Legalizing Corporate Social Responsibility in India: - A Benefit or Burden on corporations?
Published: Jan 31, 2017
By Sonali Banerjee, LL.M. Student, ILS Law College, Pune
THE concept of Corporate Social Responsibility (CSR) has always been much talked about. With the introduction of the new Companies Act 2013, which specifies legal provisions for making CSR mandatory, India now becomes the first country to make this bold move. In the words of Sachin Pilot 1., "India is now the first country to mandate CSR through a statutory provision" 2. In so far as the rest of the world is concerned, CSR is still a voluntary exercise which is left to the discretion of the corporates. At the most, the compulsory reporting of the CSR activities undertaken by the companies is made mandatory in some of the countries. However, in India, the law not only makes the reporting of CSR activities mandatory, but goes a step behind to also mandate the CSR activities in the first place. Making CSR a mandate in India is bound to have a lot of repercussions. This article discusses whether it is justified to burden the corporations to additionally spend towards CSR activities.
CSR in India - The legal Framework
The enactment of Section 135 of the Companies Act 2013 can be said to be a bold move made towards bringing CSR activities under the purview of the corporate law, by making it a mandatory provision. The concept of making CSR a mandate was introduced in the Companies Bill 2009. The passing of Companies Bill 2011, which gave effect to the present Companies Act 2013, marked a significant development in the country's effort to move forward with the CSR agenda by making it a mandate by virtue of Section 135 of the said Act.
The provision of Section 135 of the Act says that every company having a net worth of 500 crore INR or more, or a turnover of 1000 crore INR or more, or a net profit of five crore INR or more, during any financial year has to constitute a corporate social responsibility committee of the board. 3. The committee so constituted needs to have three or more directors, out of which, at least one director should be an independent director. The composition of the committee needs to be included in the board's report. The responsibility of formulating CSR policies, recommending CSR initiatives, monitoring CSR expenditure would lie with the CSR committee. A mandatory report on CSR has to be submitted by the Board in its report. It is the duty of the board to ensure that the company spends in each financial year, at least two percent of the average profits of the company made during immediately preceding three financial years in lieu CSR policies undertaken by the company. In case there occurs any failure to spend the prescribed amount, reasons have to be disclosed in the Board's report. 4.
While the quantum of CSR spending and its reporting has been mandatorily set under the provision, there exists some flexibility in terms of giving the companies choice of exercising CSR activities in accordance to Schedule VII of the Act. Subsequent to the passage of the Act in the year 2014, the Ministry of Corporate affairs has also notified rules with respect of Corporate Social Responsibility.
The Rationale behind making CSR a mandate
Conceptually, it can be said that CSR serves as a bridge between the corporation and the society, where the corporate assume a greater role in not just taking into account the interests of the shareholders but also considering the interests of all the stakeholders. The rationale of CSR needs to be understood from the viewpoint of both the society and the corporation. At a community level, there has been increasing realization that the economic activities of corporations are rooted in societal concerns. The goal of the companies needs to go beyond profit maximization by way of positively contributing to the society. In developing countries, CSR plays a major role in meeting developmental objectives of poverty reduction and bringing economic growth. CSR plays a dual role of supplementing the governmental resources & delivery mechanisms and filling up the governmental gaps that occurs when the government is weak or under sourced. 5. From the perspective of a firm, CSR is beneficial for the firms because it is driven by profit motive and belief that corporate social performance will transform into corporate financial performance in the long run. There is actually no trade-off between shareholder objectives and social responsibility. Adhering to various CSR code compliances, also results in gaining advantage at international level. Since, the CSR codes are globally accepted, engaging in CSR activities such as meeting environmental standards, sustainability performance reporting, ethical trading initiatives can be of huge help in creating goodwill of the companies in international market. A proactive approach towards CSR is taken as part of their mainstream business practice for gaining competitive advantage.
Challenges faced
In a country like India, where the development needs are many, prioritizing social investment becomes necessary. It can be argued that the companies often lack the expertise in areas of social development. This may result in inefficient use of the resources. A huge amount of money spent by the companies on ad-hoc projects might not serve any fruitful purpose. There may exist several issues such as the overlapping of CSR expenditures made by different companies in the same locality or the jeopardizing of CSR projects undertaken by companies if the performance of the company fails or it decides to move out of the locality in which the CSR project was undertaken. These issues need to be adequately taken care of. The state or local level development planning needs to properly co-ordinate with the companies regarding planning of CSR activities so as to ensure efficient use of the resources. 6.
It becomes pertinent to mention here that one of the major flaws in the said legislation is the absence of provision for strict regulatory mechanism. The law only mentions disclosure requirements, but does not embody penal provision for non-compliance of the rule. The 'comply or explain principle' for CSR has been criticized by many. Also, the law prescribes a certain threshold limit for the applicability of the provisions relating to CSR. This may result in inequalities being created among companies coming under its purview. Making companies spend only on the basis of profits does not seem like a good idea, because the profits of companies do fluctuate. On one hand, the mandatory provision encourages companies to spend on CSR when the companies are making good profits, and on the other hand the companies are not required to spend anything on CSR when they are not making good profits. 7.
