Corporate Social Responsibility under Companies Act 2013: an Overview By Ms. Vanya Rakesh

Abstract: August 29, 2013 was a red-letter day in the field of Indian corporate Law when the Companies Act 2013 was enacted with the aim of improving and simplifying corporate governance norms and legislate the role of whistle-blowers. One of the revolutionary provisions is that of mandating Corporate Social Responsibility (CSR) activities in India. The vision behind this move is this that a Corporation must not only achieve its economic goal but also adopt the principles of corporate social responsibility. Section 135 in the Act states that every company with the prescribed net worth or turnover must necessarily constitute a CSR Committee,  with clearly defined  composition ,activities to be undertaken ,budgets and  responsibilities of the Committee, so formed.[1] This would ensure that right steps are taken by companies in pursuance of the CSR provisions of the Act.

However, complying with this law may not seem to be an easy task due to some grey areas in the provision and its Rules which require clarifications because the fundamental argument arises as to how can the Companies act on behalf of the Government to uphold the spirit of the provision. Due to this, the Corporations in India have a mixed opinion about this move by the Centre. For example, some of the issues that have been brought to the fore are regarding the restrictive scope of activities mentioned under Schedule VII which will lead to the polarization of CSR resources. The limited geographical focus as provided under section 135(2) is another issue since it may subvert the idea of inclusive development in the society.[2] On the other hand it can be argued that with the allowing CSR expenditure as a deduction, the funds allocated by companies for social development would voluntarily increase by leaps and bounds, obviating the need of a mandatory provision.[3] Therefore, clarifications with respect to these, and many more Loopholes become the need of the hour to achieve the true purpose with which this provision was enacted.

This paper shall discuss the evolution of the concept of Corporate Social Responsibility and how important this is for the economy and society, alike. The pros and cons of mandating CSR initiatives for the inclusive development of the society shall be discussed and made to see how this would be different and more beneficial from the voluntary CSR spending done by a number of Corporations and businesses. The paper will throw light on several examples where big corporations were already involved in successful endeavors for social benefit and what difference this new provision will bring to the overall objectives of any Company. The problems and issues involved in the Rules issued by the Government would be discussed in detail and the paper would offer suggestions as to how these inadequacies (as believed to be by few companies) can be countered effectively so that the law is followed in its true letter and spirit.

Keywords:  Corporate social responsibility, Companies Act 2013, CSR Committee, CSR Rules

Corporate Social Responsibility – Development of the Concept in India:

Corporate Social Responsibility as a concept has existed in India since ages and plays an important role in a developing country like ours. The organizations have realized that besides profit making, a corporation must involve in trust building by working upon its societal relationships and environmental issues. Also, companies which genuinely adopt the principles of socially responsible behavior are preferred and favored by the society at large, of which the company forms an integral part.[1] Hence, one can say that CSR is basically an act of moral, social and business responsibility with the aim to protect, preserve and nurture human values and promote socio-economic welfare.[2]

CSR evolved over a period of time when in the 19th century, the industrial families like Tata, Birla, Godrej, etc. had an inclination towards such activities. These giant corporates involved themselves in a variety of CSR activities without any legal requirements and view it in the context of building goodwill, reputation and brand building. [3]

Later, during the time of Independence, Mahatma Gandhi influenced various industrialists to adopt the practices with respect to socio-economic development due to which various companies had set up training centers and educational institutions like schools and colleges. Eventually, CSR got a push by way of introduction of the labour and environment protection laws in India and the Public Sector Undertakings were asked to take up the CSR initiatives. This is how this practice developed and has now evolved as a sustainable business strategy.[4]

According to the founder of Infosys Mr. Narayan Murthy, “social responsibility is to create maximum shareholders value working under the circumstances, where it is fair to all its stakeholders, workers, consumers, the community, government and the environment.”[5]

Hence one can say that social responsibility would mean asking businesses to be more practical and analyze the positive as well as negative effects of their activities and decisions on the people and society at large.

Provision under Companies Act 2013:

The practice of CSR is not a new one in the Indian industry. It was an activity that was not deliberated, rather performed. Observers believe that in India, this activity has evolved from institutional development to community development by way of several projects and tends to focus on the utilization of profits made by a company.[6]

Also, undertaking such initiatives were a voluntary step for all companies until it was mandated by the new Companies Act which came to force in the year 2013. Section 135[7] of this Act provides that every company in India, either private or public having a net worth of Rs 500 crore, or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend a minimum of 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities.[8] A company refers to an entity incorporated under the Companies Act or under the other previous company law.

