By Harpreet Kaur, Advocate
“I think that today, more so than ever, corporate responsibility is the best strategic as well as financial path that most businesses can follow. For most businesses there are both compelling reasons to be responsible and compelling statistics that validate that responsible businesses do better according to traditional financial metrics. Of course, how you define “responsible” is somewhat of a conundrum.”
- Corporate Social Responsibility (CSR) is a concept that has attracted worldwide attention and acquired a new resonance in the global economy. Business and academic researchers have shown increasing levels of interest in CSR during recent years. Heightened interest in CSR in recent years has stemmed from the advent of globalization and international trade, which have reflected in increased business complexity and new demands for enhanced transparency and corporate citizenship.
- The notion of CSR is related to ethical and moral issues concerning corporate decision-making and behaviour.
- While governments have traditionally assumed sole responsibility for the improvement of the living conditions of the population, society’s needs have exceeded the capabilities of governments to fulfil them. In this context, the spotlight is increasingly turning to focus on the role of business in society and progressive companies are seeking to differentiate themselves through engagement in CSR. 
- Companies, especially those operating in global markets, are increasingly required to balance the social, economic and environmental components of their business, while building shareholder value. Thus, to create a better and prosperous tomorrow for the business entities, the Parliament of India has recently taken a vibrant initiative by replacing its fifty seven year old Companies Act of 1956 with the Companies Act, 2013 wherein panoply of changes has been made.
- Some important facets of this Act are making this law in pari materia with the international norms and standards, increased investor participation and protection, fraud reduction measures, accountability provisions, new government powers and greener environment.
- Most importantly, India by setting itself from other Asian countries and following the voluntary robust CSR reporting policies existing in developed countries has codified a law under Section 135 of the Act making the corporate social responsibility (for targeted companies) mandatory to make business entities more responsible and accountable to the economic, legal, ethical, and discretionary expectations that society has from them.
- Mandatory CSR reporting requirements already exists in several countries, including Sweden, Norway, Netherlands, Denmark, France, and Australia.
Historically speaking, the notion of CSR has been associated with corporate philanthropy. Well known British and American entrepreneurs realised the need for getting involved with the community and contributing to its welfare by building schools and hospitals and making donations. CSR is a western concept which found its origin in the 19th century. This was the time when the world had started discussing the concept of CSR.
However, the essential features of it can be traced back to ancient religious texts such as Rig Veda. Verse 5-60.6 says that affluent people in the society should share their wealth with poor for social development. Kautilya in Arthasashtra also stated that happiness cannot be obtained by wealth and profit alone but only by doing things rightly and doing the right things. Kautilya maintained that a leader should have no self-interest, happiness and joy for himself. His satisfaction lies in the welfare of his people. The same advice can also be found in Shanti Parva of the Mahabharta, wherein public interest (welfare) is to be accorded precedence over the leader’s interest. Although no religious text ever used the word Corporate Social Responsibility or Corporation, the essence of this concept is very much ingrained in some of their verses. The concept of social responsibility among the business communities is a phenomenon that can be traced back to the ancient Chinese, Egyptians and Sumerians as well.
Moreover, the principles of CSR can be found in Islam too. Islam talks about responsibility in general to be followed by every person following Islam including corporations. Zakah (AL Zakah) is one of the five fundamental pillars of Islam and its observance distinguishes true believers from mere nominal Muslims according to Quran. According to the principle of Zakah, when a Muslim has enough to cover the essential needs for himself and his family over a year, he is in possession of the Nisab. If he has more assets than what he needs then he is obliged to pay Zakah on the excess. The money rose from AL Zakah is used to feed poor, donate clothes and other such activities. A considerable amount of Zakah is used to manage Madrasa which provides free education to millions of students.
- The definition of CSR is very broad, dynamic and subject to change depending upon the perspective.
- World Business Council for Sustainable Development (WBCSD, 2001) defines CSR as “the commitment of business to contribute to sustainable economic development, working with employees, their families and the local communities”. Hence the fundamental idea of CSR is that the business corporations have an obligation to work towards meeting the needs of a wider array of stakeholders. More generally, CSR is a set of management practices that ensures that the company maximizes the positive impacts of its operations on society or “operates in a manner that not just meets but even even exceeds the legal, ethical, commercial and public expectations that society has of business”.
- According to International Organisation for Standardization (ISO), CSR is “responsibility of an organization for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour that contributes to sustainable development, including health and the welfare of society; takes into account the expectations of stakeholders; is in compliance with applicable law and consistent with international norms of behaviour and is integrated throughout the organization”.
- Carroll and Buchholtz define Corporate Social Responsibility as the “economic, legal, ethical and discretionary expectations that society has of organizations at a given point in time”. This definition is one of the widely accepted definitions of CSR and can also be traced in various CSR debates and disclosures”.
