However, the Ministry of Corporate Affairs, Government of the Republic of India has recently notified the Section 135 of the Companies Act, 2013 beside corporations through the (Corporate Social Responsibility Policy) Rules, 2014.
“Hereinafter CSR Rules” and the alternative notifications connected to that, which makes it mandatory.
According to Sub Section (1) of Section 135 –
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.
As mentioned by the International organization, Industrial Development Organization (UNIDO), CSR is mostly understood as being the method through which a company achieves a balance of economic, environmental and social imperatives (known as “Triple Bottom-Line-Approach”), whereas at the same time addressing the expectations of the shareholders and stakeholders.
Once your company starts growing, you may need to have to compulsorily engage in this process. Here’s all You Need to Know-
What is Corporate Social Responsibility?
CSR helps the companies to be motivated regarding the ethics which contributes socially, economically and environmentally by getting engaged in the acts like:
- Engaging members of the local community.
- By using ‘Socially Responsible Investment’.
- Engaging in the actions which are protecting and sustaining the environment.
“CSR is the process by which an organization thinks about and evolves its relationships with stakeholders for the common good,and demonstrates its commitment in this regard by adoption of the appropriate business processes and strategies.
Thus, CSR is not charity or mere donations.
CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits.
They use CSR to integrate economic, environmental and social objectives with the company’s operations and growth.”
- Environmental managing
- Responsible sourcing
- Labor standards and working conditions
- Social equity
- Gender balance
- Good governance
- Anti-corruptions measures, etc.
Scope of CSR
Changing the ethics and the responsibilities derived thereunder precede the establishment of the law because their changing nature propulses these regulations.
For example, the ideas behind the environment, civil and consumer rights movements reflected basic shifts in the values cherished by the society; eventually leading to their ethical demands leading to become the foundations of the future legislation.
Although communities might expect firms to contribute their resources towards humanitarian programs, these firms intrinsically aren’t thought to be unethical if the required levels of such efforts are not reached.
It’s necessary to create such a distinction because certain firms believe in fulfilling their social responsibility just by being good citizens within the community.
It also leads us to carry that CSR can involve philanthropic contributions, but is in no way limited to simply them.
Anything that the firm does towards achieving this state of equilibrium is what is required to try and to do it as a part of its social responsibility.
Features of CSR
- Quantum of cash utilized for CSR purposes are to be compulsorily included within the annual profit and loss report released by the company.
- The CSR rules came into force on 1st April 2014 and can include subsidiary companies, holdings and other foreign corporate organizations which are involved in the business activities in India.
- CSR has been defined in a rather broad manner in the Schedule VII of the Companies Act, 2013. The definition is exhaustive because it includes those specific CSR activities listed in Schedule VII and other social programs ex-directory in schedule VII, whose inclusion as a CSR activity is left to the company’s discretion.
Importance of CSR
- Improves public image as more ethical practices attract more consumers.
- Helps to save the costs of the company as it will cut the cost used in packaging, decrease production costs, etc.
- Improves recognition and awareness of the brand as the company will be engaged in more ethical practices,this will help the news spread. Hence, more people will be attracted towards the company.
- Beneficial for the employees of the company as there will be a more positive environment in the organization.
- A list of CSR projects or programs which a corporation plans to undertake, specifying modalities of the execution of such a project or programs and implementation schedules for the identical.
- Monitoring process of such projects or programs.
- A clause specifying that the excess arising out of the CSR projects, programs or activities shall not form a part of the business profit of the corporate.
- 3 or more directors, out of which one director shall be an independent director.
- 2 directors in case of a private company, having only 2 Board of Directors.
- 2 persons in case of foreign companies, of which one person shall be authorized as the citizen of India.
Functions of a CSR Committee
- Formulate a CSR policy to indicate the activities which are to be undertaken by the company.
- Monitor the CSR policy from time to time.
CSR Laws in India
- The net worth of the corporate should be Rupees 500 crores or more.
- The annual turnover of the corporate should be Rupees 1000 crores or more.
- Annual net profits of the corporate should be a minimum of Rupees 5 crores.
- Creation of an elaborate policy to implement its legally mandated CSR activities. CSR acts should conform to Schedule VII of the businesses Act, 2013.
The committee will allocate and audit the money for various CSR purposes.
It will be liable for overseeing the execution of various CSR activities.
The committee will issue an annual report on the assorted CSR activities undertaken.
CSR policies should be placed on the company’s official website,within the form and format approved by the committee.
The board of directors are guaranteed to accept and follow any CSR related suggestion put up by the aforementioned committee.
The aforementioned committee must regularly assess the online profits earned by the corporate and make sure that a minimum of 2% of the identical is spent on CSR related activities.
The committee must make sure that the local issues and the regions are looked into first as a part of the CSR activities.
Need for CSR Laws
In a step with the availability of data, CSR laws help by providing a monetary contribution of $600 million to $2 billion annually.
