Corporate Social Responsibility under Companies Act

In this article, saurabh kumar discusses the CSR Laws in India. 

INTRODUCTION

CSR in India is a result of the 2013, Companies Act. India is one of the few countries in the world to have a dedicated CSR act. In fact, it is the first to have brought about a legislation to implement CSR activities, followed by United Kingdom[1].

This article is an attempt at understanding Corporate Social Responsibility (CSR) laws in India with the help of the following research questions-

• How do you define CSR? What do you mean by CSR?
• What activities may be said to constitute CSR?
• What are the benefits of CSR? Why do we need CSR?
• What are the laws related to CSR in India?
• What are the advantages and shortcomings of the Indian CSR laws?
• How can CSR laws in India be made better?

WHAT IS CSR?

CSR refers to the idea that companies need to invest in socially and environmentally relevant causes in order to interact and operate with concerned parties having a stake in the company’s work. CSR is termed as “Triple-Bottom-Line-Approach”, which is meant to help the company promote its commercial interests along with the responsibilities it holds towards the society at large. CSR is different and broader from acts of charities like sponsoring or any other philanthropic activity as the latter is meant to be a superficial or surface level action as part of business strategy, but the former tries to go deep and address longstanding socio-economic and environmental issues[2].

Small or Medium Enterprises (SMEs) should be asked to promote CSR by taking into account their respective fiscal capacity and not over-stretching their rather limited resources. According to the United Nations Industrial Development Organization (UNIDO), CSR based on Triple Bottom Line (TBL) Approach, can help countries in the developing bracket to accelerate their socio-economic growth and help them become more competitive. TBL approach encourages private companies and institutions to align their activities in a socially, economically and environmentally viable way. This will help countries achieve Sustainable Development Goals (SDGs) in the long run. Companies should be encouraged to take up cost-effective CSR programmes that help the society and the environment according to the UNIDO[3].

CSR motivates companies to be ethically right by contributing socially, economically and environmentally by engaging in acts like[4]-

• Engaging members of local community.
• By using “Socially Responsible Investment” (SRI).
• Develop an amicable relationship with employees and consumers
• Engage in actions which are protecting and sustaining the environment.

NEED OF CSR

CSR is responsible for generating a lot of goodwill to companies either directly or indirectly. These include[5]-

• Making employees more loyal and help companies retain them in the long run.
• Make companies more legitimate and help them in accessing a greater market share.
• Since companies act ethically, they face less legal hurdles.
• Bolster the goodwill of companies amongst the general public and help in strengthening their “brand value”.
• Help in the stabilization of stock markets in both the short and long run
• Help in limiting state’s involvement in corporate affairs as companies self-regulate and act as most ethical.

CSR helps companies and their components like their shareholders to help in the development of a country’s economy on a macro-level. They motivate companies to cooperate and communicate with each other, their customers and the administrative machinery[6].

The various advantages granted to various stakeholders are explained below[7]:

• The Standard of living gets better with the introduction of more amenities.
• Companies engage in large-scale “capacity building” due to which the society becomes more prosperous and wealthy.

• Creates a more balanced world and healthier environmental systems.
• Ecosystems become healthier due to balancing efforts of the corporates.
• Management of waste is improved.
• Cleaner and greener environment is created.
• Advantages to corporates.
• Creates greater societal acceptance and respect.
• Helps the company to grow fiscally and makes it more competitive.
• Helps the company to interact with various stakeholders and helps them understand their needs.
• Employees and their family feel proud to be associated with a balanced corporate organization.

NEED OF CSR LAWS

CSR laws are meant to help in transferring excess capital from the haves to the have-nots via acts of charity. According to available data, CSR laws will help in increasing amount of monetary contribution from $600 million to $2 billion annually. This will help corporate undertakings to take up a lot more social, economic and environmental activities in order to help the general populace. This will also help corporates to have a direct stake in improving the society and drastically change their role from perceived exploiters of commerce to facilitators of development. They will be forced to contribute beyond the surface level and help in changing the society in a much deeper way[8].