- According to Indian Guidelines on Corporate Social Responsibility for Central Public Sector Enterprises, CSR is a concept whereby organizations serve the interests of society by taking responsibility for the impact of their activities on customers, employees, shareholders, communities and the environment in all aspects of their operations. From the analysis of all above-mentioned definitions, it can be said that fulfilling CSR is an indispensable duty of any business entity without which surviving in the long run is difficult.
There is no formal treaty at the international level dealing with CSR. However, there are number of guidelines, norms and principles which have been adopted by international organizations. Some of the international standards and initiatives relating to business corporations and CSR include:
- The International Labour Organization (ILO) Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy (MNE declaration);
- The Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises;
- The United Nations Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises;
- The Voluntary Principles on Security and Human Rights;
- The United Nations Global Compact;
- International Standard Organization (ISO) 26000 – Social responsibility;
Influenced by the above mentioned conventions and norms on CSR, the government of India has introduced mandatory CSR under section 135 of the Companies Act, 2013.The provision pertaining to CSR has attracted mixed response from the people, though it is ought to have a beneficiary effect on the society in the long run.
According to the Act, Companies that fall under the purview of Section 135 are those which during any fiscal year have
- Net worth of INR 500 crore (about U.S. 90 million) or more or,
- Turnover of INR 1,000 crore (about U.S. $ 180 million) or more or,
- Net profit of INR 5 crore (about U.S. $ 900,000) or more.
Thus, high thresholds have been set up to target few major companies.
Further, companies which fulfils any of the three above mentioned requirements are needed to 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. Sub-section 6 of Section 149 of the Companies Act, 2013 defines ‘independent director’ and lays down the stringent qualifications for the appointment as an independent director. The composition of the CSR Board shall be disclosed in the Board’s report complying with the statutory requirements under sub-section 3 of section 134. The main role of the CSR committee is to devise and recommend the CSR Policy along with the expenditure that it would take to carry out the CSR activities. Thus, the committee holds the responsibility to exteriorize the CSR Policy. The Board of every company is then required to scrutinize the CSR policies and projects framed by the CSR Committee and subscribe to it. Further, the Board also has a duty to disclose the contents of the CSR policy and upload it on the company’s website. Disclosing the contents of the CSR policy will provide transparency which will dwell the social commitment and further increase the level of responsibility and accountability on the company to achieve its CSR targets.
The most important aspect which deals with the CSR spending is the consequences for the non compliance with Section 135.The provision says that in case the company fails to spend the stipulated CSR amount then the Board shall be required to specify the reasons for such failure in its report made under clause (o) of sub-section (3) of Section 134. The CSR provision is more like a ‘comply or justify’ clause. The company can just perform its statutory duty by giving a bunch of explanations. Further, what constitutes a valid justification is again disputable. Thus, the absence of a deterrent clause with regard to CSR is a great area of concern.
Further, Schedule VII of the Companies Act mentions a list of activities, out of which at least one must be involved in the CSR policy. This provision has been criticized as the list is not exhaustive and it strikes down the discretion of the company to spend the money on an activity which suits them the best.
With regard to undertaking the CSR activities, the draft rules provides for four options.
1) The company undertakes the CSR activities on its own.
2) Through its ad-hoc foundation or organization specially set up for this purpose.
3) Through registered NGO’s that have a record of dealing with similar such activities.
4) Collaborating the CSR funds with the other company and together carrying out the CSR activities.
- CSR isn’t just about doing the right thing. It offers direct business benefits. Building a reputation as a responsible business sets you apart. Many consumers prefer to buy from ethical businesses. Companies often prefer suppliers who demonstrate responsible policies, to minimize the risk of any damage to their own reputations. Some customers don’t just prefer to deal with responsible companies, but insist on it. For example, sales of “environmentally friendly” products continue to grow and these products often sell at a premium price. Amul India became as famous for its approach to responsible business as for its products. The company has grown dramatically while continuing to focus on CSR which it started in 1946 in a small village of Khera District, Gujrat against British Polson Dairy Company.
- A good reputation not only increases consumers but also makes it easier to recruit employees. Employees are better motivated and more productive.
- Activities such as involvement with the local community are ideal opportunities to generate positive press coverage.
- If companies are to start new or augment existing CSR activities seriously, career opportunities for those in the social sector are bound to open up, sooner than later. While human resources as a specialisation is offered in most social work postgraduate courses, students who take up community development, child welfare or clinical development may also be roped in by companies, depending on the activities businesses choose to undertake, according to Godwin Premsingh, Associate Professor, Bishop Heber College, Tiruchi.