A clarification has been made with regard to computation of net profits that if the profits have been computed under the Companies Act 1956 then they need not be recomputed under the 2013 Act. Also, the CSR activities must be undertaken with respect to certain areas which are listed under Schedule VII of the 2013 Act, some of which include:

  • Activities to eradicate hunger, poverty and malnutrition.
  • Promotion of preventive healthcare, education and gender equality.
  • Setting up homes for women, orphans and the senior citizens.
  • Undertaking measures for reducing social and economic inequalities.
  • Ensure environmental sustainability, balance in the ecology and welfare of animals.
  • Protection of national heritage, art and culture.
  • Taking measures for the benefit of armed forces veterans, war widows and their dependents.[9]
  • Provide training to promote rural, nationally recognized, Paralympic or Olympic sports.
  • Contribute to Prime Minister’s National Relief Fund or any other fund which has been set up by the Central Government for socio-economic development, relief and welfare of SC, ST, OBCs, minorities and women.

The provision also states that a company shall give preference to the local areas and those areas around which the company operates for undertaking the said CSR activities. Another statutory requirement under section 135 is the formation of a CSR Committee of the Board for monitoring the CSR policies of any company consisting of at least 3 directors (inclusive of an independent director). The Committee is required to recommend and suggest the amount of expenditure that the company must incur on the activities so specified. After considering the recommendations put forth by the Committee, the Board shall approve the CSR policy for the company.

It has been notified by the Ministry of Corporate Affairs that Section 135 and Schedule VII under Companies Act 2013, along with the provisions of the Rules[10] shall come into effect from 1st April 2014. The Statue provides CSR activities to be undertaken through a registered trust or society, or a company established by its holding, subsidiary or associate company. For this purpose, the company needs to specify the activities that will be taken up and the modalities for utilizing the funds. It is said that such an entity will have to establish a track record of three years where similar activities were performed by it.[11] The report which shall be submitted by the Directors along with the financial statements of a company shall include an annual report on the CSR Activities of a company in the prescribed format under the Rules, setting out inter alia a brief outline of the CSR policy, the composition of the CSR Committee, the average net profit for the last three financial years and the prescribed CSR expenditure. If the company does not have adequate profits or has been unable to spend the minimum required on its CSR initiatives, the specific reasons for not doing so are to be disclosed in the Board Report.[12]

However, failure to report CSR spending or the specific reasons for non-expenditure shall amount to contravention of the provision under section 134 of the Companies Act 2013 and the said company shall attract penalty in the form of fine, which shall not be less than fifty thousand rupees and may extend to INR 2.5 Million. Also, every officer who will be liable for such a default will be punished with imprisonment for a term extending to 3 years, along with fine of minimum fifty thousand rupees but which may extend to INR five lakh rupees or both.[13]

Voluntary CSR Initiative v/s Mandatory Provision:

Before the statutory provision of mandating CSR initiatives in the Indian corporate sector was introduced, it is said that CSR was already textured in the activities of various corporations and business groups in India.

For example, IBM had joined hands with the Tribal Development Department of Gujarat as a part of its Corporate Service Corps Programme aiming at upliftment of the tribals in the Sasan area of Gir forests[14], the Tata Group had a range of projects which is based on CSR activities like providing health services, family planning, endorsing sports as a part of life by establishing football and archery academies. The Business group also organized several relief programmes for natural disasters and has contributed towards the field of education as well. Another notable company voluntarily undertaking CSR activities is Infosys which is involved in various community programmes to a large extent and has created a not-for-profit trust named Infosys Foundation to which it contributes up to 1% of profits after tax annually. Their Management team has also taken various initiatives in areas of education, research, community service, programmes for generating employment, promoting & providing healthcare and education for poor. Reliance Industries Ltd, being a corporate giant in India, has launched a “Project Drishti” which is a countrywide initiative to help the visually challenged people belonging to economically weaker section of the society in restoring their eye-sight.

Apart from these commendable initiatives, ITC Limited is involved in facilitating livelihood of the Indian farmers by partnering with them and came up with ‘e-Choupal’ initiative by leveraging information technology, along with making investments in rain water harvesting to improve irrigation facility, empowering the rural women and providing infrastructural support in the villages.[15] Also, the financial service sector in India has backed the Green Movement in the country and companies like HSBC India, Max New York Life and Standard Chartered Bank have contributed to it by asking the customers to adopt paperless measures and recognize the environment standards.[16]

Therefore, the compulsion to undertake CSR activities under Section 135 of the new Companies Act has been questioned primarily on this ground that it is inherently contradictory and shall be ineffective on the basis of practical application. Also, the law lays absolutely no provision with respect to enforcement or any penalties for non-compliance.