This can help corporate undertakings to require a lot more social, economic and environmental activities so as to assist the overall populace.
Now, it should also be kept in mind that for every rupee that goes into CSR, it is not invested. While the free-market theory and trickle-down economics promotes investment by companies of their profits as well, our Government should at least take a middle ground.
As such, it is felt the CSR should be made voluntary or the businesses should be provided other concessions which makes this activity an affair businesses look forward to.
CSR activities listed in schedule VII include-
- Net profits are calculated on the idea of Section 198 of the Companies Act, 2013. However, only the domestic branches are included and the dividend related payments are ignored of the ultimate calculation of the total net profits.
- Companies are allowed to implement CSR through any of the subsequent means possible.
- To set up a Trust/Society under Section 8 of the Companies Act,2013 under the direct administrative control.
- The Corporates can outsource the CSR tasks which are established by the social enterprises, institutions engaged in the CSR activities for 3 or more years.These institutions are meant to own an interaction not for profit activities.The corporates,though are speculated to monitor the social enterprises meant to enforce their CSR mandate.
- Companies can collaborate with the fellow companies and they can determine some of the arrangements that supported the CSR rules. CSR activities should follow the below mentioned rules:-
- Any familial activity or an act of non-public charity is not to be included as a part of the CSR activity.
- Any form of contribution which is fiscal or otherwise by the political organizations is outside the purview of the CSR activities as indicated under Section 182 of the 2013 Companies Act.
- All the CSR activities are to be conducted in the Indian Territory to be considered valid.
- Companies can utilize a maximum of 5% of their total expenditure to assist in the building capacity of their society, trust or outsourced social enterprise.
- As stated before,listed public companies are mandated to own upto three directors as a part of their CSR committee,one of which must always be Independent.Unlisted and personal companies are allowed to own a minimum of 2 directors and no independent directors.
- CSR reports are to be compulsorily published on an annual basis. The reports have a set format as designed by the CSR rules,which must include details like the official CSR policy,the amount of the funds dedicated to CSR and it’s detailed utilization furthermore as a close explanation for the non-utilization of the funds if any. The said format and its constituents must be displayed on the official website of the company.
- CSR activities initiated by a remote company must be through it’s Indian subsidiary to be considered legitimate under Section 135 of the businesses act.
How to make CSR Laws Effective and Efficient?
CSR in India is suffering from some serious infirmities, policies and procedures. As a result, it can be argued that some more measures are needed to help implement CSR activities better which are mentioned below:
- Specialization of companies should be utilized better. CSR shouldn’t be simply seen because of the spending of the fiscal resources, but the smart spending of the CSR resources. For example,a multi-national company engaged within the production of packaged food should provide those who are below the personal income with similar assets, telephone companies should establish telecom services in remote areas lacking such services. Section 135 of the Businesses Act should be amended to incorporate measures to permit companies to try and do CSR activities as per their strengths and specialities.
- CSR activities should be supported by expert data. Companies should not blindly spend the fiscal resources but depend upon the data and the suggestions of research institutes, so their efforts end in actual eradication of pre-existing social problems. Therefore, the companies should collaborate with social enterprises and research institutes.
- Companies should collaborate with the people on the ground, people who are the end receivers of their CSR aid. This may help them realise what people really need, what their actual problems are and accordingly they will humanize their CSR aid to assist a variety of individuals with greater efficiency.
- Companies must also compulsorily collaborate with specialist non-government institutions, who have acted in a particular field with the experience of a specialist for a minimum of three years. This may help them utilize their fiscal resources better as dedicated NGOs will guide them effectively in implementing their aid programs.
Why is the CSR in India not working?
CSR activities applied by the companies often clash with their commercial and other vested interests which are prioritized over serving the society.
Furthermore, the government’s action was unilateral and also the corporates were not consulted before the government decided to implement this rule.
10 Indian Companies for CSR in 2019
- Tata Chemicals ltd.
- Infosys ltd.
- Bharat Petroleum Corporation ltd.
- Mahindra & Mahindra ltd.
- ITC ltd.
- Ambuja Cement ltd.
- Tata Motors ltd.
- Vedanta ltd.
- Hindalco Industries ltd.
- Toyota Kirloskar Motor India
Wrapping it up
Similarly, it had also been felt that businesses with its capitalistic initiative can contribute a lot to the society.
It has given an impetus to the companies to provide back to the society, but, thanks to some policy and procedural inadequacies, it has not found a fool proof method of imparting CSR. Faulty criteria to oversee the extent of the cash spent, fudging of knowledge, selective and self-serving CSR tasks or short-term expenditure of money are a number of core problems that India’s CSR laws and policies suffer from.
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Author Bio: Vanshika Godara is a law student at Fairfield Institute of Management and Technology. Connect with her on LinkedIn.
Editor Bio: Drishti Saigal is a Bachelor of Laws – LLB student at Svkm’s Jitendra Chauhan College, Mumbai. Connect with her on LinkedIn.