Corporate Social Responsibility

This article is written by Shraileen Kaur, a student at ICFAI University, Dehradun. In this article, the author discusses corporate social responsibility, its definitions, types, significance, advantages, disadvantages, and its position in various nations, including India. 

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

Companies are morally obligated to contribute back to society in addition to their obligations to consumers or shareholders since they rely on societal assets to operate efficiently. Another name for corporate social responsibility is ‘enlightened self-interest’. Corporate social responsibility includes businesses being socially and environmentally conscious, supporting fair trade, enhancing labour standards, serving communities, reducing ecological harm, and boosting employee engagement.

The idea of corporate social responsibility operates on the principle of ‘quid pro quo’ – something in exchange for something. Corporate social responsibility enables businesses to participate in a variety of socially responsible initiatives.

Corporate social responsibility has grown as an important pillar in India over the past few years on both a legal and socioeconomic level. Corporate social responsibility initiatives in India and other countries have produced several durable results. Despite this, many people see it as a liability and a deterrent.

Even though corporate objectives have expanded beyond sales and profits, many people disagree with the notion that corporate social responsibility mostly has a negative impact on small firms.

Over the decades, the idea of corporate social responsibility has experienced numerous transformations. The capacity to significantly influence society and subsequently enhance the operation of a business and the economy is highly valued. Every company has a responsibility that goes beyond turning a profit.

Definitions of corporate social responsibility

Numerous scholars, organisations, and agencies have defined corporate social responsibility. Some of these definitions are as follows – 

Definition by the United Nations Industrial Development Organisation

According to the United Nations Industrial Development Organisation, Corporate Social Responsibility is a concept of management “whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.” As per the organisation, corporate social responsibility is the process by which a business maintains an equilibrium between its financial, ecological, and ethical obligations. They termed this process a ‘triple bottom line’ approach. The essence of the process of corporate social responsibility is that, while maintaining this equilibrium, the corporation also addresses the expectations and ambitions of different stockholders as well as stakeholders. 

Definition by Kotler and Lee who are distinguished experts in the field of marketing and sales

As per Kotler and Lee, corporate social responsibility is “an obligation to improve community well-being through business practices, discretionary and contribution of corporate resources. To support social causes and to fulfil commitments towards corporate social responsibility, corporations undertake various corporate social initiatives such as eradicating hunger, malnutrition, promoting education, etc.”

Definition by the World Business Council for Sustainable Development

As per the World Business Council for Sustainable Development – 

“Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”.

Definition by the European Union as provided in 2004

According to the European Union, Corporate Social Responsibility refers to –

‘‘a concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment, this is done by integrating social and environmental concerns in their business operations and their interaction with their stakeholders on a voluntary basis.”

Types of corporate social responsibility 

Among numerous types of corporate social responsibility, there are four major types of corporate social responsibility – 

Environmental corporate social responsibility

The primary goal of this kind of corporate social responsibility is to lessen the negative consequences that business operations have on the environment. Achieving a sustainable production process includes making efforts like adopting eco-friendly equipment and other procedures that cause little or no harm to the environment. In order to reduce the damage resulting from the use of carbon fuels, it also includes encouraging the use of non-renewable sources of energy.

Corporate social responsibility concerning community welfare 

Typically, businesses that promote community welfare work together with non-profit institutions. The goal is to provide funding for these organizations so they can carry out specific duties and initiatives aimed at raising community members’ socio-economic status. Businesses should also ensure financial accountability. They ought to pay their taxes on time and contribute to the community. This guarantees the health of the business and the economic ecosystem.

Human resource corporate social responsibility

Every individual working in the corporation is a resource for the business. Businesses must give priority to their personnel’s wellbeing and personal growth. Businesses can achieve this by compensating their workers with higher salaries, larger incentive schemes, liberal maternity and paternity policies, etc. Employee retention and morale are increased by businesses that use ethical labour practices.

Philanthropic corporate social responsibility

Corporations that fall under this category provide money to people in need and organisations in an effort to raise their quality of living and strengthen their financial situation. The majority of businesses adopt this form of corporate social responsibility. Most of the time, businesses give monetary assistance directly, but occasionally they also collaborate with a charitable organisation.

