This article is written by Naincy Mishra. This article discusses the concept, need and significance of Corporate Social Responsibility (CSR) in the Indian corporate arena. The article also delves into the theories of corporate governance, importance of ESG (Environmental Social and Governance) in corporate law, laws mandating CSR, advantages of CSR and the global trends of CSR in recent times.

Introduction 

Corporate governance stands as the foundation of organisational integrity and accountability. In the present era defined by rapid globalisation and increased societal awareness, the significance of corporate governance has become more strong. Earlier, the companies followed the conventional approach of prioritising the interests of the shareholder, but the modern framework seeks to drive the businesses towards recognizing an even broader responsibility – one that extends to the society and the environment. This big shift is incorporated in the essence of the Corporate Social Responsibility (CSR). CSR is an ethical framework that goes beyond the profit-driven motives, and promotes a more inclusive and sustainable approach for the business operations. It tries to conceptualise the idea that success in the present era is not solely measured by the financial metrics of the businesses, but by the positive impact a business can create on the society it operates in and the environment it draws the resources from. 

Today, as the businesses struggle with the multifaceted challenges posed by climate change, social inequality, resource depletion, etc., the need for a comprehensive CSR framework has become increasingly evident. Additionally, it has become all the more important for nations like India, which aim to achieve ambitious climate targets as per their commitments at the international level agreements and summits. Thus, by adopting sustainable business practices and contributing to the well-being of local communities, businesses can play a crucial role in steering the country towards environmental sustainability and India can thus be positioned as a responsible and forward-thinking player in the international arena. In the present article, an attempt has been made to elaborately discuss the concept of corporate social responsibility.

What is corporate governance

As per the Organization for Economic Cooperation and Development (OECD), ‘corporate governance involves a set of relationships between a company’s management, its board, shareholders and other stakeholders’. It provides the structure that can be helpful for setting the objectives of a company and determines the methods of achieving those objectives while monitoring the company’s performance. The purpose of corporate governance is to help build an environment of trust, transparency and accountability that is important to encourage long-term investment, financial stability as well as business integrity. 

Principles of corporate governance

OECD lays down six major principles of corporate governance which are as follows:

• Promotion of transparent and fair markets, and efficient allocation of resources. 
• Protection and facilitation of an environment where the shareholders can exercise their rights and ensure an equitable treatment of all the shareholders, including minority as well as foreign shareholders.
• Providing sound incentives all through the investment chain and ensuring the functioning of the stock markets in a manner that leads to good corporate governance.
• Recognition of stakeholders’ rights established by law as well as those decided by mutual agreements and encouraging active cooperation between the corporations and their stakeholders in order to create wealth, jobs, and sustainability of the financially sound enterprises.
• Ensuring accurate and timely disclosure of all the material matters concerning the corporation, including its financial situation, performance, ownership, and governance of the company.
• Ensuring strategic guidance of the company, effective monitoring of the management by the company’s board, as well as accountability of the board towards the company and its shareholders.

Theories of corporate governance

In order to understand the importance of Environmental Social and Governance (ESG) factors and the nature of CSR law in India, it is important to understand the theories of corporate governance. Primarily, there are six theories of corporate governance – agency theory, stewardship theory, stakeholder theory, resource dependency theory, transaction cost theory and political theory. 

Agency theory

Agency theory is a fundamental concept in corporate governance that examines the relationship between the principals (typically shareholders) and their agents (usually managers or directors) within a company. This theory provides insights into the potential conflicts of interest that may arise between these two groups and proposes mechanisms to align their interests. Here are certain key aspects of the agency theory of corporate governance:

Principal-agent relationship

The central idea of agency theory is built around the concept of a principal-agent relationship. In a corporation, shareholders (the principals) delegate decision-making authority to directors or managers (the agents) to run the company on their behalf.

Information asymmetry and conflict of interests

Information asymmetry occurs when agents possess more information about the company’s operations, performance, and opportunities than the principal itself. This information gap can lead to conflicts of interest as agents may act in their own interest rather than in the best interest of shareholders. For example, managers may prioritise short-term gains to boost their own compensation, even if it does not align with the long-term interests of shareholders.

Risk aversion

Agents may be risk-averse and may not take risks that could potentially benefit the company in the long term but carry short-term uncertainties. This risk aversion can result from the agents’ desire to protect their own positions and bonuses.

How can the conflict of interests be mitigated?

• To mitigate conflicts, agency theory suggests the implementation of monitoring and control mechanisms. These mechanisms are designed to align the interests of agents with those of principals. For example, performance-based compensation, board oversight, external audits etc. 
• In fact, well-designed employment contracts providing for incentives tied to long-term goals can help align the interests of both principals and agents. 
• Shareholders may engage in proxy contests or activism to influence the corporate decisions and ensure that the interests of the principal are being served. In this way, shareholders can influence the behaviour of agents.
• Sometimes, the underperforming entities become targets for potential acquisition and thus, the threat of a takeover incentivizes managers to act in the best interest of shareholders to retain control of the company.

Stewardship theory

Stewardship theory is an alternative perspective to agency theory in the field of corporate governance. This theory assumes that managers are inherently motivated to act in the best interests of the company and its shareholders and to act as responsible stewards of the company’s resources even in the absence of explicit contractual incentives. It suggests that fostering a positive relationship and mutual trust between the owners (principals) and managers (stewards) is crucial for the effective functioning of the organisation. Promoting a long-term orientation in decision-making, the stewards are expected to prioritise sustainable growth and value creation over short-term gains. This theory suggests that a more supportive and trusting environment can lead to better organisational outcomes.

Stakeholder theory

Stakeholder theory is a framework in business ethics and corporate governance that recognizes and addresses the interests of various stakeholders beyond just ‘shareholders’. This theory says that a company should consider and manage the needs and expectations of all its stakeholders, not just those who own shares, including all individuals, groups, or entities that can affect or are affected by a company’s actions, decisions, and policies. For example, the employees, customers, suppliers, communities, government bodies, and others with a vested interest in the company.

As per this theory, different stakeholders have diverse and sometimes conflicting interests. For example, shareholders may prioritise financial returns, while employees may be concerned with job security and fair wages. The challenge for companies is to balance these interests to create value for all stakeholders. By addressing the needs of various stakeholders, companies aim to achieve long-term sustainability because satisfied employees, loyal customers, and positive relationships with the community can contribute to the company’s overall success and resilience by mitigating potential risks related to reputation, legal issues, and operational challenges. This is the reason why it is also said that this theory closely aligns with the concept of corporate social responsibility (CSR) as per which, companies have a responsibility to operate ethically, consider environmental and social impacts, and contribute positively to the communities in which they operate.

Resource dependency theory

Resource dependency theory explains how corporations manage their dependence on external resources. In the context of corporate governance, this theory helps understand the relationships between a corporation and its external environment, particularly in terms of resource acquisition, control, and strategic decision-making. It introduces the concept of power dynamics in the corporate governance structures. Organisations with control over critical resources may exert influence over corporate decision-making which can manifest in power struggles within boards of directors, management teams, and other governance bodies. Thus, it emphasises the interdependence between corporations and various stakeholders such as suppliers, customers, regulators, and investors and the corporate governance mechanisms are designed to manage these interdependencies and enhance the overall resource base of the organisation. It says that the governance structures and practices are shaped by the need to secure, control, and manage critical resources for the corporation’s sustained success.

