This article is written by Aditi Aggarwal, a student of Symbiosis Law School, NOIDA and it aims to explain CSR provisions in India and other countries along with their comparative analysis.
Companies take their resources from society to run their business successfully and thus, these companies morally have a duty to give back something to the society beyond their commitments to investors or stockholders. This is the basic idea behind ‘Corporate Social Responsibility’ (CSR). It can also be termed as ‘enlightened self-interest’. CSR includes corporations being economically responsible, embracing fair trade, improving labor practices, giving back to the community, mitigating environmental damage, and increasing employee satisfaction.
If we look and analyze the geographical evolution of this concept, we would find that there is no consensus on what actually constitutes CSR among businesses in different parts of the world, nor is there is a uniformity in the timeline.This is due to the fact that different countries have target different sectors such as healthcare, poverty, environment etc. In fact, while many countries show a reflection of this concept, some countries do not even support the idea of CSR.
CSR regulations in India
Traditionally, CSR in India has been seen as a philanthropic activity but after the introduction of Section 135 of the Companies Act 2013, India became the first country to have statutorily mandated CSR for specified companies. Section 135 has nine subsections that regulate the CSR regime in India.
The subsections are explained as follows:
Eligibility for undertaking CSR
According to subsection 1, if a company fulfills any of the below-mentioned conditions in its last preceding ‘financial year’, it shall constitute a CSR Committee:
- The net worth of a company being five hundred crore rupees or more.
- Turnover of a company being one thousand crore rupees or more.
- The net profit of the company being five crore rupees or more.
The Committee that would be formed must have three or more directors including one independent director. There is a provision attached to this subsection according to which if under sub-section (4) of Section 149, it is not required by a company to appoint an independent director, then the company must have two or more directors in the CSR Committee.
Composition of a CSR Committee
Sub-section 2 states that the composition of a CSR Committee must be disclosed by the board’s report which is given under Section 134(3).
Duties of a CSR Committee
Sub-section 3 states the duties of a CSR Committee which are as follows:
- Formulating and recommending a CSR policy to the Board and that should include activities that have to be taken up by the company. The list of activities that a company can take as part of CSR policy is given under Schedule VII.
- Monitoring the CSR policy of the company in a continuous manner i.e. from time to time.
- Recommending the amount of expenditure which has to be spent during the undertaking of activities in above two points has to be recommended.
Duties of the Board
Sub-section 4 states the duties of a board of the company which is eligible for undertaking CSR under sub-section 1. Duties are as follows:
- Taking into account the CSR Committee’s recommendations. After this, the board in its report has a duty of disclosing the contents of such a policy along with placing it on the company’s website, if there is any.
- Ensuring that the activities which are included under the company’s CSR policy are undertaken by the company.
Further, sub-section 5 mentions another duty of the board:
- Ensuring that the company is spending at least two percent of average net profits of its CSR policy made during such immediately preceding financial years in every financial year.
Subsection 9 states that where the amount does not exceed fifty lakh rupees which were to be spent by a company under sub-section (5), then the requirement for forming a CSR Committee (under subsection 1) would not be applicable. Further, those functions of the Committee provided under Section 135 have to be discharged by the Board of Directors (BOD) of the company.
Treatment of an unspent CSR amount
There are some provisos attached to subsection 5 which are as follows:
- The company, for spending the amount earmarked for CSR activities has to compulsorily give preference to the local area and the areas around where the company operates.
- If the company fails to spend the amount specified for CSR, then the board has to compulsorily specify reasons for not doing that in the report (made under clause (o) of Section 134(3)) and the unspent amount needs to be transferred to a fund specified in Schedule VII. This is to be done within six months of the expiry of the financial year. The reasons along with transfer of amount to fund have to be done unless the unspent amount is related to an ongoing project which is referred to under subsection 6.
- If an amount is spent more than the requirements which are provided under this subsection by the company, then such a company may set off the excess amount against the requirement to spend under this subsection for such a number of succeeding financial years and in a manner that may be prescribed.
According to subsection 6 of Section 135, the amount which remains unspent under subsection 5 concerning any ongoing project, has to be transferred to a special account within thirty days from the end of the financial year. The special account has to be opened by the company in pursuance of an obligation towards the CSR Policy within three financial years from the date of such transfer.
