Corporate Social Responsibility in India

In this article, Mohammed G A who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Corporate Social Responsibility in India.

INTRODUCTION

The concept of Corporate Social Responsibility (CSR) rests on the philosophy of give and take. As the corporate entities utilize valuable resources from the society in the form of raw materials, human resources etc., for its operations, the corporates should act as trustees of the society and must give back something for the welfare of the society. In common parlance, CSR is a term broadly used for defining the responsibilities of corporate world towards the society & environment. While the term CSR is not novel in this corporate world but its scope and meaning has endured major changes from considering it as a mere voluntary charitable activity in comparison with the obligations of the Corporate towards the outer world. There are many large corporate groups who have been actively involved in the CSR activities but regrettably, the number is relatively less. With the objective of inciting more corporate groups to contribute in the process of development of the society by way of CSR, the Government of India has actually implemented the concept of CSR in the new Companies Act 2013. On February 27, 2014[1], the Government of India has notified the guidelines for CSR spending under Section 135 Companies Act, 2013 and Schedule VII[2] of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules) which has come into effect from 1 April 2014.

This scope of this article begins by developing a general understanding of the concept of CSR, based on global practices, Indian tradition, and the object and provisions of the Companies Act, 2013. It further emphasises the key features of Section 135 of the Companies Act, 2013, Schedule VII of the Companies Act 2013 and the Companies (Corporate Social Responsibly) Rules, 2014 and highlights its implications to companies.

CSR IN GLOBAL CONTEXT

There is no universally accepted definition for the term CSR, but to understand the meaning of it in simple words, one might go through the definition which has been given by the European Commission. The definition states that “CSR is the responsibility of the enterprises for their impact on the society…Enterprises should have in place a scheme to integrate ethical, social, environmental and consumer concerns in their business and core strategy, in close collaboration with their stakeholders”.[3]According to the Unites National Industrial Development Corporation (UNIDO), “Corporate social responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders”.[4]

The concept of CSR has been introduced all across the world but different countries have different ways of application. But the common thing is that all the countries use the LBG model to measure the real value and effect of their community investment to the society and business. In developed countries like USA CSR team in the Bureau of Economic and Business Affairs heads the Department’s involvement with U.S. businesses in the advancement of responsible and ethical business practices. In US corporate community contributions by US companies are ten times higher than those of their British counterparts[5] and further, US companies typically disclose CSR activities on their websites like the provision of combating climate change or providing better health care which has not appeared until recently on the websites of European companies.  In EU, the CSR policy is built upon guidelines and principles laid down by the United Global Compact, United Nations Guiding Principles on Business and Human Rights, ISO 26000 Guidance Standard on Social Responsibility and OECD Guidelines for Multinational Enterprises.

The institutional context of CSR for Countries such as Japan, South Korea and Taiwan, was in terms similar to that of European Continent. They are characterized by a high bank and public proprietorship, masculine and long-term service, and coordination and control systems based on long-term relations and partnerships rather than markets. The Japanese ‘Keiretsu’, Taiwanese conglomerates or the Korean ‘Chaebol’ have a legacy of CSR analogous to European companies comprising social services, life-term employment, and health care as a consequence of response from the regulatory and institutional environment of business but not merely due to voluntary corporate policies.

In the developing countries, many multinational companies have been the major driving force for the recent surge in CSR activities in these developing nations. For example, campaigns against Nike’s labour practices in its Asian supply chains and Shell’s role in Nigeria had sparked substantial changes toward more responsible CSR practices in MNCs. Further, the domestic companies in the developing countries have contributed to CSR activities such as improvement of the infrastructure of education, health, and transport etc. Likewise, as the example of the Grameen Bank[6], instituted by Nobel Peace Prize winner Muhammad Yunus substantiates, a vital topic on the CSR agenda is the inspiration of small-scale entrepreneurship through micro-credit, and the financial empowerment of women and other disregarded minorities.