Transaction cost theory

Transaction cost theory is concerned with the decision-making processes related to organising and governing economic transactions within a firm. It says that firms can choose between different governance structures based on the nature of transactions. The theory distinguishes between market governance (relying on external markets and contracts) and hierarchical governance (internalising transactions within the firm). Corporate governance involves making decisions about the optimal governance structure to minimise transaction costs and to achieve efficiency in organising economic transactions, for example, deciding whether to produce goods or services internally (make) or acquire them from external markets (buy). It suggests that when the costs of coordinating and contracting in the external market (e.g., searching for suppliers, negotiating contracts) exceed the costs of managing transactions internally, or where the transactions are characterised by high uncertainty or frequent interactions, firms tend to internalise those transactions.

Political theory

Political theory in corporate governance explores the relationships between various stakeholders within a corporation and examines the distribution of power, authority, and decision-making. This perspective draws on political science principles to analyse the dynamics of corporate governance structures. It considers the issues of representation, examining how effectively managers represent the interests of shareholders and other stakeholders. It explores questions of accountability and transparency in decision-making processes. It also contributes to the understanding of corporate governance reforms by examining the political processes that lead to regulatory changes and shifting the balance of power within corporations. 

What is Environmental Social and Governance (ESG)

Concept and history

The full form of ESG is ‘Environmental Social and Governance’. The ESG framework is part of the wider corporate governance framework, driving the companies towards adopting more sustainable business practices, especially relating to their societal and environmental interactions. Although the principles behind the ESG framework may be centuries old, the modern concept took shape in the mid-twentieth century. These were evident from the improvement of the basic labour working conditions which included the non-exploitative rules regarding their wages and holidays. A 2004 report of the United Nations titled Who Cares Wins was among the first documents to recognise the obligations of entities as well as their stakeholders towards the ESG in the modern context. Since then, different nations have been coming up with their own ESG obligations mandating for their business corporations. 

This is often associated with the concept of ‘corporate sustainability’ which essentially refers to the role that the companies can play in meeting the goals of sustainable development and it calls for a more balanced approach to socio-economic progress as well as for environmental conservation.

Triple bottom line

In economics, a term called the ‘Triple Bottom Line’ is often used which suggests that the companies should commit to giving as much attention to the social and environmental concerns as they give to profits. It conceptualises three elements: profit, people and the planet. It is important to understand that the environmental concerns should go hand in hand with the profit-making attitude with which a company is set up. Thus, a company’s positive efforts towards the planet are not necessarily assessed by its investments in big environmental projects, but by its choice of environment-friendly alternatives as and when required. 

Theorizing the relationship between corporations and Environmental Social and Governance (ESG)

As per the above discussion of the theories of corporate governance, it is clear that the agency theory is more about the relationship only between the directors and shareholders. However, with the passage of time, there has been a shift from the prevailing agency theory to the stakeholder theory with respect to corporate governance. The environment is considered one of the company’s stakeholders and thus requires much attention from the company owners. It has been observed that companies setting realistic goals with this outlook and attempting to formulate good sustainable solutions are the ones helping to create a more prosperous future for themselves as well as for the planet. 

Significance 

In the present era, the environmental, social, and governance factors are increasingly considered in the corporate governance framework. The following aspects reflect the paramount importance of ESG in corporate governance:

Risk management

• Environmental Risks – Assessing and managing environmental risks helps companies mitigate potential damage to their operations, reputation, and bottom line. This includes considerations like climate change, resource scarcity, and pollution.
• Social Risks – Evaluating social factors helps companies address issues related to human rights, labour practices, diversity, and community relations. Managing these risks can prevent legal issues, protests, and negative public perception.

Reputation and brand value

Demonstrating good commitment to the ESG principles can contribute to enhancing a company’s reputation as well as its brand value. In present times, the consumers and investors are increasingly considering a company’s ESG performance as a key factor in their decision-making.

Access to capital

Many investors are nowadays incorporating the ESG criteria into their investment decision-making approach. Companies with strong ESG performance may find it easier to attract investment, access capital markets, and benefit from lower financing costs.

Long-term sustainability

Integrating ESG factors into corporate governance helps companies focus on long-term sustainability. This involves considering the impact of business decisions on not just short-term financial performance but also on environmental and social sustainability.

Regulatory compliance

Governments and regulatory bodies are increasingly emphasising ESG considerations. Adhering to ESG standards ensures compliance with evolving regulations and reduces the risk of legal and regulatory challenges.

Stakeholder engagement

The ESG principles encourage the companies to engage with a wider range of stakeholders, including employees, customers, communities, and the suppliers. This can promote positive relationships and enable a more inclusive decision-making process.

Innovation and efficiency

Adopting ESG practices often leads to increased innovation and operational efficiency. Companies that prioritise sustainability may find new ways to reduce resource consumption, cut costs, and develop innovative products and services.

Talent attraction and retention

Employees, especially the younger generation, often prioritise working for companies that align with their values. Demonstrating a commitment to ESG principles can help attract and retain top talent.

Transparency and accountability

ESG reporting enhances transparency and accountability. By disclosing relevant ESG information, companies demonstrate a commitment to openness, allowing stakeholders to assess performance and hold them accountable for their impact on the environment and society.

Legal framework surrounding Environmental Social and Governance (ESG)

Constitutional provisions

Our supreme law, i.e. the Constitution of India, 1950 is perhaps one of the first constitutions in the world that contains specific provisions for the protection and improvement of the environment. At the very outset, the Preamble of the Indian Constitution itself provides that India is a country based on socialist principles wherein the state pays more attention to the social welfare than the capitalist reforms. Interestingly, the word ‘socialist’ was added to the Preamble by the Constitution 42nd (Amendment) Act, 1976, when there was a wave of environmental discussions at the international level. Further, vide Article 48A of the Constitution, it has been provided that the State must protect and improve the environment and safeguard the forests and wildlife of the country.

In addition, Article 47 provides that it is the duty of the State to raise the level of nutrition as well as living standards of its people and improve public health. Environmental protection concerns have also been highlighted by laying down duties for a citizen under Article 51A(g). Thus, it is not solely the obligation of the State or an individual, but rather collective action is encouraged.

Corporate and banking laws

The regulatory framework related to ESG cannot be found in a single piece of legislation, but various laws must be referred to for the same. With respect to the environment, the Companies Act, 2013 (hereinafter ‘the 2013 Act’), SEBI Regulations, RBI Rules, etc., contain different provisions. Setting up the foremost liability of the persons managing a corporation, Section 166(2) of the Companies Act 2013 obligates a company’s directors to act in good faith in order to promote the company’s objectives for the benefit of its members as a whole, and in the best interests of the company, its employees, shareholders, community as well as for environmental protection. Recently, in the case of M.K. Ranjitsinh v. Union of India (2021), the Supreme Court clarified that this section “ordains the director of a company to act in good faith, not only in the best interest of the company, its employees, the shareholders and the community but also for the protection of the environment.” There is no hierarchy between the duties that are owed to the company and the other stakeholders as mentioned under the said section. Thus, consideration of the matters for example, climate risk and environmental protection is not an option for the directors of the Indian companies but rather ‘obligatory’, which may create a significant risk of liability if neglected. 