Apart from this, the provision, along with Rules has several loopholes which have raised concerns. Many Indian Companies and Businesses see this provision as impractical and unnecessary as the Government has failed to show any specific purpose or objective for adoption of this model for which such expenditure must be made by any Company. The companies wish such initiatives to remain a voluntary step since it is believed that mandating CSR would lead to meddling by the implementing officers in the operations of the company[17] and would ultimately defeat the very purpose of CSR initiatives with which these are actually adopted.

No clear guidelines or instructions have been put in place which shows how vague this model/provision seems to be. A valid point has been made in this regard that when a tobacco company would comply with section 135 it would be at the same footing as any company with produces eco-friendly products for the society, with respect to corporate social responsibility. Such questions remain unanswered by this new provision.

It also affects the fundamental right guaranteed under Article 19(1)(g) of the Indian Constitution which provides the right to freely practice any profession, or to carry on any occupation, trade or business . However, the Government may argue that clause (6) of the very same article of the Constitution allows the Government to impose reasonable restrictions for the benefit of the general public. Here, it is questioned whether such a restriction is reasonable at all because this would mean imposing the burden of charity by the Government on the Indian companies. [18]

Another major concern for several industrialists is with respect to the allowance of deductibility of CSR expenditure under the Income Tax Act. This would lead to a voluntary increase in the funds which are allocated by the companies for social development and this would lead to a necessary requirement for a regulatory and mandatory provision.  Absence of any prescribed penalties in case any company fails to comply or set aside 2 per cent of Net profits for CSR is another grey area since it is not clear whether any company can get away from non-compliance simply by disclosing reasons for not spending mandatory amount or  would they be liable to pay any sort of penalties.[19] This is said to be a major setback due to an absence of a deterrent force to curb fraudulent practices. Similarly, there is an absence of clearly laid down powers, duties and responsibilities of the Committee entrusted to carry out the CSR policy and this leads to the failure of purpose with which the framework was set up by any company.[20]

This seems to be a contentious issue because it is rightly argued by the critics that the companies may try to adopt camouflaging activities to meet these regulations, particularly during an economic downturn. Also, some have stated this to be an act of outsourcing governance wherein the government has shouldered their responsibility to the companies.

This calls for a comparison with the West where no laws stipulate any mandatory CSR activities, making India the first country in the World to have a CSR spending mandated by the law. This has also been criticized by the Planning Commission of India, which holds the view that companies must take CSR as a voluntary measure and it must not be made mandatory since these will lead to a rise in corrupt practices.[21]

The basic principle of corporate responsibility is said to involve such responsible business practices which are ethical in nature and practices which respect and recognize human rights, fair sourcing and protection of the environment. The National Voluntary Guidelines (NVGs) are based on these basic principles. These are voluntary policies which ensure CSR is followed by corporates. These Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs) suggest nine core principles which businesses should follow, voluntarily.  Also, the Securities Exchange Board of India (SEBI) mandates the top 100 companies to report on these principles in their sustainability reports. However, the problem lies in the fact that the CSR rules negate these principles and values a company’s 2% contribution for CSR more than the value of the company’s respect for ethical practices, human rights and environmental records.

It is argued that this will lead to setting up of a bad precedence and shall drag India’s image with respect to corporate governance in a bad light.[22]

Another major setback is the polarization and concentration of CSR resources only in the specific and particular areas which discourages investments in any additional areas which need resources. Schedule VIII also influences the decision making process by the committees as it seems to restrict the freedom to think innovatively as to how investments can be made with regard to CSR so as to ensure wholesome development and growth of the society at large. The limited geographical focus as provided under section 135(2) is another issue since it may subvert the idea of inclusive development in the society.[23] For this purpose, it is suggested that a huge proportion of the CSR funds of a company may be utilized to comply with the requirements of section 135(2) and a considerable amount of money must be mandated to be spent on the development of those districts which have been identified as “backward” by the Planning Commission of India.

