By Vipul Kumar Tiwari, Jibin Mathew George, Amity Law School, Delhi
Editor’s Note: Corporate Social Responsibility can be defined as the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time. The author has described CSR with related to Companies Act, 2013.
After a stem of ideas, dodging, shadow-boxing, discussions and drafts, the long-awaited legislation concerning a new company law, the Companies Act 2013 was finally enacted on 29th August 2013.
The newly enacted law has been largely lauded by the corporate world for providing business-friendly corporate regulations, enhanced disclosure norms and better corporate governance among other things as it introduces significant changes in the provisions related to governance, disclosure norms, e-management, compliance and enforcement, auditors and mergers and acquisitions.
The Act has also lent itself a truly globalized character by introducing and incorporating revolutionary, new concepts such as one-person company, small companies, dormant company, class action suits, registered valuers and corporate social responsibility.
Perhaps, the most important new element introduced is encapsulated in Clause 135 of the Bill, which is the notion of mandatory Corporate Social Responsibility (CSR). Colloquially referred to as the “2percentt clause,” it has the potential to transform the landscape of CSR in India. Indian businesses have been rather reluctant to go beyond the “glorified worker towns” syndrome or providing employee services and benefits passed off as social interventions.
Indeed, “Corporate India” has fared rather poorly when it comes to affirmative action in employment, environmental responsibility and in resource efficiency and revitalisation over the years. Therefore, a scheme that potentially transfers profits towards social causes, environmental management and inclusive development could be the much needed medicine for a nation with such deep socio-economic cleavages[i].
What is important is the effective implementation which must be ensured and should not let it become another scheme where a paternalistic government is able to create another framework of patronage that the politician-businessperson nexus finds favourable for its dealings.
CORPORATE SOCIAL RESPONSBILITY IN INDIA
The evolution of CSR as a concept is practically one, which has taken greater urgency after the turn of the century. That is why probably, there is no particular understanding of what all corporate social responsibility may entail. There is no single universally accepted definition of CSR.
The closest and probably, one of the most contemporary definitions is from the World Bank Group, stating, “Corporate social responsibility is the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the localcommunity and society at large, to improve their lives in ways that are good for business and for development’’.[ii]
Traditionally, CSR has always been a duty driven by the moral urgency men possess. That is why perhaps, it is widely seen as a philanthropic activity of the charitable, pitiable nature. But today, CSR encompasses a wider range of activities and has slowly moved from institutional building (educational, research, and culture) to community development through various projects.
Today it is recognized the world over that integrating social, environmental and ethical responsibilities into the governance of businesses ensures their long term success, competitiveness and sustainability. Not to mention that companies with a good CSR record are instantly trumpeted as being ‘socially responsible’ companies, like the Tata Group, for instance in India, and goes a long way in achieving sustainable development.
This also makes business sense as companies with effective CSR, have an image of socially responsible companies, achieve sustainable growth in their operations in the long run and their products and services are preferred by the customers.
CORPORATE SOCIAL RESPONSIBILITY AND THE COMPANIES ACT, 2013
The Companies Act, 2013 has introduced the idea of CSR to the frontline of the modern media sentence. Schedule VII of the Act, whichlists out the CSR activities, suggests communities to be the focal point, the fulcrum of social responsibility in India.
According to Schedule-VII of Companies Bill, 2012 the following activities can be included by companies in their CSR Policies:-
- Eradicating extreme hunger and poverty;
- Eradicating extreme hunger and poverty;
- Promoting gender equality and empowering women;
- Reducing child mortality and improving maternal health;
- Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
- Ensuring environmental sustainability[iii]
Clause 135 of the Companies Act, 2013, states that every company having net worth Rs. 500 crore or more, or a turnover of Rs. 1000 crore or more or a net profit of rupees five crore or more during any financial year, shall constitute a CSR Committee of the Board consisting of three or more Directors, including at least one Independent Director, who shall recommend activities for discharging corporate social responsibilities in such a manner that the company would spend at least 2 per cent of its average net profits of the previous three years on specified CSR activities[iv].
FRAMING CSR STRATEGY
An effective CSR strategy should articulate:
- Who it wishes to address i e. the target group
- Where it wishes to work i e the geography
- What sectors or issues it wishes to
A brief understanding of these terms-
While development and welfare programmes in India address all the citizens, the focus is on the disadvantaged, marginalised and excluded. Marginalisation in India is primarily on the basis of gender, disability, ethnicity and location. This consequentially leads to a simmering abyss create deep between the people and the necessary services they are entitled to.