The Act also mandates the Board’s report to incorporate the details on the steps taken by the company towards energy conservation as well as technology absorption under Section 134(3)(m). Various companies, such as Reliance Industries Ltd, ITC Limited, Vedanta Ltd, and HDFC Bank, etc. have signed up to go carbon neutral in the coming years. In fact, some companies are modifying their businesses to meet the net-zero emission deadlines.

SEBI also via Regulation 34 (2)(f) of the Listing Obligations and Disclosure Requirements Regulations, 2015 and its BRSR framework (Business Responsibility and Sustainability Reporting, 2021) makes it mandatory for the top 1000 listed companies based on market capitalization, to include in their annual report, a business responsibility report describing the initiatives taken by the listed entity from an ESG perspective. This more particularly includes companies’ material ESG risks and opportunities, approach to mitigate or adapt to the same, sustainability-related goals, disclosures such as greenhouse gas emissions, waste management practices, etc.

Further, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 under Schedule VI, Part A, Para. 11(I)(C)(iv) also mandate disclosure of management’s discussion and analysis of the financial condition of the company, alongside a discussion of various factors such as unusual or infrequent events or transactions, including unusual trends, significant economic changes, known trends or uncertainties, etc. that materially affected or are likely to affect income from continuing operations. These provisions become all the more important for vulnerable companies such as those engaged in the oil and gas business, chemical industries, etc.

RBI has also joined the Network for Greening the Financial System as a member in 2021 to assess the progress of RBI-regulated entities in managing climate risks. RBI keeps on formulating new rules to facilitate environmental protection by the entities. In 2023, RBI came up with a regulatory framework for the banks to accept green deposits from the customers, and this money is supposed to be invested towards environment-friendly projects such as financing renewable energy projects in a fight against climate change. These rules aim at preventing greenwashing and helping achieve sustainable objectives.

What is corporate social responsibility (CSR)

Concept of corporate social responsibility (CSR)

One of the most important provisions related to ESG in the present times is that of corporate social responsibility (CSR) as given in Section 135 of the Companies Act 2013, read with The Companies (Corporate Social Responsibility Policy) Rules, 2014. It mandates companies with a specific net worth or turnover to annually spend at least 2% of their average net profits of the last three financial years on CSR. India is one of the few nations in the world to have a dedicated mandatory provision for the business entities for abiding by their corporate social responsibility.

In India, having a CSR law reflects the country’s commitment to operate in a manner that is economically, socially, and environmentally sustainable. CSR involves taking into account the impact of actions of a company on its various stakeholders, such as its employees, customers, community, and the environment. The goal of CSR is to go beyond financial success and contribute positively to society and the environment. According to the United Nations Industrial Development Organization (UNIDO), CSR, as based on the ‘Triple Bottom Line’ approach, can help countries to advance their socio-economic growth and to become more competitive in the present era. 

CSR activities

CSR motivates the companies to contribute socially, economically and environmentally by engaging in acts like :

• Engaging members of the local community
• Using “Socially Responsible Investment” (SRI)
• Developing cordial relationship with the employees as well as the consumers
• Engaging in actions/ activities for the protection and sustainability of the environment eg. using chain of sustainable manufacturing/production practices
• Paying fair wages to the workers
• Supporting reforms in the social justice policy 
• Innovating the products to solve any environmental or a social issue
• Undertaking to reduce the carbon footprint
• Contributing appreciable profits to any charitable cause

Section 135 of the Companies Act, 2013

Section 135 of the Companies Act, 2013 provides for the mandate for constitution of a Corporate Social Responsibility Committee (CSR Committee) of the Board, its obligations and the contribution that must be made by the specified entities towards its CSR policy.  

Corporate social responsibility committee

Sub-section 1 of Section 135 states that every company that has a net worth equal to or more than Rs. 500 crore, or a turnover equal to or more than Rs. 1000 crore, or a net profit equal to or more than Rs. 5 crore during any financial year, is required to constitute a CSR Committee of the Board which shall consist of three or more directors, amongst whom at least one director should be an independent director. 

It says that the Board must disclose the composition of such a committee under its report to be laid before the company in its general meeting as mandated by Section 134(3).

Functions of the committee

Sub-section 3 of Section 135 further provides the responsibilities of the committee. It says that the committee shall:-

• Formulate and recommend a CSR Policy to the Board, mentioning the activities which are to be undertaken by the company as specified in Schedule VII of the Act;
• Recommend the expenditure amount which is to be spent on the activities referred hereinabove; and 
• Monitor the company’s CSR policy from time to time.

The provision also states that after considering the recommendations made by the CSR Committee, the Board has to approve the CSR policy and disclose the contents of the policy in its report. Moreover, it must also be ensured that the contents are also placed on the company’s website in the manner prescribed by the Government. In addition, the Board must ensure that the activities as envisioned in the policy are actually undertaken by the company because if the activities are not undertaken in practice, it will defeat the whole purpose of this provision. 

Contribution towards CSR policy

Sub-section 5 of Section 135 states that in pursuance of its CSR Policy, the Board of every company, as referred to hereinabove (company having a net worth equal to or more than Rs. 500 crore, or a turnover equal to or more than Rs. 1000 crore, or a net profit equal to or more than Rs. 5 crore during any financial year), is required to ensure that in every financial year, the company is spending at least 2% of the company’s average net profits made during the past three financial years. Moreover, in case the company has not completed three years since its incorporation, the average will be taken out proportionately.

It also states that for spending such an amount as specified for the CSR activities, preference shall be given by the company to the local area(s) around it, where such company carries its operations.

Non-compliance of this provision

The provision further states that if the company fails in spending such an amount towards the CSR activities as laid down by the CSR policy, the company’s Board has to specify the reasons therewith, in its report as mentioned under Section 134(3)(o). 

Average net profit

Explanation attached to Section 135 of the Act states that the “average net profit” of the company is to be calculated in conformity to Section 198 of the Act. Section 198 provides that the computation of a company’s net profits in a financial year must conform to the following things:-

Sums to be credited

Firstly, credit must be given to the bounties and subsidies received from the Central or State Government or any public authority constituted or authorised by any government in this behalf,  except in cases where the Central Government directs otherwise. 

Sums to not be credited 

Section 198(3) provides that the following sums must not be credited :

• Profits occurred by way of premium on the company’s shares or debentures issued or sold; 
• Profits on sale of forfeited shares of the company;
• Profits of capital nature which also includes profits from the sale of the company’s undertaking(s); 
• Profits from the sale of any immovable property or fixed assets of a capital nature comprised in the company’s undertaking(s), unless the company’s business, wholly or in part, consists of buying and selling of such property/assets; and
• Any change in the carrying amount of an asset or liability that is recognised in the equity reserves, which also includes any surplus in the ‘profit and loss account’ measuring such asset or liability at a fair value. 