“Contributions to PM’s national relief fund and such other funds established by the central or state government” as one of the activities to be taken up under CSR as prescribed under Schedule VIII poses another challenge since it is argued to be deeply flawed. It is believed that such an activity is subject to misuse as the funds so raised are not accountable. Besides this, as per the submission of the Prime Minister’s Office (PMO) to the Central Information Commission, the Prime Minister’s National Relief Fund itself is not a Government body. Therefore, it has been suggested that by way of a clarification, the Prime Minister’s National Relief Fund should be excluded from the list of funds eligible for CSR donations. [24]

It must be ensured by the government that the CSR funds of any company must be invested wisely in such projects which bring socio-economic benefits in the long-run with the aim of social justice and social development.

Conclusion and Suggestions :

Therefore, it can be concluded that the recent CSR provision in the new Companies Act has the potential to bring novelty in the corporate field and institutional philanthropy in India. Despite of the various practical difficulties with respect to the implementation of the new CSR provisions, the initiative by the government has been appreciated by many on the ground that it entrusts responsibility on giant corporates to contribute towards social welfare of the society.

However, due consideration must be given to the fact that when CSR is seen in a broader context, it should mean bringing sustainable changes around a company’s eco-system and CSR should be seen as a mix of good governance and corporate philanthropy for a company but with a business and financial side to it as well.

This can be backed by the fact that corporate India is already involved in corporate philanthropy and that these funds (which a company is required to spend on CSR activities) could be spent with more accountability and alignment with the needs of the country.[25] Thus, the core philosophy behind CSR must be ‘investing’ money rather than merely ‘spending’ money.

It is suggested that though this new provision and the Rules bring no clarity regarding the implementation of such a socially inclined initiative, an effort must be made to resolve the ambiguities in the statute to ensure adoption of healthy practices by companies. Proper regulatory system for management and allocation of funds must be developed to ensure compliance with the 2% mandatory spending rule. Also, proper mechanism must be devised to gauge the effect of CSR initiatives adopted by the companies and a penalty must be included in section 135.[26]

Also, absence of any clear policy prescribed for initiation of social business projects has hampered responsible investment by many companies and due to this, many companies have been unable to explore the need to invest in social business projects. Therefore, it has been suggested that MCA should mandate all companies which are governed by section 135 to develop specific policies on the lines of ethical business practices, and which acknowledge human rights and the need for environment protection. Also, these must be strictly adhered to and timely reported, and any violation of the same shall be appropriately punishable. [27]

This means, Integration of National Voluntary Guidelines in the form of more constructive guidelines for deploying corporate CSR policies is a viable option.[28]

Another suggestion that has been put forth by experts is this that a trained and well-organized team must be formed by every company to ensure that the law is followed in its true letter and spirit. One step forward has been put forward by Indian Institute of Corporate Affairs (IICA) in this regard since the Institute plans to initiate a certificate programme on Corporate Social Responsibilities activities for working executives.[29]

An organized and critical plan of action shall help the companies in meeting their development challenges of economic growth as well as combating social evils. The government must issue clarifications with respect to the grey areas in the Statute which makes effective and efficient adoption and implementation of the Law impossible.

This shall ensure that the provision is accepted by the companies across the country and the objective with which it was incorporated is successfully achieved and the companies are able to involve themselves in wholesome development of the society, living up to the true meaning of the concept of Corporate Social Responsibility and become a responsible entity.

By :  Ms. Vanya Rakesh, Vanya Rakesh, 10th Semester, B.A.LL.B. (Hons.),  Institute of Law, Nirma University, Ahmedabad

[1]Rajeev Prabhakar and Ms. Sonam Mishra , A Study of Corporate Social Responsibility in Indian Organization: An-Introspection , Proceedings of 21st International Business Research Conference 10 – 11 June, 2013, Ryerson University, Toronto, Canada, ISBN: 978-1-922069-25-2, available at: http://www.wbiworldconpro.com/uploads/canada-conference-2013/management/1370168444_430-Sonam.pdf

[2] Nishith Desai Associates, Corporate Social Responsibility & Social Business Models in India- A Legal & Tax Perspective, November 2013, available at: http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Corporate_Social_Responsibility___Social_Business_Models_in_India.pdf

[3] Sanjay Kumar Sharma , A 360 degree analysis of Corporate Social Responsibility (CSR) Mandate of the New Companies Act 2013 , Global Journal of Management and Business Studies, ISSN 2248-9878 Volume 3, Number 7 (2013), pp. 757-762, available at: http://www.ripublication.com/gjmbs_spl/gjmbsv3n7_09.pdf

