Corporate Social Responsibility: A Road Map for Further Transformation of India's Corporate Sector



Corporate Social Responsibility: A Road Map for Further Transformation of India's Corporate Sector

Introduction

A significant and dominant concept, when a business enterprise or a company publicly reports its operational and financial data, is the Corporate Social Responsibility. Every corporation has a policy which deals with Corporate Social Responsibility (CSR) and annually assembles a report stating its functioning. The chief intention of CSR is to encourage the corporate sector to be more aware of their business and its subsequent impact on the economic and social environment. It tends to impose certain compulsory labour onto the corporate sector which is necessary for the good of the society, and also penalizes when there is a non-compliance with the policy.

Definition

Corporate Social Responsibility is a business approach that contributes to sustainable development by delivering social, economic and environmental benefits for all stakeholders. - Financial Times”

The manner in which CSR is understood and applied is different in different countries. The concept of CSR is a comprehensive one and thus covers a wide variety of subjects. It addresses various topics such as corporate governance, working conditions, human rights, health and safety, contribution towards economic development and environmental effects.

Thus a more simplified definition of the Corporate Social Responsibility could be “incorporation of activities which are beneficial for society, into the corporation’s operational model and culture, thus helping them to become much more efficient and gain positive attention.”

Corporate Social Responsibility in India

After the commencement of Companies Act, 2013 Corporate Social Responsibility became an inevitable activity of categorized corporate firms. This somewhat shifted the burden of social welfare from the state to the market. Earlier the sole objective of these market firms was to make profit and expand business, giving less or no heed to contributing towards the social cause. But after the Act of 2013, these firms cannot easily escape from their liability to undertake CSR as a part of business activity.

In 2013, Price Waterhouse Coopers published a Handbook on Corporate Social Responsibility in India, which stated that, “a minimum of 6,000 Indian companies will be required to undertake CSR projects in order to comply with the provisions of the Companies Act, 2013 with many companies undertaking these initiatives for the first time. Further, some estimates indicate that CSR commitments from companies can amount to as much as 20,000 crore INR. This combination of regulatory as well as societal pressure has meant that companies have to pursue their CSR activities more professionally (p.5). “

Legal Aspect

Section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014 are the two most important documents that provide legal framework for Corporate Social Responsibility in India.

a) Section 135, Companies Act, 2013 envisages following provisions [Source: Taxmann Corporate Laws & Research gate]:

  • 135 (1) - Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of 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.
  • Any holding or subsidiary of a company or a foreign company having its branch or office in India, fulfilling the above mentioned prerequisites will also have to constitute CSR Committee. In case of foreign companies having business operations in India, criteria such as Net Profit, etc. will be applicable.
  • The said committee should observe transparency while monitoring implementation of the program and therefore it must institute a transparent mechanism for the same.
  • Every company which fulfils the specifications mentioned in Sec 135(1) falls under the scope of CSR provisions. The term “Companies” prescribed in the provision includes foreign companies as well. However, any company which has been unable to meet above specifications for 3 consecutive financial years, may be exempted from CSR till the time it retains the same.
  • 135 (2) - The Board's report should disclose the composition of the Corporate Social Responsibility Committee.
  • 135 (3) - The Corporate Social Responsibility Committee should 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.
  • 135 (3) - The Corporate Social Responsibility Committee should also recommend the amount of expenditure to be incurred on the activities and monitor the Corporate Social Responsibility Policy of the company from time to time.
  • 135 (4) - The Board of every company referred to in sub-section (1) should 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. The Board should also ensure that the activities mentioned in the Corporate Social Responsibility Policy of the company are undertaken.
  • 135 (5) - The Board of every company referred to in sub-section (1), should ensure that the company spend at least two percent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

b) Company (CSR Policy) Rules, 2014 urges the companies to form a CSR committee and comply with the provisions of the Act. It states that the company must be careful in choosing CSR activities as those activities which benefits its employees cannot be considered under CSR. Not more than 5% of the expenditure shall be spent on constituting such a committee. It also provides that more than two companies can join hands together to commit CSR activities.

Other Important Directions under the Act

The Companies Act specifies that preference must be given to the area, within the local limits of which, the company is operating. It has also been duly stated that the company may join hands with 2 or more companies in order to commit CSR activities, provided they report individually.

A subsequent CSR Policy has to be created by the committee which will mention the projects and programmes which the company will undertake during the year of execution. It must also channelize resources and try to link the business oriented model with the priorities of society and environment in order to create share value.

If the company deems fit, it may surrender a report on the CSR activities along with the annual report. Such report may contain average net profit for 3 financial years and also approved expenditure for CSR.

If there is non-compliance with spending the minimum expenditure, required for CSR, the company must provide reasons for such non-compliance in order to avoid penal provisions.

Need for CSR in India

India is a developing country with a huge population. Like other developing countries, there are many areas which need a significant consideration on the part of the Government’s plan for development. Therefore there is a need for aggressive implementation of CSR Policy in India as it will distribute the responsibility of social welfare between the Government and the Corporate Sector. Also with the change in time there is change in the social expectation of buyers, as they seem to expect more from the company whose product they prefer to buy. Globalization has also played a significant role in increasing the need for implementation of CSR Policy.

Conclusion

In conclusion it can be said that need for CSR is ever growing. Every company must take up certain activities voluntarily for the benefit of the society, not only when they are forced to do so by the legislature. It must be included in the corporate conscience of the company that it needs to do certain welfare activities and not just indulge into profit making business.

CSR should not only be introduced to large organisations but also to Medium and Small Enterprises. This will not only help in the economic development of the country, but also build a strong relationship of trust and security between the Corporate world and the Society.

(Disclaimer:  The information provided in this article is given only to provide helpful information and understanding on the subject/topic of law discussed. The contents of this article are not the views of Amie Legal and  Amie Legal does not take any responsibility or liability for the opinions expressed by the Author herein.)

Corporate Governance
Corporate Social Responsibility (CSR)
Human Rights
Section 135 Companies Act 2013
The Indian Companies Act 2013

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