Sums to be deducted

According to Section 198(4), following sums shall be deducted while computing the net profit :

• All usual working charges; 
• Remuneration of the directors; 
• Bonus/commission paid or payable to any staff member, or to any engineer, technician or a person employed by the company on a whole/ part time basis;
• Any  notified as a tax on excess or abnormal profits by the Central Government; 
• Any tax imposed on business profits for special reasons/in special circumstances as notified by the Central Government; 
• Interest on debentures issued by the company;
• Interest on mortgages executed by the company and on loans and advances secured by a charge on the fixed or floating assets of the company;
• Interest on unsecured loans and advances of the company; 
• Company’s expenses on the repair of immovable or to movable property, provided that the repairs must not be of a capital nature; 
• Outgoings including the contributions made under Section 181 (contribution to bona fide and charitable funds); 
• Depreciation to the extent as specified in Section 123 (declaration of dividend); 
• The excess of expenditure over the income, having arisen while computing the net profits in compliance with this provision in any year, to the extent that such excess amount has not been deducted in any subsequent year preceding the year for which the net profits have to be determined; 
• Any damages or compensation to be paid in lieu of any legal liability which also includes any liability arising from a contractual breach, and any sum paid as insurance against the risk of meeting any liability for it; 
• Bad debts and debts written off or adjusted during the year of accounting. 

Sums that shall not be deducted

Sub-section 5 of Section 198 provides for the sums that shall not be deducted :

• Income-tax and super-tax payable by the company under the Income Tax Act, 1961, or any other tax on the company’s income not falling under:-
  • Any tax notified to be in the nature of a tax on excess or abnormal profits by notification of the Central Government ; 
  • Any tax imposed on business profits for special reasons/in special circumstances as notified by the Central Government; 
• Any compensation, damages or payments made voluntarily, i.e. except any damages or compensation to be paid in lieu of any legal liability which also includes any liability arising from a contractual breach, and any sum paid as insurance against the risk of meeting any liability for it; 
• Loss of a capital nature including loss on sale of the undertaking(s) of the company, not including any excess of the written-down value of any asset that is sold/discarded/demolished/destroyed over its sale proceeds or its scrap value; 
• Any change in carrying amount of an asset or a liability as recognised in the equity reserves which also includes the surplus in profit and loss account on measurement of such asset or liability at fair value. 

Schedule VII

This schedule mentions the activities that may be included by companies in their corporate social responsibility policies. It states that the activities may be relating to :

• Eradicating extreme hunger and poverty; 
• Promotion of education; 
• Promoting gender equality and women empowerment; 
• Reducing child mortality and enhancing maternal health; 
• Combating human immunodeficiency virus, acquired immune deficiency syndrome (AIDS), malaria and other diseases; 
• Ensuring environmental sustainability; 
• Employment improving vocational skills;
• Social business projects; 
• Contribution to the PM’s National Relief Fund (PMNRF) or any other fund set up by the Central or State Government for socio-economic development and relief and funds for the welfare of the SCs, the STs, OBCs, minorities and women; and 
• Any other prescribed matters.

Ineligible activities under CSR provisions

Following are the activities that do not fall under the purview of the CSR provisions :

1. Activities that are carried out in conformity to the normal course of the company’s business. 

Nevertheless, any company engaged in R&D activity of any new vaccine, drugs and medical devices in its normal course of business may carry out such work related to COVID-19 for the financial years 2020-21, 2021-22, 2022-23 depending upon fulfilment of the conditions that :

• Such R&D activities are undertaken in partnership with any institutes or organisations specified in item (ix) of Schedule VII of the Act;
• Particulars of such activity are disclosed independently in the CSR Annual report as submitted by the Board.

2. Activities undertaken by the company outside the Indian territory, apart from the training of Indian sports persons representing any State/UT at the national level or representing India at an international level.
3. Activities that benefit the employees of the company.
4. Activities supported by the companies on the basis of sponsorship, to derive marketing advantages for the products or services of the company.
5. Activities that are carried out in order to fulfil any other statutory obligations under any other law enacted in India.

Companies (Corporate Social Responsibility Rules Policy) Rules, 2014

Definition

Rule 2(c) defines that “Corporate Social Responsibility” means and includes but is not limited to:

1. Projects/programs relating to activities, areas or subjects specified in Schedule VII to the Act; or 
2. Projects/ programs relating to activities undertaken by the company’s board of directors (BOD) pursuant to the recommendations of Committee of the Board as per the company’s declared CSR Policy subject to condition that such policy will include activities, areas or subjects specified in Schedule VII of the Act. 

Applicability

Rule 3 states that every company including its holding or subsidiary, and a foreign company defined under Section 2(42) of the Companies Act, 2013 having its branch office or project office in India that fulfils the criteria specified in Section 135(1) of the Act has to comply with these rules as well. However, a proviso has been added to this provision which states that the net worth, turnover or net profit of a foreign company as stated shall be computed in accordance with the balance sheet and profit and loss account of such company prepared according to Section 381(1)(a) and Section 198 of the Act.

Section 198 has already been discussed earlier in detail. On the other hand, Section 382 provides that in each calendar year, every foreign company is required to make out a balance sheet and a profit and loss account containing such particulars and attach such documents as may be prescribed for the purpose of this provision. Additionally, the foreign company has to submit a copy of those documents to the Registrar. 

Companies (CSR Policy) Amendment Rules, 2021

In order to determine the effectiveness and results of the CSR initiatives, the Ministry of Corporate Affairs (MCA) has notified the Companies (CSR Policy) Amendment Rules, 2021 through which it introduced the Impact Assessment tool. It requires specified companies to undertake an impact assessment through an independent agency.

Annual action plan

Rule 5 of these rules provide that the CSR Committee has to recommend an annual action plan to the Board which must include:-

• List of the CSR projects/programmes as approved to be undertaken in the areas specified in Schedule VII of the Act.
• Manner of execution of such projects/programmes.
• Modalities of the fund utilisation and the schedule for implementation of such projects/programmes. 
• Monitoring and reporting mechanism for the projects/programmes.
• Details of the need and impact assessment for the projects.

It is further given that as per the recommendation of the CSR Committee, the annual action plan may be altered at any time during the financial year. However, reasonable justification for the same has to be given while altering. 

CSR expenditure

Regarding the CSR expenditure, the rules provide that it is the duty of the Board to ensure that the administrative heads do not exceed 5% of the total CSR expenditure of the company for the financial year. 

With respect to any surplus that arises out of the CSR activities, it has been provided that any such surplus must not form part of the company’s business profits and the same has to be:-

• Spent on the project, or 
• It can be transferred to the ‘Unspent CSR Account’ and then spent for the company’s CSR policy/annual action plan, or
• It can be transferred to the fund as specified in Schedule VII, within 6 months of expiration of the financial year.

Creation or acquisition of a capital asset

The rules also provide that the company may spend the CSR amount for the creation or acquisition of a capital asset which will be held by-

• A company which is established under Section 8 of the Companies Act 2013, or a Registered Public Trust or a Registered Society, that has charitable objects and the CSR Registration Number; or
• Beneficiaries of the CSR project, in form of SHGs, collectives, entities, etc.; or
• A public authority.

Significance of corporate social responsibility (CSR)

Since the concept of the CSR has its origination from the ‘environmental social and governance’ (ESG) framework, it is obvious that the advantages flowing from the actions of the corporations in pursuance of ESG will also benefit the corporations that abide by the law of CSR. Thus, the need of CSR can be understood in light of the following roles:

Legal mandate

India has a legal framework that mandates certain companies to spend a specified percentage of their profits on CSR activities. Section 135 requires qualifying companies to allocate 2% of their average net profits (ANP) over the preceding three years to CSR initiatives.