Significance of corporate social responsibility

In today’s scenario, the significance of corporate social responsibility is making great progress. It guarantees that, in the long term, social and economic operations in modern capitalist communities are sustainable. The significance of corporate social responsibility is illustrated below- 

Increased brand value of the corporation

It is a well-known fact that a company that engages in good business conduct and numerous corporate social responsibility programmes can gain popularity among the public and increase customer loyalty. The company’s goods and services, as well as its corporate social responsibility initiatives, gain the community’s respect and loyalty.

Revenue and consumer network growth

Organisations that indulge in meaningful initiatives in addition to their usual business operations are seen optimistically by both current and prospective consumers. Additionally, this results in a rise in revenues as consumers are more likely to buy from a company that they believe has indulged in ethical business conduct.

An improvement in staff loyalty and involvement

A company’s corporate social responsibility actions aid in developing a positive public image. The employees prefer working at these companies. Additionally, employees become more empathetic and devoted to the organisation. An increased sense of fulfilment among the employees further leads to better employee retention.

Removal of poverty

The business industry has the necessary skills and expertise to guarantee that the greatest impact can be achieved at the lowest possible cost. Despite numerous government initiatives to help the poor, the disparity between the rich and the poor continues to be immense. Through their corporate social responsibility initiatives, businesses can support communities at the ground level and contribute to the reduction of poverty.

Competitive edge over rival corporations who do not follow the guidelines

Companies that participate in corporate social responsibility are in a better position than their rivals who do not. For instance, nowadays, consumers opt to purchase environmentally friendly goods, which increases the sales and revenue of the business that makes such goods by adhering to the guidelines of corporate social responsibility.

Positive impacts of corporate social responsibility

Decreased cost of recruiting new employees

A business must ensure that all of its employees are treated fairly. A company’s treatment of its staff gives a lot of insight into how it might treat the public at large. If employees are treated well, they become active members of society and serve as brand advocates for the business. Employees who work for a corporation need to feel valued and nurtured in their respective employment. The employees’ satisfaction is raised as a result. These employees experience a sense of togetherness and a certain level of compassion in their employment with the company. Positive actions taken by the company can motivate employees. As a result, there is an enhancement in staff retention, which lowers the expense of new hiring and training.

Optimised public perception

In the modern world, it is crucial to demonstrate your accomplishments; otherwise, they do not count. Companies must demonstrate their corporate social responsibility efforts in the digital age. As a result, the business receives recognition for its efforts and better participation from the local community. Customers would feel good about purchasing goods or services from a particular brand that benefits society as a whole.

Increase in financial contributions

Companies that consistently participate in corporate social responsibility initiatives obtain support from a variety of social organisations. Due to its active participation, the corporation will be recognized, which greatly enhances its reputation and opens up new commercial potential. As a result, other corporations would devote their resources more to such businesses than to businesses that don’t participate in corporate social responsibility activities.

Issuance of social licence

A company’s operation depends heavily on a variety of factors, including sustainable machinery, international investment, and ethical labour standards. But in modern times, the entire community is now a significant shareholder. A company’s license is valid from both a legal and ethical standpoint. However, companies that participate in corporate social responsibility initiatives also win the community’s love and credibility. They have a ‘social licence’ that they obtain as a result of their efforts for society. This is often referred to as the brand’s ‘social goodwill’.

Better customer retention

Corporate social responsibility-focused businesses enjoy better consumer relationships and even gain their trust. Customers prefer to associate with businesses that are socially conscious. Companies that actively participate in these initiatives and have an image of being responsible corporate members are more likely to attract customers. Customers are willing to pay more for the company’s goods and services in these circumstances if they feel that it is actually making an attempt.

Apart from these positive impacts, increased sales and profitability, better decision-making procedures, and the development of productive human assets are all additional positive impacts of corporate social responsibility.

