimated costs and implementation timelines.

The procedure also requires industries to include details of CSR expenditure from the previous fiscal year in their annual audit reports.

However, private sector businesses have faced allegations of misusing CSR funds by distributing donations or charity to acquaintances and influential groups in the name of social responsibility.

Birendra Raj Pandey, president of the Confederation of Nepalese Industries, said effective monitoring and oversight were necessary to prevent misuse.

“We are spending one percent of our post-tax profits to support local communities. This is also an international practice,” he said. “If there is misuse, there are mechanisms to investigate it. There should be a clear boundary on which sectors the money can be invested in.”

The Nepal Rastra Bank’s “Corporate Social Responsibility Guidelines for Banks and Financial Institutions 2025 (First Amendment)” state that CSR spending by BFIs must be transparent, effective and purpose-driven.

“The mobilisation of CSR funds should prioritise communities living below the poverty line, especially those in extreme poverty,” the guidelines state. “Institutions must ensure that at least 60 percent of the amount deposited in the fund from annual profits is spent within the same fiscal year.”

Under the central bank’s directive, BFIs must spend at least one percent of their net profit on CSR activities. Last fiscal year, 20 commercial banks alone posted profits of Rs71.51 billion. Based on that figure, those institutions are required to spend at least Rs715.1 million on CSR this year. The total amount would rise significantly when profits of development banks, finance companies and microfinance institutions are included. The overall profits of the industrial sector, however, have not been quantified.

Nepal Rastra Bank spokesperson Guru Prasad Paudel said the central bank had formulated the guidelines in line with the Supreme Court’s order.

“The government’s move to introduce legislation should be viewed positively,” Paudel said. “A unified fund could become more effective by creating a large pool of resources. We have already circulated the guidelines for implementation in accordance with the Supreme Court’s order.”

On December 2, 2024, a division bench of the Supreme Court comprising justices Hari Prasad Phuyal and Nripa Dhwoj Niroula issued a directive order barring the government from spending CSR funds on large development projects.

The court ordered that such funds, meant for poor, vulnerable and targeted groups, should only be spent on those communities. Nepal’s latest Living Standards Survey shows that 20.27 percent of the population lives below the poverty line.

The court said the funds should be channelled into areas necessary for a minimum standard of human life, including housing, education, healthcare, children’s welfare and women’s empowerment, with a focus on communities living in extreme poverty.

Advocate Semanta Dahal said it would be inappropriate to separate CSR funds from companies.

“Only South Asia has the practice of mandating a fixed CSR allocation,” he said. “This is money separated after companies have already paid taxes on their income. The government cannot become the owner of that money. Instead, the government should define the sectors eligible for CSR investment and strengthen auditing.”

During hearings on a petition seeking regulation of CSR funds, the Supreme Court formed a study panel that included representatives from the central bank. The panel submitted a report recommending the need for an umbrella law to address CSR.

“The report states that an umbrella law is necessary to regulate funds spent under corporate social responsibility in order to build public trust in industries, bring profit-making companies within the scope of CSR, protect national interests, ensure product safety and consumer rights, control industrial pollution, promote sustainable and healthy economic growth, reduce hunger and achieve the goals set under the Sustainable Development Goals 2019-2030.”

The top court also said that businesses misusing CSR funds for their own interests or benefit should face penalties and fines.

The court directed the Ministry of Industry to monitor whether funds allocated by industries for social protection were being spent on poverty alleviation, and instructed the Ministry of Law to draft a new CSR law. That draft legislation, however, has yet to be prepared.