Social development

CSR initiatives in India play an important role in addressing the social issues and contributing to the overall development of the country. Companies engage in projects related to healthcare, poverty alleviation, education, etc. making a positive impact on society.

Inclusive growth

CSR activities in India often focus on inclusive growth, aiming to bridge socio-economic gap and ensure that the benefits of economic development reach marginalised and underprivileged communities. This contributes to a more equitable and sustainable development model.

Environmental sustainability

Many CSR initiatives in India also focus on environmental sustainability. Companies engage in projects related to renewable energy, environmental conservation, and sustainable practices to mitigate their environmental impact and contribute to a greener future.

Community engagement

CSR provides companies with an opportunity to actively engage with the communities in which they operate. This helps build positive relationships, foster trust, and create a sense of shared responsibility between businesses and local communities.

Brand image and reputation

Engaging in meaningful CSR activities positively influences a company’s brand image and reputation. Consumers, investors, and other stakeholders often appreciate companies that demonstrate a commitment to social responsibility, leading to enhanced trust and loyalty.

Employee morale and productivity

Companies that actively participate in CSR activities tend to have higher employee morale. Employees often take pride in working for socially responsible organisations, and this can positively impact productivity, employee retention, and overall workplace satisfaction.

Risk mitigation 

Proactive CSR initiatives can help companies mitigate certain business risks. By addressing social and environmental concerns, companies reduce the likelihood of facing regulatory issues, negative public perception, or legal challenges.

Global standards and expectations

As India integrates further into the global economy, adherence to international CSR standards becomes increasingly important. Many multinational companies operating in India follow global CSR practices, and local companies are aligning their strategies to meet these expectations.

Comparative analysis of corporate social responsibility (CSR) provisions in different countries

Global outlook

Globally, the transformation in consumer behaviour with the passage of time has led the corporate businesses to cast a socially responsible image with the aim of maintaining positive relations with the public. With the increase in an informed citizenry, the corporates are increasingly aspiring to implement the CSR initiatives that are sustainable and socially impactful. Therefore, it has moved from being optional to being an important requirement. While the issues such as illiteracy, poverty, poor health and sanitation, absence of clean water and electricity, etc are prominent in the under-developed nations, other broader issues such as climate change, terrorism, GHG emissions, etc. have a uniform detrimental effect all over the world. As a result, the legislative framework around CSR also comes up with regional variations. 

For curtailing and eliminating these pressing societal as well as environmental issues, various international organisations are roping in commitments in the form of sustainable development goals or legally as well as non-legally binding frameworks. These frameworks obligate the signatories or the member states to bring positive change in their short and long-term operations through their national bodies and corporations. These frameworks thus prompt the already existing as well as emerging corporations to incorporate promising stipulations and initiatives in their operations to have beneficial impact on the society and aid their nations to achieve their respective commitments on the global level. 

UN Global Compact

The United Nations Global Compact is a principle-based framework for corporate entities, whereunder, the companies around the world are brought together with the UN agencies, civil society and labour groups. It is amongst one of the most followed guidelines across the world for the businesses and companies with respect to their CSR rules. The ten principles to be followed by the businesses are as follows:

• Supporting and respecting the protection of internationally proclaimed human rights.
• Non-involvement in human rights abuses.
• Upholding freedom of association and right to collective bargaining.
• Elimination of all forms of forced and compulsory labour.
• Abolition of child labour.
• Non-discrimination in employment and occupation.
• Precautionary approach to environmental issues.
• Taking initiatives for promoting greater environmental responsibility.
• Encouraging the development and diffusion of environmentally friendly technologies.
• Working against corruption in all its forms.

Global Reporting Initiative

Global Reporting Initiative (GRI) is another such globally acclaimed initiative that guides as well as supports the governments, businesses and other organisations in understanding and communicating the influence of business on major sustainability issues around the world. GRI has been providing sustainability reporting since the late 1990s, modifying it from a niche practice to a practice that is embraced today by the majority of organisations worldwide. 

Organisation for Economic Co-operation and Development

Organisation for Economic Co-operation and Development (OECD) is an international organisation working with nations to address the socio-economic as well as the environmental challenges of globalisation. The OECD Guidelines for Multinational Enterprises provide voluntary principles and standards for responsible business conduct that is in accordance with the applicable laws as well as government policies. These guidelines aim to reinforce the basis of mutual confidence between the enterprises and the societies where they operate, and to intensify the contribution by multinational enterprises towards sustainable development. 

ISO 26000

ISO 26000 is an International Standard which guides the manner in which the organisations can enhance their social responsibility and thus be instrumental in sustainable socio-economic and environmental development. The core content of these standards comprise of seven principles; seven core subjects and the stakeholder engagement.

Europe

CSR has always been an important feature for the European Union’s ambitions towards sustainable development, innovation and competitiveness. The European Commission (EC) strongly promotes CSR activities to be undertaken by sustainable and responsible enterprises of the region as with the changing social expectations, it is important to ensure consumer trust as well. The EU started giving recognition to the need for CSR activities as part of its sustainable development strategy since the 1990s itself. It also strongly stimulates the effective implementation of CSR in the European enterprises as an important factor for contributing to its long term strategies. EC defines CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis”. 

In 2014, it was declared that the CSR directive will require all public companies having more than 500 employees to annually give a report of their performance on various non-financial metrics. The companies were also mandated to provide ‘relevant and useful information’ with respect to their human rights impacts, environmental performance as well as anti-corruption measures in the report. These reports are based on recognized CSR frameworks such as the OECD Guidelines for Multinational Enterprises. Nonetheless, given the cultural, economic and demographic diversity across the European nations, CSR has been followed differently by them. While some nations have traditionally practised CSR, others perceive it a contribution towards societal well-being. In recent times, various socio-economic and political factors have revisited the boundaries between the public and private sector with more focus towards CSR as a voluntary initiative by the enterprises in order to manage their socio-economic and environmental impacts. However, they are also legally defined in some European nations. 

Austria

Various environmental, labour and social protection laws setting efficient business standards regulate the market economy of Austria. The Companies Act, 1966 provided for the corporations to extend their benefits to the general public beyond the shareholders. Subsequently, the government adopted the joint sustainability strategy in 2002 in order to integrate social, economic and environmental spheres. However, there is absence of any specific legal framework providing for CSR related mandatory reporting except for the CSR Guiding Vision of 2009 ‘recommending’ for the same.

Belgium

Belgium is a high income nation with a highly productive and skilled workforce. It comprises three regions, each having a number of initiatives on the CSR. The national level law on ‘Coordination of the Federal Policy for Sustainable Development’ of 1997 lays down a framework of the strategies to be followed with six priority areas translated in several actions including CSR. The federal action plan for CSR in Belgium was developed in 2006 to implement CSR and encourage the companies to incorporate it in their management. However, it is obligatory in nature rather than being mandatory. 

Finland

Although there is a lack of specific legislation with respect to CSR or its reporting in Finland, the country does have laws covering several aspects of CSR such as social, educational and environmental. Lately, the companies have been using global frameworks such as UNGCN, OECD and GRI guidelines to involve the stakeholders in their CSR initiatives.