Negative impacts of corporate social responsibility

Increased administrative burden and enforcement fees

The main drawback of corporate social responsibility is that small companies may find it difficult to afford the expenses associated with complying with the norms of corporate social responsibility. Small organisations find it difficult to allocate a budget for corporate social responsibility, whereas for large organisations, allocating resources for corporate social responsibility is a cakewalk. It becomes necessary to incur more expenses to establish a different operating model than usual, which is challenging for organisations. The expense of staff training, creating specific programmes for societal improvement, and maintaining environmental safety led to increased costs which are ultimately borne by consumers through increased prices of goods and services.

Conflicts between different business goals

It is a well-known truth that all commercial organisations have profit as their main goal. They produce a range of goods and services for the clients with the sole intention of profit maximisation. The idea of corporate social responsibility may be a barrier when making certain choices. The organisation must find the right balance between its own needs and the objectives of the general public. This can also result in a disagreement between different stakeholders, which eventually results in a defeat for these organisations as ‘consumer is the king’.

The ‘greenwashing’ impact

Today’s consumers are more watchful than ever before. They are cognizant of the strategies employed by many corporations, sometimes known as ‘greenwashing’. The term is used to characterise corporate activities that provide the impression of being environmentally friendly but do not alter how the organisation runs its operations. It is well known that corporate social responsibility initiatives carried out in a restricted environment provide very little profit. However, if the corporation does it in a public area, it may come under closer inspection. 

Therefore, if the firm makes a mistake or shows even the slightest sign of acting irresponsibly, it will undoubtedly draw the ire of the general public. Therefore, there is a significant chance the organisation will experience more negative effects than positive ones.

Additionally, if a company is operating ethically and responsibly toward society, it is required to inform the general public of the flaws in its products. Due to their sharing of this information, the company is more vulnerable to harm to its market standing and brand impression.

The disadvantage over other competitors

The long-term effects of corporate social responsibility can be detrimental to businesses. Incorporating corporate social responsibility practices into business operations may result in an increase in operational costs and other additional expenses. Customers and other stakeholders in the organisation must face the weight of this cascading effect. Customers will be less likely to buy the goods from such a business as a result of a rise in selling prices. They will purchase goods that enable them to spend less money on something of equal quality. 

As compared to businesses that do not follow corporate social responsibility norms, this could put an organisation that practices corporate social responsibility in a disadvantageous position.

Critical challenges and issues of corporate social responsibility

Absence of community support for carrying out corporate social responsibility activities  

The local community does not show much enthusiasm for supporting corporate social responsibility initiatives. As no real attempts have been made to raise the visibility of corporate social responsibility and build trust in the local population about such activities, this is primarily due to the fact that there is very little to no information about corporate social responsibility among the local people. The situation is made worse by a gap in information exchange between the corporation and the local community.

Necessity of developing local infrastructure 

There is a major lack of competent, trained professionals that can assist in the corporate social responsibility initiatives carried out by businesses. Hence, it is important to strengthen the infrastructure of local non-profit organisations. This severely restricts the applicability of corporate social responsibility programmes and makes it difficult for them to scale up.

Concerns with transparency

One of the main problems identified by several industry experts is a lack of transparency. The corporations claim that there is an ambiguity on the side of the local authorities and agencies since they do not make sufficient efforts to provide information about their programmes, audit concerns, performance evaluations, and fund utilisation.

This apparent lack of transparency has a detrimental effect on the process of facilitating communication between businesses and local organisations, which is essential to the achievement of any localised corporate social responsibility programme.

The lack of non-governmental organisations

It is also claimed that there is a lack of coherent non-governmental organisations in remote and less populated areas that can evaluate and highlight the specific needs of the population and collaborate with businesses to secure the effective rollout of corporate social responsibility activities. Increasing the ability of local communities to carry out reform measures at the local level further strengthens the reason for partnering with local populations.

Publicity parameter

The mainstream media’s role in promoting fruitful corporate social responsibility initiatives is appreciated since it conveys positive messages and educates the native population about several corporate social responsibility programs that businesses are currently doing. Many non-profit groups participate in event-based programs with the perceived impact of increasing awareness and branding, often losing out on effective grassroots actions in the meantime.

Limited discussions on corporate social responsibility initiatives

Non-governmental organisations and government organisations have limited discussions and debates on the corporate social responsibility initiatives of businesses, frequently categorising corporate social responsibility projects as being more donor-driven than locally focused. They struggle to decide if they should engage in such pursuits in the medium and long term.