CSR IN INDIA

Philanthropy and CSR are not a new concept for India or Indian Companies. CSR in India has traditionally been seen as a philanthropic activity, which was more of a kind of voluntary spend rather than a statutory obligation under any of the statutes. If we look at the Indian heritage, there were three types of philanthropic or charitable activities which were traditionally practised namely Dana, Dakshina and Diksha. Dakshina was one which was given in exchange/return of something; Diksha was something thing which was given for your own enlightenment and Dana was the purest form of charity which was done without expecting something in return.  Keeping in view of Indian Tradition, this was an activity which was voluntarily performed by the people without any deliberation.  As a consequence of this, there is limited documentation on specific activities related to this concept. Further, the corporates entities in India such as Tata can self-esteem themselves on more than one hundred years of reliable business practices, including far-reaching philanthropic activities and society involvement.[7]

India is the first country in the world to have a statutory compliance requirement on CSR spending whereas, in other countries like UK, France, Germany etc., there have been voluntary guidelines. The Companies Act, 2013 has instituted the idea of CSR under Sec 135 of the Companies Act, 2013, to the forefront and through its disclose-or-explain directive, is promoting greater disclosure and transparency.  The Act stipulates that companies which meet a certain set of criteria will have to spend at least 2% of their average profits in the last three years towards CSR activities.  Schedule VII of the Act, which lists out the CSR activities, advises communities be the focal point. On the other hand, by conversing a company’s relationship with its stakeholders and assimilating CSR into its core operations, the CSR rules suggest that CSR needs to go beyond communities and beyond the concept of philanthropy.  In case, entities are unable to comply with the CSR provisions under the Act, they would be required to give explanations/reasons for not spending the amount on CSR activities. The approach is to ‘comply or explain’. If they fail to do so, they would face action, including a penalty.

CSR under the Companies Act 2013

Some of the key features of CSR under the Companies Act, 2013 have been analyzed under the below subheadings

CSR provisions and applicability

According to Section 135, Companies Act, 2013, the CSR provisions will be applicable to private limited and public limited companies, as well as their holding and subsidiary companies and foreign companies that have offices in India and meets any of the following criteria:

1. Company must have a net worth of INR 500 crore of more in any financial year;
2. Company must have an annual turnover of INR 1,000 crores or more in any financial year;
3. Company must have a net profit of INR 5 crore or more during any financial year.^[8]

Companies that meet any of the aforesaid criteria must spend at least two percent (2%) of their average net profits made during the previous three financial years on CSR activities.

An inclusive definition of CSR

While the Companies Act used CSR as a nomenclature without actually defining it, the notified CSR rules have defined the term “CSR” to mean and include but not limited to:

1. Projects or programs relating to activities enumerated in the Schedule; or
2. Projects or programs relating to activities undertaken by the Board in pursuance of recommendations of the CSR Committee as per the declared CSR policy subject to the condition that such policy covers subjects specified in the Schedule.

This inclusive definition of CSR is of importance as it permits the companies to involve in projects or programs relating to activities enumerated under the Schedule. It also gives flexibility to the companies by permitting them to choose their ideal CSR engagements that are in accordance with the CSR policy.

CSR Committee and Policy

Every qualifying company will be required to constitute a Committee (CSR Committee) of the Board of directors (“Board”) consisting of 3 or more directors, including at least one independent director.[9] The CSR rules 2014, states that an unlisted company and a private company which are not required to appoint an independent director shall constitute a CSR committee without an Independent director.[10] A private company having only two directors shall constitute its CSR committee with two such directors.[11] In the case of a foreign company, the CSR Committee shall consist of at least two persons wherein one person shall be Indian resident and another person shall be nominated by the foreign company.[12]

The CSR Committee shall articulate and endorse to the Board, a CSR policy which shall specify the activity or activities to be undertaken by the company; recommend the amount of expenditure to be incurred on the activities referred and monitor the CSR Policy of the company.[13]The Board shall take into considerations of the suggestions made by the CSR Committee and approve the CSR Policy of the company.[14]

Role of the board and the CSR committee:

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Computation of Net profit

Every company incorporated under Companies Act will have to report its net profits accrued during the financial year for the purpose of ascertaining the criteria stated under Section 135(1) of the Companies Act, 2013. There are a distinct set of rules governing the Indian and Foreign Company in this aspect.