France

There are various legal texts on the application of CSR in France. The first such law was on social reporting in 1977. Further in 2001, the NRE law (Nouvelles Regulations Economiques) was enforced mandating the listed companies to record the social and environmental impacts of their activities. Subsequently, the French government has been enacting more laws to complete the CSR legal framework in the country. 

Germany

While there exists some ambiguity with respect to the concept of CSR in Germany, it seems quite probable that CSR is understood as a voluntary activity for the businesses in the absence of any mandatory law with respect to the same. However, as a significant step, there was the constitution of a multi stakeholder forum on CSR in 2009, which contained the recommendation for having a national action plan on CSR.

Russia

In Russia, the CSR practices by the businesses is open to interpretation within the local contexts and it is often beyond what is legally mandated. The Russian enterprises have been undertaking CSR activities in conformity with the government’s increasing acknowledgement that CSR is very crucial in order to address the pressing social, political and environmental issues but there is lack of any specific legislation with respect to the same.

Sweden

Sweden is one of the few countries that has been amongst the top ranked countries in various socio-economic indices at the international level. The country’s public sector dominates the space of social responsibility, thereby setting examples for the private companies and civil society to follow. In 2000, the government took a major approach to CSR and launched ‘Globalt Ansvar’ (The Swedish Partnership for Global Responsibility) a national initiative – with the aim of assuming increased roles in social responsibility.

United Kingdom (UK)

In the UK, the concept of CSR was developed some 200 years ago when the country was emerging as the world leader in this field. The UK Corporate Governance Code provides that the duties of a company extend beyond its shareholders. However, the code does not explicitly mention CSR. The major step towards formalising the approach to CSR in the UK was the inclusion of a mandatory CSR provision in the Companies Act of 2006 by which the companies were asked to report on the emerging socio-environmental issues. 

Ireland 

Supporting the EU’s viewpoint in this regard, Ireland also perceives CSR as a voluntary practice by the businesses. The country does not have any legislation on CSR. However, the Credit Institution (Financial Support) Act of 2008 mandates the financial institutions of the country which are supported by the government guarantee scheme to account for their corporate responsibility through the Irish Banking Federation.

East Asia

On a broader outlook it has been perceived that Asia, amongst its other eastern counterparts, has been lagging behind the western countries in defining the approach to (or the concept of) corporate social responsibility and driving the corporate entities to undertake the practices related to CSR. Asia, which continues to accommodate the largest number of poor people, lags behind in various international indices relating to economic inequality, human development and declining quality of life. The increasing social as well as environmental problems in the continent stress upon the businesses to function more responsibly towards their shareholders, stakeholders as well as the community. CSR related provision has started finding its place in the Asian context as the businesses begin to streamline their CSR operations and policies. 

China 

China’s political ecosystem including various ministries as well as its government bodies and the country’s local authorities such as the Environmental Protection Bureaus (EPBs) and CSR Departments play vital roles in furthering the obligations owed towards CSR. While it is better known in the more developed parts of the country (for example Beijing and Shanghai), it is less prominent in the western part of the country. After 2004, the government has been a step forward in bringing key legislations providing for the CSR as an fruitful means to achieve sustainable development and build a harmonious society. In fact, recent years have witnessed the working of the Chinese government towards putting the businesses as well as the civil society under pressure to follow the environmental law as well as responsible business policies. Some key CSR policies of China include – regional improvement of CSR initiatives, proposing a mandatory disclosure system, supporting voluntary services, clarification upon the tax related to environmental protection, targeted poverty reduction etc.

Japan

The traditional ideology on CSR in Japan is termed ‘Sanpo-yoshi’ meaning, a three-way satisfaction relating to benefits for seller, buyer and of the local community. It has been argued that Japan has come late towards realising corporate social responsibility. Moreover, the change has been brought down through the initiatives and demands of the foreign investors, generally pertaining to a more liberal and a shareholder-oriented model of the corporations. 

The Japanese Business Federation (‘Keidanren’) emphasises upon the reporting related to the initiatives towards the CSR as well as towards environmental conservation in order to gain public trust and rapport. This organisation advocates that every corporation has a responsibility to partake in the economic development of the country and to make their existence advantageous. Studies indicate that the Japanese firms perform much better in the environmental aspect in comparison to the firms in other OECD countries. Japanese firms are often acknowledged among the first adopters of environmental policies. However, promising initiatives in the social facets are less clearly developed. In this regard, the corporations have scored less than the European or especially Nordic firms.

America

United States of America (USA)

In the USA, the practice of CSR has been evolving irregularly across industries due to variations in the leadership, perspectives, economic incentives, government regulations and influence of the communities. Although the concept was undertaken as a philanthropic activity by the businesses, the present definitions have broadened its ambit to entail the ‘corporate citizenship’ through CSR by recognizing the importance of other stakeholders. Even at present, the country does not provide for a mandatory obligation for the companies to undertake social and environmental commitment processes. Since there is absence of any regulatory compliance for undertaking CSR initiatives and reporting thereof, the corporate social responsibility in the US is often characterised by voluntary societal involvements by the businesses for their long term sustainability. For example, cause-related marketing, charitable contributions, etc. 

The principal enabling and propelling factor for the US corporations to undertake CSR is the legitimate expectation of the people. In 1971, the Committee for Economic Development of the US brought the concept of social contract between the corporations and the society. As per this theory, the corporates are able to function because of public consent, and thus, they owe a duty to effectively constructively serve the society. As per the social contract, the corporations are duty bound to:

• Supplying jobs and promoting economic growth. 
• Running the business fairly to the employees. 
• Involving themselves in betterment of the community as well as the environment in which they operate.

Brazil

Until the 1960s, the businesses of Brazil hardly acknowledged any social problems, however, after the introduction of the concept of CSR, companies started acknowledging the existing socio-economic problems and owned them by proposing probable solutions. Currently, though there have been initiatives to make the CSR announcement compulsory, the country is still away from a mandatory legislative provision which specifies the definition of CSR or which mandates social responsibility of the corporates. Thus, the concept has been interpreted differently by different stakeholders.

Middle East and Africa

These are the most resourceful regions in terms of petroleum, natural gas, radioactive elements, etc. Their exports to other nations of the world consist of more than half of the total exports. The concept of CSR in these regions has always been between being a philanthropic activity to a responsibly prompted social investment by the corporates. The historical concept of ‘giving’ is the basis for interpretation of the CSR in these regions. Nevertheless, some countries have moved forward towards creating a regulating framework for performing as well as reporting CSR activities, but robust steps must be taken given the high emissions from these regions. 

Egypt 

Historically, Egypt has a powerful culture of giving and thus, the corporate sector has been voluntarily contributing to community development. Even though there have been several political and economic reforms, the country still treats corporate social responsibility as a non-institutionalized concept, rather than as a philanthropic one. Due to the lack of a legislative binding in the corporate milieu of the country, CSR has been subjected to various interpretations and hence, pursued differently by different institutions. 