Lack of clearly defined corporate social responsibility guidelines

The corporate social responsibility efforts of businesses lack clear-cut statutory requirements or strategic directions to provide a specific pathway. According to a report by the High-Level Committee on Corporate Social Responsibility, the scope of a company’s corporate social responsibility initiatives should be determined by the size and nature of its industry. In other words, a company’s corporate social responsibility program grows in scope as it becomes larger.

Lack of agreement on corporate social responsibility project implementation

There isn’t much agreement on corporate social responsibility programs among local agencies. Corporate houses frequently concentrate their efforts in the regions where they are operating. Instead of creating collaborative approaches to challenges faced, this encourages competition among local implementing agencies. This issue makes it more difficult for the organisation to periodically evaluate the impact of its activities.

Overview of corporate social responsibility in India

Corporate social responsibility has been a part of the Indian societal structure since its inception. It is an extremely old concept. Monarchs, landowners, and businesses all embraced the idea of being socially responsible in the ancient period, and they placed a high emphasis on it. The saying “The more you give, the more you receive” is recognized by everyone. Only the unified efforts of society can enhance and accomplish the long-term sustainable growth of each individual and the community at large.

Primarily, corporate social responsibility in India has been viewed as a philanthropic activity. Section 135 governs India’s corporate social responsibility framework. In contrast to other nations that merely provide guidelines and recommendations, India has a statutory obligation on corporate social responsibility spending. 

The Companies Act, 2013 incorporates the idea of corporate social responsibility into Section 135. According to Section 135 of the Companies Act of 2013, 

“Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a corporate social responsibility committee of the board consisting of three or more directors, out of which at least one director shall be an independent director.”

Such businesses are required to contribute a minimum of 2% of their profits to corporate social responsibility. With the implementation of Section 135 of the Companies Act 2013, India became the first nation to have a statute that formally mandates corporate social responsibility for certain corporations. 

Additionally, Schedule VII of the Companies Act, 2013 lists a broad range of tasks that firms in the country may carry out. 

The word ‘corporate social responsibility’ is defined in the Companies (Corporate Social Responsibility Policy) Rules under Rule 2(d). It has a broad meaning to the term ‘corporate social responsibility’. The definition is advantageous to businesses because it gives them freedom by allowing them to select the best corporate social responsibility engagements that adhere to the established guidelines. The required actions include things like guaranteeing a positive impact on the environment, reducing inequality and malnutrition, advancing gender equality and literacy, etc. In addition, Rule 8 of the Corporate Social Responsibility Policy Rules, 2014 mandates that businesses submit an annual corporate social responsibility report on their respective sites.

History of corporate social responsibility in India

The history of corporate social responsibility is most exhaustive in India. The idea has been around for more than a century. Social inclusion, compassionate employee interactions, and environmentally accountable manufacturing are some of the stages through which corporate social responsibility in India has developed.

The first phase of corporate social responsibility (1850 to 1914)

Compassion and generosity are the driving forces behind this corporate social responsibility phase. The concept of ‘corporate social responsibility’, which was only developed in the 20th century, did not exist at that time. Hence, it was inspired by family values, customs, history, religion, as well as industrialization. The very first stage of corporate social responsibility throughout India is very well recognized for its charitable character. Businessmen invested their resources for the betterment of society by building institutions, colleges, other public facilities, and religious establishments. Businessmen would open their palaces to the hungry and needy during times of hunger, drought, and other natural disasters. The way that corporate social responsibility was approached changed significantly when the colonial period began.

But the contributions—whether monetary or otherwise—were paid for out of personal funds, neither of which belonged to the equity holders nor were vital to the functioning of the company.

The industrialists of the 19th century tended to prioritise socioeconomic concerns throughout this period. Philanthropy was motivated by caste divisions and political agendas, not only humanistic or religious ones. Charity and philanthropy, the very first methods of corporate social responsibility, continue to have an impact on corporate social responsibility practices today, particularly in local communities.