CSR LAWS IN INDIA

The Companies Act, 2013, a successor to The Companies Act, 1956, made CSR a compulsory act. Under the notification dated 27.2.2014, under Section 135 of the new act, CSR is compulsory for all companies- government or private or otherwise, provided they meet any one or more of the following fiscal criterions[9]:

• The net worth of the company should be Rupees 500 crores or more
• The annual turnover of the company should be Rupees 1000 crores or more
• Annual net profits of the company should be at least Rupees 5 crores.

If the company meets any one of the three fiscal conditions as stated above, they are required to create a committee to enforce its CSR mandate, with at least 3 directors, one of whom should be an independent director[10].

The responsibilities of the above-mentioned committee will be[11]:

• Creation of an elaborate policy to implement its legally mandated CSR activities. CSR acts should conform to Schedule VII of the Companies Act, 2013.
• The committee will allocate and audit the money for different CSR purposes.
• It will be responsible for overseeing the execution of different CSR activities.
• The committee will issue an annual report on the various CSR activities undertaken.
• CSR policies should be placed on the company’s official website, in the form and format approved by the committee.
• The board of directors is bound to accept and follow any CSR related suggestion put up by the aforementioned committee.
• The aforementioned committee must regularly assess the net profits earned by the company and ensure that at least 2 percent of the same is spent on CSR related activities.
• The committee must ensure that local issues and regions are looked into first as part of CSR activities.

FEATURES OF CSR LAWS

The broad and important features of the CSR laws are as follows:

• Quantum of money utilized for CSR purposes are to be compulsorily included in the annual profit-loss report released by the company[12].
• The CSR rules came into force on 1st April 2014 and will include subsidiary companies, holdings and other foreign corporate organizations which are involved in business activities in India[13].
• CSR has been defined in a rather broad manner in Schedule VII of Companies Act, 2013. The definition is exhaustive as it includes those specific CSR activities listed in Schedule VII and other social programmes not listed in schedule VII, whose inclusion as a CSR activity is left to the company’s discretion[14].

CSR activities listed in schedule VII include[15]:

“eradicating hunger and poverty, promotion of education and employment, livelihood enhancement projects, promoting gender equality, women empowerment, hostels for women and orphans, old age homes, day care, environmental sustainability, protection of flora and fauna, contributions to PM relief fund, measures to benefit armed forces veterans, war widows and dependants, promotion of sports, and rural development projects”.

• Net profits are calculated on the basis of Section 198 of Companies Act, 2013. However, only domestic branches are included and dividend-related payments are left out of the final calculation of total net profits[16].
• Companies are allowed to implement CSR via any of the following means possible[17].
• Setting up a Trust or Society under Section 8 of the 2013 Companies act under its direct administrative control.
• Corporates can outsource the CSR tasks to established social enterprises- institutions engaged in CSR activities for 3 years or more. These institutions are meant to engage in not for profit activities. The corporates though are supposed to monitor the social enterprises meant to enforce their CSR mandate.
• Companies can collaborate with fellow companies and work out some arrangement based on the CSR rules.
• CSR activities should follow the below-mentioned rules[18]:
• Any familial activity or act of personal charity is not to be included as part of CSR activity.
• Any sort of contribution-fiscal or otherwise by political organizations is outside the purview of CSR activities as indicated under Section 182 of the 2013 Companies Act.
• All CSR activities are to be conducted in Indian territory to be considered valid.
• Companies can utilize a maximum of 5 percent of their total expenditure to help in capacity building of their society, trust or outsourced social enterprise.
• As stated before listed public companies are mandated to have up to 3 directors as part of their CSR committee- one of whom should always be independent. Unlisted and private companies are allowed to have at least 2 directors and no independent director[19].
• CSR reports are to be compulsorily published on an annual basis. The reports have a fixed format as designed by the CSR rules, which must include details like official CSR policy, the number of funds dedicated to CSR and its detailed utilization as well as a detailed explanation for non-utilization of funds if any. The said format and its constituents must be displayed on the official website of the company[20].
• CSR activities initiated by a foreign company has to be via its Indian subsidiary to be considered legitimate under Section 135 of the companies act[21].
• Trusts created by companies to carry out their mandated CSR tasks, are to be compulsorily registered in some states where it is mandatory under Income Tax, 1956[22].
• Companies are allowed to co-operate with their independent counterparts, provided the latter has a proper tracking and reporting system for CSR activities that may be undertaken[23].
• Companies are allowed to engage in capacity building by allotting up to 5 percent of all expenses to be incurred on CSR activities to be devoted to training and equipping of personnel to carry out CSR and related activities[24].
• Activities that cannot be considered as CSR include[25].
• Operational and administrative activities of the business.
• CSR activities that do not take place in Indian territory.
• Employee and familial welfare activities are strictly outside the purview of CSR tasks as well.
• Fiscal help rendered to political outfits is not considered as a CSR activity as well.
• Events like the marathon, award functions, fiscal help rendered to charitable institutions, sponsoring TV shows etc that are strict “one-off”-i.e. meant to happen just once in a while are not considered CSR.
• Companies cannot report lawful duties rendered under acts or regulation like Labour Act, Land act etc cannot be considered as CSR tasks.