Nonetheless, based on the suggestions given in the ‘Business Solutions for Human Development Report’ in 2007, the Egyptian Corporate Responsibility Center (ECRC) was established in 2008 which has been working on the principles of the UN-GCN to provide business improvement advisory as well as capacity building training to the private companies so that the overall position to design, apply and monitor sustainable CSR policies can be effectively improved. Nevertheless, there is still the need to reform the CSR policy of the country to make the state as well as non-state actors responsible and harmonised to bring about sustainable changes.

South Africa

In South Africa, the concept of CSR was traditionally understood in terms of corporate social investment (CSI) or a strategic philanthropy in the corporate ecosystem, but CSI was criticised as it seemed as an extension of business strategies without ensuring any social outcome or sustainability. Although there is no CSR legislation in the country binding the corporates to carry out the CSR activities, there has been an addition in the Companies Act 2008 providing for the companies to constitute a social and ethics committee. Moreover, it provides for creation of a CSR board committee responsible for supervising and enacting the CSR policies of the corporation. 

UAE

In the UAE, 2017 was declared as the “year of giving” by the UAE during which 11 initiatives were launched by the Ministry of Economy guiding the companies on CSR initiatives, thereby promoting social responsibility and corporate investments. To incentivize corporates to invest in the development initiatives, the government launched ‘National Corporate Social Responsibility Index’ and ‘Social Responsibility Passport’. Subsequently, in the next year, the CSR law in UAE was enforced requiring the companies to report on CSR activities and financial contributions.  

Australia

In Australia, there is a lack of consensus on a widely accepted definition of CSR; the country has no specified CSR legislation requiring the corporates to perform or report on CSR. The Corporations Act of 2001 does not explicitly mention corporate social responsibility or sustainability. However, it indirectly mentions performing business to be responsible giving due consideration to the welfare of other stakeholders as well.

Even though CSR continues to be open to interpretation in the corporate ecosystem, the country has not been left behind in reporting requirements related to social responsibility investments of the corporates. Community pressure on the corporates continues to increase by requiring them to report on aspects other than the financial bottom line.

Corporate social responsibility (CSR) spending in India in recent years

The data from MCA (released May 2023) indicates that the top three developmental sectors  receiving the CSR funds are education, healthcare, and rural development. Ever since the enactment of the CSR provisions, these sectors have attracted major CSR funds owing to their necessity, possible results on the society as well as their alignment with the country’s SDGs. Analysing the numbers from 2014-15 till 2020-21, it can be deduced that these sectors together comprised nearly 76.6% of the total CSR expenditure. 

The data is based on the filings made by corporates in the MCA-21 registry:-

S. No.	Sector	What all are included?	Funds received (in crores)	Share of total CSR Expenditure
1.	Education	Education, livelihood enhancement projects, special education and vocational skills	47187.68	37%
2.	Health	Health care, poverty, sanitation and Swachh Bharat Kosh	38011.49	30%
3.	Rural development	Rural roads, sanitation, etc.	12,300	9.6%

However, for the overall development of the country, it is essential that the companies incur their CSR expenditure towards all the development sectors.

With respect to the fiscal year 2022-23, the CSR spending made by certain companies across different sectors can be analysed as follows:

S. No.	Company	CSR spending (in crores)
1.	Tata Consulting Services Ltd.	783.00
2.	Tata Services Ltd.	481.00
3.	Infosys Ltd.	391.51
4.	State Bank of India (SBI)	316.76
5.	Wipro Ltd.	215.70
6.	Hindustan Unilever Ltd.	208.32
7.	Tech Mahindra Ltd.	123.70
8.	Asian Paints Ltd.	77.00
9.	Piramal Enterprises Ltd.	20.00
10.	Tata Consumer Products Ltd.	16.24
11.	Tata Power Company Ltd.	4.06
12.	Aditya Birla Money Ltd.	00.56

Is corporate social responsibility (CSR) an ineffective law

While CSR is a good initiative towards the ESG framework, it suffers from several infirmities that hamper its effective implementation in the present arena.

Lack of adequate knowledge

Scholars claim that companies despite having enormous fiscal resources lack adequate knowledge of existing public problems and policy measures. As a result, their CSR efforts are misguided and do not help the public in the long run with sustaining benefits. For example- companies blinded by carrying out their mandated CSR activities might employ contractual workers with extremely low pay and virtually no other benefits. 

Focus on short term projects

Some companies may focus on short-term, one-off projects to fulfil CSR requirements rather than engaging in sustained, impactful initiatives that address long-term societal issues. Many companies tend to concentrate their CSR efforts in areas such as education, healthcare, and sanitation. While these are essential, broader issues like environmental sustainability and social justice may receive less attention.

In fact, companies often face difficulties in identifying and selecting suitable CSR projects that align with both their business values and societal needs. Lack of this kind of strategic alignment affects the overall effectiveness of CSR efforts. Moreover, the absence of a standardised and comprehensive impact measurement framework also makes it challenging to assess the tangible outcomes and effectiveness of CSR initiatives.

Low in Priority

CSR activities carried out by companies often clash with their commercial and other vested interests which are prioritised over serving the society. Furthermore, it is also claimed by scholars that social issues often cannot be solved by money alone and most corporations do not want to look beyond fiscal measures to help the society. 

Incomplete disclosures

As per Section 135 of the Companies Act, 2013, CSR efforts will be equated with the money spent, which should be at least 2 percent of the net profit. However, companies are not very transparent in declaring their CSR income. Companies in the past have fudged figures to meet the mandatory CSR spending. Furthermore, companies that were spending more than 2 percent before the said law came into place, have started spending much less these days. More lately, companies have been engaging in selective CSR tasks that ultimately benefit their brand value and help them prosper rather than activities that genuinely help the society at large. According to some corporations, the mandated 2 percent CSR on net profit is also a way of extracting higher profits illegitimately via a “back door” and forcing them to fill in areas where the government has not acted enough. Furthermore, the government’s action was unilateral and the corporations were not consulted before the government decided to implement this rule.

Targeted entities 

It is important to note that the requirement of abiding by the CSR law is only for entities meeting specific profit criteria. By linking CSR obligations solely to profit levels, there is a risk of overlooking innovative contributions from smaller companies and reinforcing a narrow definition of corporate responsibility. This profit-centric focus may encourage short-term profit maximisation over sustainable business practices, and the exclusion of certain sectors may result in an inequitable distribution of social responsibility.

How can corporate social responsibility (CSR) law be effective

Pursuant to understanding the deficiencies lying in effective implementation of the CSR law, certain ways can be resorted to, in order to fill the gap:-

Utilization of Specialization of companies

Firstly, it is important to effectively utilise the specialisation of the corporations in this regard. CSR should not be simply seen as the spending of fiscal resources, but as the smart spending of CSR resources. For example, a multi-national company engaged in the production of packaged food should provide those below the poverty line with similar assets; telephone companies should set up telecom services in remote areas lacking such services. Section 135 of the Companies Act should be amended to include measures to allow companies to do CSR activities as per their strengths and specialties. 

Nevertheless, it is important to build the capacity and skills of company personnel involved in CSR planning and implementation. This primarily includes understanding the complexities of social issues and effective project management.

Corporate social responsibility (CSR) activities based on expert data

It must be ensured that the CSR activities are based on expert data. Companies should not blindly spend fiscal resources but rely on the data and suggestions of research institutes so that their efforts result in actual eradication of pre-existing social problems. Therefore, companies should collaborate with social organisations and research institutes.