If a company fails to do so, the company has to transfer the amount to a Fund specified in Schedule VII. This has to be done within thirty days starting from the date of completion of the third financial year.
Subsection 7 states that if a company fails to comply with the provisions under sub-section 5 or 6, such a company shall be liable to a penalty. The penalty is twice the amount which was to be transferred to the Fund specified under Schedule VII or to the Unspent Corporate Social Responsibility Account, as applicable, or one crore rupees, whichever is less.
Further, it is mentioned that company’s officers who made the default would be compulsorily liable to a penalty of one-tenth of the amount that was to be transferred to such Fund specified in Schedule VII of the Unspent Corporate Social Responsibility Account, as applicable or two lakh rupees, whichever is less.
Power of the Central Government
Subsection 8 states that the Central Government may give special or general directions to a company or class of companies as it considers necessary. This is to ensure compliance with provisions of Section 135. It is further mentioned that such a company or class of companies have to comply with such directions.
At last, the explanation attached to Section 135 states that ‘net profit’ would have to be compulsorily calculated according to the provisions under Section 198 and that such profit shall not include sums that may be prescribed.
Activities that can be undertaken as a part of CSR
Activities that can be undertaken as a part of CSR are mentioned under Schedule VII of the Companies Act 2013. These activities (as before amendment) were related to the health sector, sanitation and drinking sector, promoting education, gender equality, environment, eradication of poverty, hunger and malnutrition, national heritage, art and culture, sports, contribution to any fund set up by the central government, the welfare of minority communities, technology, rural development, etc.
The notification issued by the Ministry of Corporate Affairs on 23 March 2020 seeks to include funds spent on various activities related to COVID-19 covered under the existing items under Schedule VII of the Companies Act, 2013. This has been done because the World Health Organization declared Coronavirus as a pandemic and subsequently the Government of India decided to treat it as a notified disaster.
The other notification was related to incubators. Under the earlier provision, only technology business incubators as defined by the Department of Science and Technology which were located within academic institutes were eligible to receive funds under CSR. The new notification permitted all incubators that are supported by any state or central government or agency to be eligible to receive funds under CSR.
Examples of CSR in India
In India, some successful companies undertake CSR projects on a large scale. For example, The Tata Group, an Indian multinational conglomerate manufacturer of airplanes, automobiles, and other products works for bringing a significant improvement in the community, alleviating poverty, helping people through various self-help groups, and carrying out many projects in the field of education. Another example can be Ultratech Cement, the biggest cement company in India which is involved in a lot of social work with a focus on healthcare and family welfare programs, infrastructure, environment, education, sustainable livelihood, and social welfare across 407 villages.
Countries that have made CSR a legal mandate
‘Mandatory CSR’ can be defined as a general legal duty of acting in a responsible social manner. That legal duty can be created under either corporate law or as a part of the fiduciary duty of directors.
Even though CSR is voluntary and beyond compliance with the law. Yet, a few countries such as China, UK, South Africa, and Indonesia have taken a progressive step and made CSR a legal mandate. Their corporate statutes expressly state that companies shall engage in CSR activities.
China was among the first countries in the world to mention the phrase ‘CSR’ in its corporate statute. Company Law of the People’s Republic of China 2006 states that a company shall undertake “social responsibility” in doing the business.
According to the experience of China regarding CSR, it is less a corporate behavior standard and more of a judicial review standard. It is also evidenced that interpretation of CSR places high demands on the judiciary.
Limited Liability Company Act 2007 of Indonesia requires explicitly that the companies in the sector of natural resources or any connection with such resources are under an obligation of implementing environmental and social responsibility.
This law of August 2007 made Indonesia the first nation in the world to mandate companies in the extractive and energy industries to disclose their CSR activities. Ten years have passed since the CSR mandate and Indonesia has yet to issue a related implementing regulation, hence making it unenforceable.
The UK Companies Act, 2006 takes the approach of making CSR a legal duty as a part of the fiduciary duty of directors. The law requires directors to have regard to two things, one is to long-term programs and another is to various factors of CSR including the interests of suppliers, environment, consumers, and employees. It broadly replaced the old duty to act in the company’s best interests.
