A GOOD INITIATIVE FOR SOCIAL ACCOUNTABILITY: INDIA’S MANDATORY CSR PROVISION

The phrase ‘Social responsibility of businesses’ means the economic, legal and ethical expectations the society has from the business organizations/ industries. According to Chappel and Moon, ‘CSR is a company’s commitment to operating in an economically, socially and environmentally sustainable manner whilst balancing the interest of diverse stalk holders’.[1] This is on the ground that all institutions have a moral obligation to fulfil and sub-serve social objectives, and thus be responsible and accountable to the society. The corporate spending for social causes was really a cause of concern in India for the policy makers as there was an under supply of investment in education, sanitation, health etc.

When the new Companies Act was enacted, it made Corporate Social Responsibility mandatory for the companies to undertake. The Ministry of Corporate Affairs later notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility policy) Rules, 2014 (CSR Rules) with effect from 1 April 2014. The provision provides a threshold limit for the applicability of mandatory CSR to a Company; that is, the net worth of the company to be Rs.500 crore or more or turnover to be Rs.1000 crore or more or net profit of the Companies to be 5 crore or more. The Companies that trigger any one of the above said conditions have to spend at least 2% of their net profits made during the three immediately preceding financial years on CSR activities and report the reason for such spending or non-spending. Moreover, it has now become applicable to foreign companies having branches or project offices in India.

In the first year of legislation, Rs 6490 crore was the total amount to be spent for CSR activities, out of which Rs.5115 was actually spent.[2] Of course, this is a good start. On the other hand, more than half of the firms that filed their annual reports on CSR as of January 31, 2016 failed to spend the stipulated amount. ONGC, NTPC, TCS, Airtel, Monsato India, Apple India, Pfizer and Nestle India are some of the big companies that did not meet its obligation. However, latest reports suggest that in the subsequent year, the companies have become more serious about CSR as they are endeavouring to match the prescribed CSR requirements with the actual CSR spend[3].

WHAT DOES THE ACT SAY?

Section 135 states that

‘(1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand 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.

(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 clause (a)

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

(4)  The Board of every company referred to 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 in such manner as may be prescribed, and

(b) Ensure that the activities as are included in the corporate social responsibility policy 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 2% 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 remarked 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 S.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 S.198.

The Act, instead of providing a comprehensive definition of CSR, merely lists out in Schedule VII of the Act what activities could be CSR activities .This is too vague and leads to much confusion.

Schedule VII says that the companies may under take activities as part of their CSR Policy which may include,

1. Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation [including contribution Swach Bharat Kosh set-up by the Central government for the promotion of sanitation] and making available drinking water.
2. Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differentially abled and livelihood and enhancement projects:

• Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing faced by socially and economically backward groups;

1. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal, welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of River Ganga;
2. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and heritages;
3. Measures for the benefit of armed forces of veterans, war widows and their dependents;

• Training to promote rural sports, nationally recognised sports, Paralympics sports and Olympic sports;
• Contribution to Prime Ministers’ National Relief Fund or any other fund set up by the Central Government for socio economic development and relief and welfare of scheduled castes and Scheduled tribes, other backward classes, minorities and women;

1. Contributions or funds provided to technology incubators located within academic institutions which are approved by the central government;
2. Rural development projects
3. Slum area development

Explanation to the Schedule says that for the purposes of the last entry ‘slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under the law for the time being in force.

The above list given by Schedule VII is not exhaustive and the company’s are free to undertake any activities which are similar or related to the enumerated activities.

ANALYSIS OF THE MANDATORY CSR PROVISION

Before the Companies Act, 2013, the companies could spend a negligible amount on CSR and give it huge publicity to attract clients. Today, CSR expenditure is an utilisation of profit, and therefore, keeps away the relevant issue of multiple objectives inherent in the stakeholder theory. Corporations will still have shareholder value maximisation as the sole objective from which, ex-post, 2% of the profits can be appropriated towards the CSR activities. Thus, these stipulations do not destroy economic objectives as is typically the case with stakeholder optimisation.

 If the companies feel that they do not have adequate expertise or core competency to carry out CSR related projects, they may either appoint reputed trusts (the Rules allow so) to carry out such projects or simply donate the specified amount to the prime ministers relief fund[4].

CONCLUSION

This provision in the Companies Act should be looked upon as an endeavour of the government to make the ‘profit’ oriented corporate sector play a complementary role with the government in satisfying the social objectives and to ensure that they give back to the society from where their riches are earn.

In spite of certain loopholes in the section, it has within three years of its coming into force, proved to be land mark legislation towards achieving the constitutional goals of ‘equal distribution of wealth’ and ‘equality in access to the means of production’. Moreover, it is a great means towards the end of ‘Justice’, particularly social and economical.

[1] M. Chappel and J. Moon, ‘CSR in Asia: A Seven Country Study of CSR’ (2005) 44(4) Business and Society 415.

[2] Khalid Parwez, ‘Corporate Social Responsibility: Delivering Social Good?’ (2017) 8(1) Lex Witness 10.

[3] ibid.

[4] Jayaty Sarkar and Subrata Sarkar,  ‘Corporate Social Responsibility in India: An Effort to Bridge the Welfare Gap’ (2015) (Indira Gandhi Institute of Development Research Working Paper 023/2015, 20 <http://www.igidr.ac.in/pdf/publication/WP-2015-023.pdf> accessed 23 February 2017