It is only eventually that the crumbling stratification of such an arc leads to the complete, social and physical exclusion of groups from all branches of development. In India, especially reaching out to these marginalised and chronically segregated groups is tasked by the fact that unlike the many countries of the world, diversity in India is asymmetrical which offers no easy solution to bring collective and uniform good The CSR strategy should ideally indicate which of these marginalised groups it proposes to target[v].
Sector and issue
Sector refers to the development area that the company wishes to focus on; typically, health, education, livelihood, environment, and so on. In other words, a sector will be a company’s primary area of focus and concern, which shall be the playing field for all of the company’s efforts as part of its CSR strategy.
On the other hand, an issue refers to a specific aspect of a sector for example, primary education in the education sector and basic stitching and handicraft training for social enterprises in the livelihoods sector. It is essential for a company to determine which sector and issues it will focus on to ensure a significant positive impact. Also, the reporting format in draft rules of the Companies Act, 2013 requires that the company report against the sector making it all the more important[vi].
Clause 135 of the Act lays down the guidelines to be followed by companies while devising and incorporating its CSR policy. It states that the CSR committee should be constituted comprising of three or more directors with at least one independent director which should be responsible for preparing a detailed map on CSR strategy it wishes to partake including the expenditure, the scope of activities, roles and responsibilities of various stakeholders and a regulatory mechanism for such activities.
The new Act requires that the board of the company shall, after taking into account the recommendations made by the CSR committee, approve the CSR policy for the company and disclose its contents in their report and also publish the details on the company’s official website, if any, in such manner as may be prescribed.
CSR AND SMEs
Small and medium enterprises (SMEs) have historically, been an integral element of India’s success story, however, dwarfed it may seem with respect to the success story across our border. Even today, they are a key wheel in the growth cycle of the Indian economic machine. They employ nearly 40% of India’s workforce and contribute around 45% to India’s manufacturing output[vii].
It must be therefore noted that the business activities of SMEs are performed in close proximity to the people they serve, which mean they are more up-to-date with the needs and demands of the people they serve than any conglomerate which may draw such assumptions based on any random survey. This in turn, enables these SME’s to manage expectations and develop CSR programmes accordingly.
As SMEs tend to focus on time-specific, short-term activities that involve lesser operational costs and convenience costs under Companies Act, 2013, the SME’s approach to CSR has to be appropriately moulded and reformed, while keeping operational costs low[viii].
The fruitful alternative is to pool resources of the SMEs and create a joint CSR programme managed by a single, specific entity shared and participated in by each of such SME’s. Collaboration will not only reduce operational costs of the SMEs but also will help in building and projecting long-term plans and strategies.
The whole concept of CSR must, by its very definition, be a product of the fundamental need to price services, infrastructure and resources that societies provide businesses located in their proximity. By mandating a plain vanilla formula for allocation of two per cent of net profits towards CSR, the law will create a locational and geographical distortion, which may frame an inconsistency in the delimitation of goals and projections of such plans.
It also poses the risk of delineating the concept of CSR from the onus of societal responsibility. Proximal duty and care is the Holy Grail when it comes to a company’s responsibility towards the society, in general. Without the fulfilment of this holy duty, businesses cannot be allowed to choose the destination of commitment to society[ix].
Like every law or provision, the CSR provision too must fully qualify in the simple tests of simplicity and reasonableness. This goes hand-in-hand with the ever-reminding tests of testing such provision’s political viability. To achieve this, CSR policies must be a product of the transparent interface of community stakeholders and corporates.
A demand-driven process for contemplating business-specific CSR policies must be instituted at the grassroots level. Such consultations and discussions could be chaired by public servants like District Magistrates and other town leaders and representatives. Through transparency, any such decision made must be reported and filed, thereby creating a public accountability structure for the delivery of a CSR policy, which is so often failed by our own failure to enforce[x].
The very legal formulation of CSR is a step in the right direction for the business and economic prospects of India. However, it will only hold firm if we counter the very failings of our society by making a conscious effort to do our part towards society. And that means, making sure we all pay our dues.
Formatted on March 2nd, 2019.
[ii] The Challenges of Social Corporate Social Responsibility: Facts for You, May 2013, pp. 38-39
[iii]LokSabhaUnstarred Question No. 4113 dated 21.3.2013
[iv]RajyaSabhaUnstarred Question No. 2986 dated 22.4.2013