CSR SPENDING IN INDIA IN 2017

According to data compiled by various NGOs, the total amount of money spent on CSR activities has increased by 20 percent in the year 2017, as compared to the year 2016. This data was compiled based on CSR spending done by top 100 companies, which contribute about one-third of all CSR spending in India as seen in the year 2017 and contribute at least one crore rupees. Governmental enterprises and Public Sector Undertakings (PSUs) were deliberately left out of the compiled data. Furthermore, as compared to 44 percent defaulters of CSR data in 2016, the number was 36 percent in 2017, a marked improvement. Actual CSR spending has also relatively increased from 86 percent in 2016 to 88 percent in 2017. About 33 percent of the companies have also spent more than their mandated spending of 2 percent of net profits. Companies spend more than half of their mandated CSR aid via their holdings and subsidiaries. About 33 percent of total CSR aid was utilized for literacy-related purposes and a similar amount of money was spent on rural welfare and on the health sector. An up and coming area for allocation of CSR resources is on improving the diet of those suffering from malnutrition and on environment protection[26].

However, since more than 1/3rd of the companies are not complying with CSR rules and releasing related data, as mentioned above and this shows that greater government regulation and aid is needed in setting up a thorough system to help them channelize and report their mandated CSR aid. Furthermore, the government must find a way to utilize unused fiscal aid from the past year. Companies have also been found to be less than efficient in allocating resources and tasks to their subsidiaries and holdings to carry out their transferred CSR tasks[27].

WHY CSR IN INDIA IS NOT WORKING?

Eminent scholars have claimed that companies while having enormous fiscal resources lack adequate knowledge of existing public problems and policy measures. As a result, their CSR efforts are misguided and do not help the public in the long run with sustaining benefits. For example- companies blinded with carrying out their mandated CSR activities might employ contractual workers with extremely low pay packages and virtually no other benefits. CSR activities carried out by companies often clash with their commercial and other vested interest which are prioritized over serving the society. Furthermore, it is also claimed by scholars that social issues often cannot be solved by money alone and most corporates do not want to look beyond fiscal measures to help the society. They also do not realize that money can often worsen existing problems[28].

As per section 135 of the Companies Act, 2013, CSR efforts will be equated with the money spent- which should be at least 2 percent of the net profit. However, companies are not very transparent in declaring their CSR income. Companies in the past have fudged figures to meet the mandatory CSR spending. Furthermore, companies that were spending more than 2 percent before the said law came into place, have started spending much less these days. According to available data, companies have engaged in selective CSR tasks that ultimately benefit their brand value and help them prosper rather than activities that genuinely help the society at large. According to some corporates, the mandated 2 percent CSR on net profit is also a way of extracting higher profits illegitimately via a “back-door” and force them to fill in areas where the government has not acted enough. Furthermore, the government’s action was unilateral and the corporates were not consulted before the government decided to implement this rule[29].

HOW TO MAKE CSR LAWS EFFECTIVE AND EFFICIENT?