(a) Indian Company: The methodology for computation of net profit has been explicitly provided in the CSR Rules. According to the CSR Rules for the determination of the ‘net profit’, of a company profits made by the company from its overseas branches or dividend income received from another Indian company have to be disregarded. Further, the 2% CSR is to be computed as 2% of the average net profits made by the company during the last three financial years.[15] Also, the computation of net profit is in accordance with Sec 198 of the Companies Act, 2013 which is mainly net profit before tax.[16]

(b) Foreign Company: CSR rules states that the net profit of a foreign company incorporated in India shall be determined in conformity with the profit and loss account and balance sheet of a foreign company which will be formulated in accordance with Section 381(1)(a) read with Section 198 of the Companies Act.[17]

Scope Activities under CSR

Schedule VII of Companies Act, 2013, provides a wide spectrum of activities which may be undertaken by the body corporates in India. Apart from the specified activities, the Government may prescribe any other activity which it thinks proper to be included within the ambit of CSR.[18] The activities that can be done by the company to achieve its CSR obligations include

1. eradicating extreme hunger and poverty;
2. promotion of education;
3. promoting gender equality and women empowerment
4. reducing child mortality and improving maternal health,
5. combating human immuno-deficiency virus, acquired, immune deficiency syndrome, malaria and other diseases
6. ensuring environmental sustainability;
7. employment enhancing vocational skills;
8. social business projects;
9. contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women and
10. such other matters as may be prescribed by the government of India.[19]

General Circular No. 21/2014 of Ministry of Corporate affairs had clarified that the entries in the Schedule VII have to be interpreted liberally so as to encapsulate the crux of the subjects listed in the said schedule. The items enumerated in Schedule VII of the act are based on broad concepts and expected to cover a wide range of activities. The General circular also provides an elucidatory list of activities that can be included under CSR. In a similar manner, CSR expenditure can be spent on many more activities which are relatable to the ones which are enumerated under Schedule VII.[20]

The Ministry of Corporate Affairs, in order to provide clarity to the execution of CSR, has enumerated the activities which shall not be treated as CSR activities. The following do not constitute as activities falling under CSR:

1. Activities undertaken in pursuance of the normal course of business by the company;
2. Activities undertaken outside India;
3. Activities that are exclusively for the benefit of employees of the company and their families;
4. One-off events such as awards/ marathons/ advertisement/ charitable donations/ sponsorships of TV programmes etc. would not be regarded as part of CSR expenditure.
5. Expenses incurred by companies for complying with any Act/ Statute of regulations (such as Land Acquisition Act, Labour Laws etc.)
6. Contributions made either directly or indirectly to any political parties under Section 182 of Companies Act 2013.[21]

Implementation of CSR

As per the Companies Act, 2013, the activities enumerated in Schedule VII can be executed in the following ways:

1. It must be carried out within India, preferably at the local areas and the areas around where the company operates.
2. It may be performed as CSR projects or activities or  programs which may either be fresh or ongoing;
3. It may be carried out with the aid of a registered trust or society, or a charitable company functioning within India which is established by the funding company, its parent, subsidiary or associate company; or which is not established by the funding company, its parent, subsidiary or associate company if it has a proven track record of undertaking similar activities for at least three years;[22] and
4. It may be conducted in association with other companies provided that each eligible company is able to report its CSR activities individually.[23]
5. It may also use up to 5% of its CSR spending in a financial year for training its own employees/personnel for implementing CSR activities or for developing the required facilities/capacities of their own personnel or implementing agencies.

Reporting

It is mandatory for the companies to publish the CSR report on their company’s official websites annually[24]. The Board of directors of the Company must prepare an annual report on the CSR activities of the company in a separate format specified in the CSR rules. The CSR report, inter alia, must contain a brief overview of the CSR policy, the composition of the CSR committee, average net profit in the preceding three financial years, 2% of the average net profit of the company, the amount of expenditure that was spent on CSR activities and any amount which have left unspent. In the case of a foreign company, the balance sheet failed under sub-clause (b) of Section 381(1) shall contain an annexure regarding report on CSR. If the company fails to spend the minimum required portion of its net profit on CSR activities, the reasons for failing to do so must be mentioned in the Board report.

Penalty for Contravention of CSR provisions

According to Section 134(3)(O) the companies Act 2013, the board of directors need to mandatorily disclose all the relevant information about its Company’s CSR policy and its implementation on an annual basis. Section 134(8) of the Act states that if the company fails to comply with the aforementioned provision, it shall be liable to pay a fine which shall not be less than Rs. 50,000 but may extend to INR 25,00,000. Further, every defaulting officer shall be punishable with an imprisonment for a term, not more than 3 years or with a fine which shall not be less than INR 50,000 but may extend to INR 5,00,000 or with both. This essentially infers that the Act penalizes a company for failure to disclose information about its CSR policy but does not hold them liable for not undertaking CSR activities.