[4]Gahlot Sushmita , Corporate Social Responsibility: Current Scenario, Research Journal of Management Sciences, Vol. 2(12), 12-14, December (2013) , ISSN 2319–1171, available at : http://www.isca.in/IJMS/Archive/v2/i12/3.ISCA-RJMS-2013-105.pdf

[5]P. Paramashivaiah and Puttaswamy, CSR for sustainable development: an empirical study on the corporate social responsibility focus of top listed companies of BSE, AL-SHODHANA, Vol.-I, No.2, July 2013, available at: http://staloysius.edu.in/c/document_library/get_file?uuid=7f9338fb-b64c-4d23-b793-2b6941c1099c&groupId=11530

[6] Handbook on Corporate Social Responsibility in India, Confederation of Indian Industry, available at: http://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/handbook-on-corporate-social-responsibility-in-india.pdf

[7] (1) Every company having a net worth of Indian rupees five hundred crore or more, or a turnover of Indian rupees one thousand crore or more or a net profit of Indian rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

(2) The Board’s report under sub-Section (3) of Section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

(3) The Corporate Social Responsibility Committee shall,-

(a) formulate and recommend to the Board a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;

(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and

(c) Monitor the Corporate Social Responsibility Policy of the company from time to time.

(4) The Board of every company referred to in sub-Section (1) shall,-

(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such a manner as may be prescribed; and

(b) ensure that the activities as are included in Corporate Social Responsibility of the company are undertaken by the company.

(5) The Board of every company referred to in sub-Section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-Section (3) of Section 134, specify the reasons for not spending the amount

Explanation- For the purposes of this Section “average net profit” shall be calculated in accordance with the provisions of Section 198.

[8] Implications of Companies Act, 2013 Corporate Social Responsibility, Grant Thorton, available at: http://gtw3.grantthornton.in/assets/Companies_Act-CSR.pdf

[9] Press Trust of India, 1st April 2014, Promoting healthcare likely to be considered CSR activity, available at : http://www.business-standard.com/article/pti-stories/promoting-healthcare-likely-to-be-considered-csr-activity-114040100701_1.html

[10] Companies (Corporate Social Responsibility Policy) Rules, 2014

[11] Lalit Jain, Challenges in the CSR & Rules Implementation, http://www.icsi.edu/portals/70/NIRRULE.PDF

[12] Supra note 5

[13] India Briefing, 12th March 2014, available ta: http://www.india-briefing.com/news/indias-corporate-social-responsibility-mandate-companies-act-2013-8057.html/

[14] Supra note 5

 

[15] Mandatory Corporate Social Responsibility: Is the Government Shifting its Failure to Corporate India?, available at: http://socialissuesindia.files.wordpress.com/2012/12/mandatorycsrinindia.pdf

[16] Supra note 5

[17] Supra note 19

[18] Supra note 2

[19] Supra note 8

[20] Supra note 6

[21] Supra note 19

[22] Supra note 3

[23] Comments on draft CSR Rules under Section 135 of Companies Act 2013, National Foundation for India, available at: http://www.nfi.org.in/sites/default/files/nfi_files/Comments%20on%20draft%20CSR%20rules.pdf

[24] Ibid

[25] Mark Hodge, Two elephants  in the Indian CSR Room: time to focus on business impacts and state duties, 20th August 2013, available at: http://www.ihrb.org/commentary/guest/two-elephants-in-the-indian-csr-room.html

[26] Supra note 8

[27] National Human Rights Commission, Developing Code of Ethics for Indian Industry , available at: http://nhrc.nic.in/Documents/reports/misc_dev_code_of_ethics_for_indian_industry_ICSM.pdf

[28] Samir Saran and Vivan Sharan, Less corporate, more social, 10th August 2013, available at: http://www.thehindu.com/opinion/op-ed/less-corporate-more-social/article5007515.ece

[29] Supra note 7

[1] Shashank Sharma, Making CSR Mandatory in India-A Flawed Approach, IJSSH 2013 Vol.3(1): 33-35 ISSN: 2010-3646

[2] Comments on draft CSR Rules under Section 135 of Companies Act 2013, National Foundation for India, available at: http://www.nfi.org.in/sites/default/files/nfi_files/Comments%20on%20draft%20CSR%20rules.pdf

[3] Aneel Karnani, Mandatory CSR in India: A Bad Proposal, 20th May 2013, available at : http://www.ssireview.org/blog/entry/mandatory_csr_in_india_a_bad_proposal

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