CSR in India suffers from some serious infirmities- policy and procedure-wise. As a result, it can be argued that some more measures are needed to help implement CSR activities better like[30]:

• Specialization of companies should be utilized better. CSR should not be simply seen as the spending of fiscal resources, but the smart spending of CSR resources. For example- a multi-national company engaged in the production of packaged food should provide those below the poverty line with similar assets, telephone companies should set up telecom services in remote areas lacking such services. Section 135 of the Companies Act should be amended to include measures to allow companies to do CSR activities as per their strengths and specialties.
• CSR activities should be based on expert data. Companies should not blindly spend fiscal resources but rely on data and suggestions of research institutes so that their efforts result in actual eradication of pre-existing social problems. Therefore companies should collaborate with social enterprises and research institutes.
• Companies should collaborate with the people on the ground- those who are supposed to receive their CSR aid. This will help them realize what people actually need, what their actual problems are and accordingly they can humanize their CSR aid to help a number of people with greater efficiency.
• Companies must also compulsorily collaborate with specialist non-government institutions, who have acted in a particular field with specialist experience for at least three years, This will help them utilize their fiscal resources better as dedicated NGOs will guide them in effectively implementing their aid programmes.

CONCLUSION

CSR in India was legislated with the hope that it would bring about a change in the attitude of corporate institutions, who would give back to the society in a big way as it was the society whose needs helped them prosper in the first place. Similarly, it was also felt that the society would also get help as the government has been found to be wanting in its efforts to help local populace in several instances. The CSR act, in spite of all its good intentions, has failed to cover a lot of ground. It has given an impetus to companies to give back to the society, however, due to some policy and procedural inadequacies, it has failed to set up a fool-proof method of imparting CSR. Faulty criterions to determine the extent of money spent, fudging of data, selective and self-serving CSR tasks or short-term money spending are some of the core problems that India’s CSR laws and policy suffer from. Therefore, the need of the hour is to change the CSR laws and amend it to become long-term, simple and easier to monitor. CSR laws, with some tweaks, will greatly help the society in the near future.

[1] The Telegraph, The corporate social responsibility law needs to be rationalized, December 22, 2016, available at https://www.telegraphindia.com/1161222/jsp/opinion/story_125987.jsp (Last visited on March 13, 2018).

[2] United Nations Industrial Development Organization,  What is CSR, available at https://www.unido.org/our-focus/advancing-economic-competitiveness/competitive-trade-capacities-and-corporate-responsibility/corporate-social-responsibility-market-integration/what-csr (Last visited on March 13, 2018).

[3] Id., 2.

[4] ed.ac.uk, What is a corporate social responsibility?, July 3, 2017, available at https://www.ed.ac.uk/careers/your-future/options/occupations/csr/what-is-csr (Last visited on March 13, 2018).

[5] Project Guru, Importance of corporate social responsibility to societies, May 18, 2012, available at https://www.projectguru.in/publications/importance-of-corporate-social-responsibility-to-societies/ (Last visited on March 13, 2018).

[6] Id., 5.

[7] Id., 6.

[8] Business Today, The unintended consequences of India’s CSR law, January 13, 2015, available at https://www.businesstoday.in/opinion/columns/corporate-social-responsibility-tax-in-india-hidden-costs/story/214463.html (Last visited on March 13, 2018).

[9] Tax Guru, New Rules of Corporate Social Responsibility, March 10, 2014, available at https://taxguru.in/company-law/rules-corporate-social-responsibility.html (Last visited on March 13, 2018).

[10] Id., 9.

[11] Id., 10.

[12] Id., 11.

[13] Id., 12.

[14] Id., 13.

[15] Id., 14.

[16] Id., 15.

[17] Id., 16.

[18] Id., 17.

[19] Id., 18.

[20] Id., 19.

[21]Tax Guru, 32 FAQs on Corporate Social Responsibility (CSR), September 4, 2016, available at  https://taxguru.in/company-law/32-faqs-corporate-social-responsibility-csr.html (Last visited on March 13, 2018).

[22] Id., 21.

[23] Id.,22.

[24] Id.,23.

[25] Id.,24.

[26] INDIA CSR, 20% increase in actual CSR spend in FY 2017,  July 9, 2017, available at http://indiacsr.in/20-increase-in-actual-csr-spend-in-fy-2017/ (Last visited on March 13, 2018).

[27] Id., 26.

[28]Bansal, Supra note 8.

[29] Live Mint, Why the CSR law is not a success, December 13, 2016, available at http://www.livemint.com/Opinion/1wIQwFPRyRckBMg5IugW1K/Why-the-CSR-law-is-not-a-success.html (Last visited on March 13, 2018).

[30] Bansal, Supra note 28.

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