However, Section 450 read with Sec 451 of the Act, which deals with general penalties for contravention of the rules and repeat offences, contains a provision for punishing a company or its officers in case no specific punishment is provided for a particular offence. Sec 450 of the Act states that if a company contravenes with any provisions of the Act or any rules thereunder, the company and any defaulting officer are liable to pay a fine which may extend to INR 10,000 and INR 1,000 per day if the contravention continues after the first fine.

According to Section 451 of the Act, where the defaulter is punished either with fine or with imprisonment and where the identical offence is committed for the second or successive occasions within a period of three years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence.

CONCLUSION

From the above analysis, it is evident that CSR is a noble initiative wherein the corporate entities which reap the benefits of resources available at the society helps to fill the gap of socio-economic inequality prevalent in the country and address the problems faced by the society at large.  In most of the countries, CSR activities was a voluntary obligation by the companies or by regulatory. India is the first country in the world to have a mandatory statutory compliance requirement on CSR spending, which was incorporated under Section 135 of the Companies Act, 2013 and has come into effect from 1 April 2014. As a consequence of this, various companies have taken on extensive projects addressing the socio-economic concerns and have supplemented the government’s efforts of sustainable development and engage the corporate world with the country’s development.

However, there are certain lacunas like; there was no tax clarity on the CSR spending, ambiguity on the computation of financial accounts of foreign companies, an absence of clarity on the regulations of CSR vis-a-vis foreign contribution. Even though there are certain lacunas, they should not be permitted to become an obstacle in implementing the true spirit of CSR.  Thus, the government and corporate entities must mutually work together for an effective implementation and addressing their concerns.

BIBLIOGRAPHY

 STATUTES

• The Companies Act, 1956
• The Companies Act, 2013

RULES

• Companies (Accounts) Rules, 2014
• Companies (Corporate Social Responsibility) Rules, 2014

SCHEEDULES

• Schedule VII of Companies Act, 2013

NOTIFICATIONS

• Ministry of Corporate Affairs. Schedule VII. [GSR 130 E] dated 27^th Feb, 2014.
• Ministry of Corporate Affairs. Corrigenda to Schedule VII.  [GSR 261 (E)] dated 31^st Mar, 2014.
• Ministry of Corporate Affairs. Enforcement Notification S.O. 902(E) dated 26^th Mar 2014.
• Ministry of Corporate Affairs. Further Amendment to Schedule VII. [GSR 568 (E)] dated 06^th Aug, 2014.
• Ministry of Corporate Affairs. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2014. [GSR 644(E)] dated 12^th Sep, 2014.
• Ministry of Corporate Affairs. Further Amendments to Schedule VII. [GSR 74 (E)] dated 24^th Oct 2014.
• Ministry of Corporate Affairs. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2015 [GSR 43(E)] dated 19^th Jan, 2015.
• Ministry of Corporate Affairs. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016. [GSR 540 (E)] dated 23^rd May, 2016.
• Ministry of Corporate Affairs. Exemption to Specified IFSC Private Company [GSR 09(E)] dated 04^th Jan, 2017.
• Ministry of Corporate Affairs. Exemption to Specified IFSC Public Company [GSR 08(E)] dated 04^th Jan, 2017.

CIRCULARS

• Ministry of Corporate Affairs. Clarifications with regard to provisions of Corporate Social Responsibility under Section 135 of Companies Act,2013.General Circular No. 21/2014 bearing No. 05/01/2014-CSR. (Issued on 18^th June, 2014)
• Ministry of Corporate Affairs. Clarification with regard to the provisions of Corporate Social Responsibility (CSR) under Section 135 of Companies Act, 2013. General Circular No. 36/2014 bearing No. 05/01/2014-CSR. (Issued on 17^th Sep, 2014)
• Ministry of Corporate Affairs. Constitution of a high level committee to suggest measures for improved monitoring for the implementation of Corporate Social Responsibility policies by the companies under Section 135 of Companies Act, 2013. General Circular No. 01/2015 bearing No. 05/09/2014-CSR. (Issued on 3^rd Feb, 2015)
• Ministry of Corporate Affairs. Frequently Asked Questions (FAQs) with regard to Corporate Social Responsibility under Section 135 of Companies Act,2013.General Circular No. 01/2016 bearing No. 05/19/2015-CSR. (Issued on 12^th January, 2016)
• Ministry of Corporate Affairs. Clarifications with regard to provisions of Corporate Social Responsibility under Section 135 of Companies Act,2013.General Circular No. 05/2016 bearing No. 05/01/2014-CSR. (Issued on 16^th May, 2016)