Mandatory CSR can be implemented by a company’s board of directors where the interests of the shareholders can be served easily. Corporate Law 2008 of South Africa requires the creation of a CSR board committee that is responsible for supervising and enacting the company’s CSR policies. In addition to this, a new report was issued in 2010 which focuses on the issues of risk and sustainability.
Comparison of CSR regulations in India with that of other countries
CSR is not just a legal duty, it can also be defined as a procedure for assessing the impact of an organization on society and thus, evaluating its responsibilities. The procedure begins with an assessment of the following aspects of each business:
Companies (CSR Policy) Amendment Rules 2021 bring a critical change in connection with the scope of expenditure of CSR funds on employees. The 2014 Rules prohibited a company from investing the amount of CSR in activities that are beneficial only to the employees of the company and their families. The Amendment Rules appear to prohibit any benefit being received by the employees of the company from the CSR expenditure.
After analyzing CSR laws in India, it is clear that the country mixes two factors under this regime: traditional philanthropy and strategic projects. CSR in India operates at places where there is a lack of resources such as toilets and schools. A community’s need is a major factor under the CSR regime on which India broadly places a top priority. In contrast to this, CSR in wealthier or major countries like Canada and Australia utilizes CSR funding mostly to cultural institutions and such countries prefer implementing green business practices. CSR is approached with the intrinsic skills of the business in such countries.
In conclusion, two of the biggest differences between India’s approach and other countries’ approach towards CSR is as follows:
- The government of India mandates CSR spending while the government of most of the other countries do not mandate it.
- CSR in India is understood in a way that allows businesses to mitigate the negative impact its activities have caused on the local communities which means that social wellbeing and business success are framed and perceived as antithetical in India. While in other countries like Brazil, U.S. or the European Union, the two are seen as mutually beneficial.
Implementation and success of CSR globally
For the universal acceptance of undertaking CSR, the United Nations (UN) has played a major and significant role. It promoted the “Global Compact” under which many countries are signatories. This global compact is the world’s largest initiative concerning corporate sustainability which binds the signatories to universally accepted principles of social responsibility which the businesses in those countries ought to follow and which are tracked for implementation.
Mandating certain activities as a part of CSR programme : need of the hour
Ghana is a country where there is no comprehensive CSR policy or law. It is an emerging economy where the financial backdrop was faced recently. Research suggests that Ghana should focus mostly on the assessment of aspects of stakeholders in rolling out the CSR program. It is further researched that business organizations are pressured to report on sustainability activities due to the stakeholder and institutional influence.
The research also suggests that multinationals in Ghana are guided by legal prescriptions for undertaking CSR programs while their indigenous counterparts are mostly guided by social and discretionary considerations. However, firms while carrying out CSR, organizations also become mindful of their impression and reputation before the general public. What influences CSR in the West may differ from Africa and developing countries.
In advanced countries, ethical issues are highly rated as a part of CSR. An MNC may desire to score high and be more ethical when it comes to CSR international ratings but that may not be the need and priority of countries within which those MNCs operate. Thus, these multinationals need to adapt their CSR programs to suit the needs and settings of their host countries.
Multinationals have their interests like giving priority to global consistency through managing international standards, upkeeping the interests and values of headquarters and home country while local representatives have interests like having local responsiveness by managing host country interests, laws, and values. This conflict can only be managed by an organized development of a framework. Thus, the mandate of undertaking certain activities as a part of CSR is an urgent necessity for addressing issues like poverty and underdevelopment in the least developed and emerging economies.
The concept of CSR is nothing but looking beyond profits. Though India is the first country in the world to have a mandatory statutory compliance requirement on CSR spending, there are still many challenges ahead that would be addressed by the working together of government, corporations, and civil society. The same is the condition with the other countries where a proper framework of CSR is needed and implementation needs to be done in a proper manner.
Undoubtedly, consumers would be more willing to purchase the product or service of a company if that company shows a commitment to address economic, environmental, and social issues. Thus, apart from creating appealing and conscious advertisements, corporations must enlist cooperation and support of the media in spreading awareness about CSR and its impact on the society to the people at large.
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