- CSR can make you more competitive, and reduces the risk of sudden damage to your reputation (and sales). Investors recognize this, and are more willing to finance you. “A social commitment to the community where the company operates from can help maintain smooth industrial relations,” says S. Baskaran, Director, DEE-HR fusion lab, Puducherry.
- CSR also helps in understanding the wider impact of your business which in turn can help you think up profitable new products and services.
- Many investors consider more ‘socially responsible’ companies to be more secure investments. 86% of institutional investors believe that CSR will have a positive effect on business. Also, a growing number of institutional investors have some kind of socially responsible investment portfolio and therefore favour companies that are seen as socially responsible.
- Calling this piece of legislation a masterpiece wouldn’t be fair as it suffers from various problems making it incongruous. An attempt has been made to chalk out the main inadequacies in the CSR provision. These are as follows:
- The CSR law lacks a deterrent effect and makes it more of a ‘comply or justify provision’ where in as long as a reason for not spending on CSR activities is contained in the annual board report, a targeted company stands fulfilling its statutory duty. Thus, such kind of an escape route defeats the very purpose of the provision. What all reasons and explanations satisfy the test of reasonability is again a matter of concern.
- In-exhaustive list of CSR activities, out of which at least one activity has to be undertaken by the company in its CSR policy, is another major inadequacy. It interferes with the discretion of the company to spend the money on an activity which suits them the best. Also, it will hamper the degree of innovation if the CSR policies and programs are made to confine with a fixed list. If a company spends money to implement a reduction in its own packaging and thereby reduces its carbon prints then whether it shall fall under Clause (vi) of Schedule VII of the Act is a big question. Further, for the purposes of Clause (vii) of Schedule VII whether an internal employee skills training on new equipment or software would qualify under the CSR policies and programs is uncertain. Thus, what all activities can fall under Schedule VII lies in the grey area.
- With regard to spending on CSR activities it is not always necessary that the companies will spend at the right place and with the right knowledge. Lack of knowledge and expertise of financial corporation might be a hurdle in the effective results from expenditure on the CSR activities. It has been pointed out by the theorists that ‘social contracts’ are obscure and unfathomable unlike profit and that corporate executives simply have no expertise in spending money to foster social goods.
- Further, in the proposed draft rules of Section 135, it has been said that the activities which are solely for the benefit of employees or their family members are excluded from the purview of CSR activity. This contradicts the principle that employees are the key stakeholders in the entire scheme of things.
- Moving forward, Section 135 says that ‘the company shall give preference to the local areas and areas around it where it operates for spending the CSR resources. ‘According to NFA’s comments on the CSR Draft Rules such a clause is a welcome step to build a stronger community –business relationship, but it may distort resource allocation by undermining ‘inclusive development principle’. It has further thrown some light on the fact that the manufacturing units and business offices are generally set up in developed and well to do places, whereas the places which are underdeveloped require most of the concentration of resources.
- Moreover, there is no clarification whether the amount spent on CSR activities will be considered as business expenditure under the Income-Tax Act, 1961 or not.
- Another inadequacy with the CSR provision is that CSR activities performed outside India shall not fulfil the statutory requirement under Section 135. This implies that if an Indian company is operating outside India and is undertaking CSR activities in that country then such expenditure incurred outside India will not exempt the company from the statutory duty of spending 2% of the profits. This shall have a bad effect on the Indian companies having operations outside India. Thus, the law stresses only on the mandatory expenditure without paying heed to anything else.
Though the present CSR clause suffers from various inadequacies, it is still a step towards building better community – business relations and channelizing the funds for social welfare in an organized and a transparent way. If this law overcomes its few inappropriate and obscure provisions then it will categorically turn into a much appreciated piece of legislation.
- Firstly, a slab system should be introduced wherein 3 tiers should be made based on the company’s profit making. The concentration of small business entities is more than the large ones. These generally lack latest know how and often carry out their business activities at the stake of environment and its surroundings. So, in a way these companies also have an obligation to contribute to the society. Based on the profits, small entities should also be made to incur a certain percentage (though being less than two percent) of their profits on the CSR activities. Thus, a code of uniform rules should be followed subject to the company’s financial standing.
- Secondly, CSR clause shouldn’t carry an image as that of a ‘comply or justify’ provision. If the government has taken an initiate of making CSR mandatory then it should do it whole heartedly. No reason or justification should impair the authority of this provision, though few exceptions can be laid down in the act itself. This way the companies will comply with the law rather than rummaging an escape route. Further, strict penalties should not just be laid down but also be pursued to project a deterrent effect.