The second phase of corporate social responsibility (1910 to 1960) 

This phase is associated with India’s social development. The second phase took place during the Indian Freedom Struggle. Rich merchants and businessmen were under an obligation to contribute to strengthening the country and its people after Mahatma Gandhi pushed them to give their resources to the poor and oppressed members of society. Gandhi’s trusteeship philosophy, which promoted socioeconomic development, had a significant impact in the second phase. Gandhi referred to businesses and sectors as ‘temples of modern India’.

 Mahatma Gandhi, in his theory of trusteeship, stated that – 

“I desire to end capitalism almost, if not quite, as much as the most advanced socialist. But our methods differ. My theory of trusteeship is no make-shift, certainly no camouflage. I am confident that it will survive all other theories.” 

He persuaded people in business to create trusts for universities, research centres, and training facilities. These trusts also participated in social reform initiatives like women’s emancipation, untouchability abolition, agricultural production, and literacy. The corporate leaders largely matched Gandhi’s reform initiatives with the initiatives of their trusts.

The third phase of corporate social responsibility (1950 to 1990)

The third phase was dominated by the ‘mixed economy’ model and was notable for the establishment of public sector undertakings to achieve a fairer distribution of wealth in India, which resulted in a reduction in the contribution of private industry to India’s advancement. This period was referred to as the ‘age of command and control’ due to the severe restrictions. Corporate social responsibility during this time focused on the introduction of labour laws and environmental legislation in a newly independent India.

The transition from corporate self-regulation to severe industrial licensing and taxes, legal capital issues, loans, imports, resource allocation, price setting, the concentration of economic power, growing monopolies, and public regulation of company activities are other features of this phase. Since success rates of public sector units were low, the private sector expanded and began taking a more active role in socio-economic development. During one of the national conferences on corporate social responsibility held in 1965, academics, lawmakers, and businessmen placed a strong focus on stakeholder interactions, social accountability, and operational transparency. Owners, management, and other business associated individuals and groups are responsible for corporate social responsibility under the ‘mixed economy paradigm’. In this context, corporate social responsibility mostly manifests itself as the legal control over company operations and the support of community engagement.

The fourth phase of corporate social responsibility (1980 onwards)

As a result of the obligation of the organisations to owners, managers, other stakeholders, and the general public, corporate social responsibility is ambiguous in today’s globalised world. The fourth phase is marked by new and innovative ways to help the poor and those in need, as well as a focus on building a company’s brand. It also includes certain conventional elements. In the last stage, corporate social responsibility took on a distinct personality.

With a relatively flexible licensing system and LPG reforms (Liberalisation, Privatisation, and Globalisation), India experienced tremendous economic growth that has continued till today. 

The increasing profitability brought about by this ‘quick expansion’ also enhanced business willingness and capacity for giving, and it also raised expectations of firms from the general public and the government. The Indian corporate social responsibility strategy has benefited from India’s emergence as a significant economic and political player in globalisation against this backdrop. The use of global sourcing by multinational companies has increased, and India has developed into a desirable and significant production and manufacturing base. Indian enterprises that export and make goods for industrialised nations must adhere to international norms as western consumer markets grow more receptive to labour laws and environmental regulations in developing countries.

Changes introduced by Corporate Social Responsibility Amendment Act, 2020 

A group of individuals can get together to form a corporation or firm, which is a legal entity designed to engage in and manage industrial and commercial activities. An organisation might be set up in several ways depending on the state’s corporate legislation in order to minimise taxes and maximise financial accountability. The industry in which a firm conducts business typically reflects the sort of corporate structure it favours, such as a company, partnership, or sole proprietorship. The ownership structure of the business is also reflected in these systems. 

According to the Companies Act of 2013, any company with an overall income of Rs. 500 crores or more than, the income of Rs. 1000 crores or even more, as well as a net income of Rs. 5 crores or more, is required to establish corporate social responsibility committee meetings during the fiscal year and allocate 2% of its average net profit over the 3 financial years prior to the implementation of its corporate social responsibility policy. According to the circular issued by the Ministry of Corporate Affairs amending the Companies Act, 2013, companies having an annual obligation of up to Rs. 50 lakhs are exempt from the requirement to form corporate social responsibility committees. Businesses will also deduct an excess amount of future corporate social responsibility liabilities if they pay anything over their corporate social responsibility liability during the financial year. 