Increased collaboration 

Companies should collaborate with the people on the grassroots level- those who are supposed to receive their CSR aid. This will help them realise what people actually need and what their actual problems are and accordingly plan their CSR aid to help a number of people with greater efficiency. In fact, the companies must also compulsorily collaborate with non-government institutions that have acted in a particular field for at least three years. This will help them utilise their fiscal resources better as dedicated NGOs will guide them in effectively implementing their aid programmes.

Remedies if corporate social responsibility (CSR) is not followed

In this regard, the role of shareholders is paramount. Shareholders are often referred to as the owners of a company. They hold stock(s) in the company and possess a right to vote in matters pertaining to the company. When the company does well and makes profits, it is very well reflected in the form of dividends received by the shareholders. However, the role of shareholders is much more than just receiving profits. The company law mandates the presence and voting of the shareholders in certain important matters because if the decision-making is left to the key managerial personnel (KMPs) proposing the agenda, there will be an element of bias and ultimately, no objection can be raised even if the proposed agenda or change is unfavourable to the interests of the company. Since environmental protection is a collective action, shareholders must give their full attention while any idea is being proposed and analyse the short and long-term environmental effects of the same.

Nevertheless, the shareholders can resort to the remedies mentioned in the Companies Act, 2013 if they wish to bring about a desired change in the operations of a company that would possibly result in a better decision ensuring greater environmental benefits: –

1. To this end, the shareholders have the right to invoke Section 241 of the 2013 Act when they are aggrieved by oppression or mismanagement of the company. Denial of voting rights to a shareholder is an example of oppression. On the other hand, mismanagement occurs when the company is managed in a manner prejudicial to the public interest.
2. The Act also provides for a ‘class action suit’ under Section 245 of the 2013 Act for the minority shareholders representing a common interest. It can be invoked whenever there is any prejudicial or abusive conduct committed by the Board of Directors (BOD) or the KMPs.
3. Sometimes, even one shareholder with a minority shareholding, can bring a cause of action to sue the BOD on behalf of the company itself. This is called a ‘derivative action’ which is not incorporated per se in the Act but the courts in India as well as in other countries have recognized it as a claim. In fact, in a recent case of Valluvar Kuzhumam Pvt. Ltd. v. APC Drilling & Construction Pvt. Ltd, (2022) decided by the Madras High Court, a derivative action was held to be included in Section 241 of the 2013 Act.

In the recent times, this shareholder activism, taken into consideration with respect to environment-related proposals submitted by the shareholders to their company, has actually led the companies to take steps towards the same. For instance, on an average, the extent of climate-risk disclosure by the companies has increased by approximately 4.6% for each such submitted environment-related proposal. Thus, shareholders play a big role in bringing about this kind of desired change in the company’s functioning.

Conclusion

Development is indispensable for any society, but it should not be entertained at the cost of the environment. The present law on corporate governance addresses environmental concerns in many ways. However, no law can ever be effective unless the people sitting in the Board room for decision-making take the environmental concerns seriously. Therefore, an understanding of related future risks and opportunities is necessary. Finally, ways that can harmonise corporate interests along with the protection of the environment, such as optimal utilisation of natural assets, taxation (rebate) policies or incentivization of companies, carbon or emissions trading, etc., will be of more help to address this concern and would provide a win-win situation for the companies as well as the government in fulfilling the ultimate objective of equitable and sustainable development. Thus, providing for robust CSR laws in the present times is crucial as it not only benefits the society and the environment but also positions companies and, by extension, nations as global leaders in sustainable development.

Frequently Asked Questions (FAQs)

How can one define CSR?

Generally, corporate social responsibility can be understood as the way through which a company achieves a balance of economic, environmental and social imperatives, while addressing the expectations of its shareholders and various other stakeholders. 

Which section of the Indian Companies Act deals with corporate social responsibility (CSR)?

Section 135 of the Companies Act, 2013 deals with the CSR. Further, the permitted activities have been mentioned in Schedule VII attached to the Act. 

How can a company calculate its average net profit?

The average net profit of a company can be calculated by virtue of Section 198 of the Companies Act, 2013, as discussed above. 

Is it necessary to comply with the CSR obligations?

Yes. As per the Companies Act, 2013, every company that has a net worth equal to or more than Rs. 500 crore, or a turnover equal to or more than Rs. 1000 crore, or a net profit equal to or more than Rs. 5 crore during any financial year, is required to contribute at least 2% of the company’s average net profits made during the three immediately preceding financial years.

Does ESG mean the same as CSR?

No. While the environment, social and governance (ESG) is a broader concept of corporate governance, the concept of corporate social responsibility (CSR) can be said to be a sub-part of the ESG obligations of the corporations. 

Is there any liability on the company and directors for not abiding the CSR obligations?

Section 135(7) of the 2013 Act provides for the penal action if the company fails to comply with the CSR provision. It states in case there is default by a company in complying with the provisions of sub-section (5) or sub-section (6) of Section 135, such company shall be imposed with a penalty of twice the amount that is required to be transferred by the company in the Fund specified in Schedule VII or in the Unspent Corporate Social Responsibility Account (Unspent CSR Account), as the case may be, or Rs 1 crore, whichever is less. Moreover, it provides that the officer-in-default shall also be liable to a penalty of one-tenth of the amount that is required to be transferred by the company to such Fund as specified in Schedule VII, or the Unspent Corporate Social Responsibility Account (Unspent CSR Account), as the case may be, or Rs 2 lakh, whichever is less.

What role can the shareholders play to bring the company’s focus towards its environmental-related concerns?

Yes. The Companies Act, 2013 provides for individual as well as class action to be undertaken by the shareholders to bring about any positive change in the company’s affairs. The related provisions are Section 241 and 245 respectively. 

How can Indian businesses contribute towards India’s ambitious commitments at the international level?

Indian businesses can contribute towards achieving the national targets by abiding the obligations such as CSR, honest annual reporting by the Board and taking appropriate measures against any discrepancies in fulfilling the environmental social and governance framework.  

References

• https://hbr.org/2021/04/shareholders-are-pressing-for-climate-risk-disclosures-thats-good-for-everyone  
• The Triple Bottom Line: What It Is & Why It’s Important  
• https://www.oecd.org/daf/ca/Corporate-Governance-Principles-ENG.pdf 
• https://zapier.com/blog/corporate-social-responsibility-examples/ 
• https://cleartax.in/s/corporate-social-responsibility 
• https://indiankanoon.org/doc/165550376/ 
• https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-the-history-of-esg/ 
• https://www.mca.gov.in/bin/dms/getdocument?mds=U%252BdFbuCbB5XrAg1p1P9g1A%253D%253D&type=open
• https://indiacsr.in/india-csr-spending-report-2022-23/#google_vignette 
• https://files.caclub.in/wp-content/uploads/mca-notification-dt-22-01-2021-companies-csr-policy-amendment-rules-2021.pdf 
• https://www.transparenthands.org/corporate-social-responsibility-csr-in-different-countries/ 
• https://thecsrjournal.in/csr-policies-around-the-world/ 
• https://www.egyankosh.ac.in/bitstream/123456789/74141/1/Unit-1.pdf 
• Analysing recent amendments to corporate social responsibility legislation – Lexology