- Thirdly, key principle that employees are the key stakeholders should not be completely undermined.CSR activities solely serving the employees of the company should not be discarded completely and a certain limit should be made acceptable for the purposes of complying with the statutory limit. For instance, a total of 25% of the CSR expenditure should be allowed and rest of the expenditure shouldn’t be solely incurred on the employees of the company or their family members. This way the company will be able to kill two birds with one stone that is it will be able to serve and satisfy its employees and their families and fulfill its statutory duty simultaneously.
- Fourthly, restricted geographic focus of CSR activities should be frowned upon.As suggested by the National Foundation for India in its report, certain amount of the CSR expenditure should be mandated to be spent on the development of the ‘backward areas’ as mentioned by the government. This shall result in better allocation of funds in a better way and at the right place where it is more desired.
- Fifthly, this provision should spell out the penalties for not spending on CSR activities besides providing adequate safeguards to plug the political leanings in the shape of charitable activities; otherwise the lofty philanthropy will have a neutral fall through.
The initiative of the Government to make CSR mandatory would go a long way in strengthening the social initiatives taken by the companies. The hurdle that stands in the way of ensuring effective implementation of this law is the absence of deterrent clause. There are other inadequacies too which if cured, CSR wouldn’t be less than a masterpiece. If a proper governmental mechanism is established to monitor and scrutinize the CSR spending and to prevent the companies from CSR evasion then only the true letter and spirit of the law can be followed. Further, keeping in mind the numerous benefits of CSR spending the companies should welcome this provision and comply with it. This provision is surely ought to bring out good results in the society.
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 See, Business Leaders Initiative on Human Rights, available at http://www.blihr.org/; see also Human Rights and Business, available at http://www.humanrightsbusiness.org/040_hrca.htm; see also International Alert, available at http://www.international-alert.org/our_work/themes/business_1a.php; International Business Leaders Forum, available at http://www.iblf.org
 It was adopted by Governing Body of the International Labour Office at its 204th session (Geneva, November 1977) and amended at 279th session (Geneva, November 2000) with the main motive of providing social policy guidelines in a vulnerable and extremely complex area of activities.
 Dating back to 1976, and revised in 2000, these are one of the earliest examples of comprehensive guidance on how to ensure that business operations are in harmony with government policies and the societies in which they do business.
 It establishes an international framework for mandatory standards on Corporate Social Responsibility and was approved on 13 August 2003 by the United Nations Sub- Commission on the Promotion and Protection of Human Rights.
 These are designed to help extractive companies maintain the safety and security of their operations within an operating framework that ensures respect for human rights and fundamental freedoms and, when applicable, for international humanitarian law.
 It encourages companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment and anti-corruption through its ten principles. It lays down measures which companies can undertake to promote greater environmental protection and adopt a precautionary approach to meet environmental challenges and develop environment friendly technologies. Although, it does not expressly talk about education, it mentions that business organizations should support internationally proclaimed human rights which includes the right to education as well.
 Section 135 (2) of the Companies Act, 2013 (Hereinafter referred to as the Act)
 Section 135 (4) (a) of the Act.
 Activities include activities relating to: eradicating extreme hunger and poverty; promotion of education; promotion of gender equality and empowerment of women; reducing child mortality and improving maternal health; combating HIV, AIDS, malaria and other disease; ensuring environmental sustainability; employment enhanced vocational skills; social business projects; contribution to PM’s National Relief Fund; and such other matter as may be prescribed.
 Organization is required to be registered as a Trust or Section 8 company, or Society or Foundation or any other form of entity operating within India to facilitate the implementation of CSR activities in compliance with the stated CSR Policy.
 The organization needs to have an established track record of at least three years in carrying out the CSR activities.
 Supra Note 16.
 S Gerald, The CSR advantage, available at http://www.thehindu.com/features/education/careers/the-csr-advantage/article5335216.ece
 Supra Note 16.
 Schedule VII of the Act lays down the list of activities which may be included by companies in their Corporate Social Responsibility Policies.
 Clause (vi) of Schedule VII of the Act enlists a category relating to ‘Ensuring environmental sustainability’.
Clause (vii) of Schedule VII of the Act enlists a category relating to ‘Employment enhancing vocational skills’.
 R S Steven, True Codes Versus Voluntary Codes of Ethics in International Markets: Toward the Preservation of Colloquy in Emerging Global Communities, 327-29 (1994).
 Rule 8 of Part II of the Proposed Draft CSR Rules states that ‘only activities which are not exclusively for the benefit of employees of the company or their family members shall be considered as CSR activity.’
National Foundation for India, Comments on Draft CSR Rules under Section 135 of Companies Act 2013, available at http://www.nfi.org.in/sites/default/files/nfi_files/Comments%20on%20draft%20CSR%20rules.pdf
 Rule 7 of Part II of the Proposed Draft Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013 states that ‘Only such activities will be taken into consideration as are undertaken within India.’
 One of the provision of Section 135 of the Act states 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.