BOOKS

• A Ramaiya, Gudie to Companies Act: Providing Guidance on the Companies Act, 2013 (18^th edition, LexisNexis 2015)
• Taxmann’s, A Comparative Study of Companies Act 2013 and Companies Act 1956

(Taxman Publication Pvt. Ltd., 2013 edition)

ARTICLES

• Elankumaran, S., Seal, R., & Hashmi, A. 2005. Transcending Transformation: Enlightening Endeavours at Tata Steel. Journal of Business Ethics, 59(1): 109-119.
• Brammer, S., & Pavelin, S. 2005. Corporate community contributions in the United Kingdom and the United States. Journal of Business Ethics, 56: 15-26.
• EC, Green Paper, Promoting a European Framework for Corporate Social Responsibility, COM (2001) 366 (18/07/2001), para 20.
• CII and PWC. 2013. Handbook on Corporate Social Responsibility in India. Available at: https://www.pwc.in/assets/pdfs/publications/2013/handbook-on-corporate-social-responsibility-in-india.pdf

WEB SITES

• http://www.mca.gov.in
• http://www.unido.org/csr/o72054.html
• http://www.grameen-bank.net/

References.

[1] Press Release dated 27th February 2014; http://pib.nic.in/newsite/erelease.aspx?relid=104293

[2]Schedule VII deals with the activities which may be included by companies in their CSR policies

[3] EC, Green Paper, Promoting a European Framework for Corporate Social Responsibility, COM (2001) 366 (18/07/2001), para 20, available at http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52001DC0366&from=EN. Accessed on 21 March 2017

[4] http://www.unido.org/csr/o72054.html. Accessed on 21 March 2017

[5] Brammer, S., & Pavelin, S. 2005. Corporate community contributions in the United Kingdom and the United States. Journal of Business Ethics, 56: 15-26

[6] http://www.grameen-bank.net/

[7] Elankumaran, S., Seal, R., & Hashmi, A. 2005. Transcending Transformation: Enlightening Endeavours at Tata Steel. Journal of Business Ethics, 59(1): 109-119

[8] “Any financial year” referred under Sub-Section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three previous financial years’

[9] Section 135(1) of the Companies Act

[10] Pursuant to Section 149 of the Companies Act, 2013 and Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 5(1(i))

[11] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 5(1(ii))

[12] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 5(1(iii))

[13] Section 135 (3) of the Companies Act

[14] Section 135 (4) of the Companies Act

[15] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 2(1)(f)

[16] Frequently Asked Questions (FAQs) with regard to Corporate Social Responsibility under Section 135 of Companies Act,2013.General Circular No. 01/2016 bearing No. 05/19/2015-CSR. (Issued on 12^th January, 2016)

[17] Section 198 of the Companies Act, 2013 deals with calculation of profits; Companies (Corporate Social Responsibility Policy) Rules, 2014, Proviso to Rule 2(1)

[18] The Companies Act, 2013, Schedule VII

[19] The Companies Act, 2013, Schedule VII

[20] Clarifications with regard to provisions of Corporate Social Responsibility under Section 135 of Companies Act,2013.General Circular No. 21/2014 bearing No. 05/01/2014-CSR. (Issued on 18^th June, 2014)

[21]General Circular No. 21/2014, Ministry of Corporate Affairs, (June 18, 2014), http://www.mca.gov.in/Ministry/pdf/General_Circular_21_2014.pdf

[22] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 4(2); See Ministry of Corporate Affairs, Notification Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016. [GSR 540 (E)] dated 23^rd May, 2016

[23] Companies (Corporate Social Responsibility Policy) Rules, 2014; Rule 4(3); See Ministry of Corporate Affairs, Notification Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016. [GSR 540 (E)] dated 23^rd May, 2016

[24]Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 8 and 9

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