People are also of the opinion that the Government should incentivize the companies to contribute to CSR rather than achieving it through compulsion. Tax benefits are now being demanded by the corporations on the expenditure incurred by them on social welfare activities. Undertaking CSR activities require companies to incur huge expenditure both in terms of technology and ongoing costs, which are at times disadvantageous to businesses. Tax deduction would act as a motivational factor for the companies to engage in CSR practices 8. Mandatory CSR activities are often viewed as an effort of the Government trying to outsource its responsibilities towards the companies into performing a role that is properly its own, and that making CSR a mandate is a subversion of democracy. 9.
Constitutional Validity of CSR
Quite a few people have raised concerns regarding the validity of CSR provision; as being contrary to the basic structure of the Constitution. Article 19 (1) (g) of the Constitution of India, provides the fundamental right to carry on any occupation, trade or business. The present provision of mandatory CSR affects the right of corporations to freely carry on its business operation. Even if the Government tries to justify the CSR provisions as "reasonable restrictions" being imposed on the fundamental rights of people by virtue of Article 19 (6) of the Constitution, the reasonability of such restrictions have been questioned. 10.
Equality before law and equal protection of law within the territory of India are guaranteed to every citizen by virtue of Article 14 of our Constitution. The provision of CSR has also been questioned on the ground of violation of Article 14. The provisions of CSR have been made mandatory for companies. The said provisions do not attract other forms of organizations such as partnership firm or LLP's. So, even if the net worth or profits or turnover of such organizations are more than the prescribed limit, they are spared from mandatorily complying with the provisions. It becomes hard to contemplate any "reasonable classification" for such action. 11.
Conclusion
The idea of corporate social responsibility has floated for quite some time. In the past, few companies had recognized the positive duty that they owe to the society and they have performed public welfare activities by incorporating the concept of CSR in their economic policies, even before CSR had a legislative backing. 12. What must be understood is that, a developing country like India, the need to address CSR activities becomes crucial because the Government alone may not capable of taking responsibility of such magnitude, and so it calls for the competency of the private sector to assist in them in social welfare of the community. Even though, the legislation is not free from drawbacks, what needs to be appreciated is that it recognizes the need to overcome the poverty ridden state through social welfare programmes. The companies need to realize that mandatory CSR spending is not an attempt of the State to take away their profits illegitimately, rather by exhibiting socially, environmentally and ethically responsible behavior in governance of its operations, businesses can generate value and long term sustainability for themselves while making positive contribution for the betterment of the society. 13.To mark N.R Narayana Murthy's words, "The good that a corporation must do is defined by Corporate Social Responsibility"
_________________________________________________________________________
1. Corporate Affairs Minister from 28th October 2012 - 17th May 2014.
2. Arpita Ghosh, "Mandatory Corporate Social Responsibility in India", New Company Law- An Insight (Corporate law advisor in association with SLS Noida) p. 181.
3. Supra note 3 at p.143.
4. Kruthika Prakash, 'Evaluating the concept of CSR in the Companies Act, 2013- A Policy and Doctrinal Perspective', in Prof. Nishtha Jaswal, Dr. S Ravichandran & Dr. Rajinder Kaur (ed.), Selected Essays on Companies Act: Mohan Law House publications (publication year not mentioned) at p.6.
5. Jayati Sarkar & Subrata Sarkar, 'Corporate Social Responsibility in India- An effort to bridge the Welfare Gap,' Indira Gandhi Institute of Development Research Mumbai August 2015, available at http://www.igidr.ac.in/pdf/publication/WP-2015-023.pdf (last accessed on 9th August at 21.00 hours) at p.8
6. Supra note 2 at p. 190.
7. Akshay, Divanshu Gupta, Dhruv Kaushal & Chitrangada Sharma, 'Corporate Social Responsibility- A Critical Dissection as laid down in the Companies Bill, 2012', in (ed. not mentioned), New Company Law- An Insight: Corporate law advisor publications & SLS Noida, (publication year not mentioned) at p.197.
8. Justin Jos, 'Corporate Social Responsibility in the Companies Act 2013', in Prof. Nishtha Jaswal, Dr. S Ravichandran & Dr. Rajinder Kaur (ed.), Selected Essays on Companies Act: Mohan Law House publications (publication year not mentioned) at p. 126-131.
9. Shantanu Tiwari & Shashank Shrivastava, 'Corporate Social Responsibility: a Distant Reality?', in Prof. NishthaJaswal, Dr. S Ravichandran & Dr. Rajinder Kaur (ed.), Selected Essays on Companies Act: Mohan Law House publications (publication year not mentioned) at p. 46
10. Shashank Sharma, 'Making CSR Mandatory in India - A flawed Approach', International Journal of Social Science and Humanity, Vol 3, No 1, January 2013.
11. Amudha Murthy, 'Constitutional Validity of CSR', Law Mantra Online Journal, [ISSN: 2321-6417] available at https:// journal.lawmantra.co.in/ [accessed on 30th January, 2017 at 17.35 hours].
12. Raviena Bedi, 'Vision for an Effective Implementation of Corporate Social Responsibility in India: Mutatis Mutandis', in Prof. Nishtha Jaswal, Dr. S Ravichandran & Dr. Rajinder Kaur (ed.), Selected Essays on Companies Act: Mohan Law House publications (publication year not mentioned) at p.70.
13. Supra note 21 at p.69.