Companies that violate Section 135(5) or Section 135(6) of the Companies Act of 2013 are subject to the following penalties: 

  1. A fine of twice the amount that should have been transferred to the Fund as specified in Schedule VII of the Companies Act of 2013 or the ‘Unspent Corporate Social Responsibility Account’, as applicable, or one crore rupees, whichever is less;
  2. Any officer of the company who is in default will be fined one-tenth of the amount that must be transferred by the corporation to any fund listed in Schedule VII of the Companies Act, 2013, or the unspent corporate social responsibility account, depending on the situation, or two lakh rupees, whichever is less.

The following actions are specifically excluded from corporate social responsibility: 

  1. Activities that the corporation conducts as part of its business
  2. An organisation’s operations which are carried out outside of India.
  3. Contributions made, directly or indirectly, to a political party.
  4. Activities that primarily benefit the company’s personnel.

Additionally, there are certain modifications to the definitions of several terms and phrases as well as some duties outlined in the Act that will be taken into consideration by businesses and the government.

Also, there are certain other guidelines that are applicable, as follows:

  1. The phrase ‘corporate social responsibility strategy’ is changed to ‘a paper explaining a company’s approach to selecting, executing, and monitoring its corporate social responsibility operations’. 
  2. Make a category for ‘ongoing ventures’ which are ongoing projects that firms undertake over an extended period of time (three years or less) to fulfill their corporate social responsibility obligations, excluding the fiscal year in which the initiative began. 
  3. Government permission to accumulate any unspent corporate social responsibility amount in a ‘National Unspent Corporate Social Responsibility Fund’. According to the Companies Act,2020, this amount will be utilised to execute corporate social responsibility initiatives.

Changes introduced by Corporate Social Responsibility Rules, 2021

In 2021, The Companies (Corporate Social Responsibility Policy) Rules, 2014 were revised by the Ministry of Corporate Affairs. These regulations are now referred to as the Companies (Corporate Social Responsibility Policy) Amendment Rules 2021. The Companies (Corporate Social Responsibility Policy) Rules 2014 updated these rules to promote compliance and transparency. Numerous changes are introduced by Corporate Social Responsibility Rules are as follows-

Administrative expenses 

Following the modification, ‘administrative overheads’ now solely pertain to the costs incurred by the business for ‘general management and administration’ of its corporate social responsibility initiatives. It excludes all other costs that are directly incurred for planning, supervising, executing, and evaluating a specific corporate social responsibility activity from the definition of administrative overheads.

In layman’s words, it indicates that all direct costs associated with a certain corporate social responsibility project or initiative will not be included in the administration expense.

Also, the board must make sure that administrative expenses do not amount to more than 5% of the company’s overall corporate social responsibility spending for the fiscal year.

Permit to the international organisations

An organisation that has been designated as an international organisation and to which the provisions of the Schedule to the United Nations (Privileges and Immunities) Act, 1947 apply is referred to as an international organisation. This organisation has been so designated by the central government according to Section 3 of the United Nations (Privileges and Immunities) Act, 1947.

The international organisation has been permitted by the central government to evaluate, implement, and supervise any corporate social responsibility projects or programs.

Existing project

It refers to a multi-year project that a business undertakes to meet its corporate social responsibility commitment. The program’s duration must not be more than three years, excluding the fiscal year it was started.

It also covers new proposals that were not designated as multi-year projects but had their terms extended by the Board by more than a year for justifiable reasons.

Changes in definition and guidelines of corporate social responsibility policy

The strategy and purpose set out by a corporate board while taking into consideration the suggestions of its corporate social responsibility committee are included in the revised definition of corporate social responsibility policy. Along with providing guidelines for selecting, conducting, and evaluating operations, the definition also covers how to create an annual implementation strategy.

Changes in Rule 5 

According to Rule 5, businesses must set up a corporate social responsibility committee. A yearly action plan must be developed by the corporate social responsibility committees in accordance with the company’s corporate social responsibility policy, and it must be recommended to the board of directors.

The yearly implementation plan should include the following, as per the suggestion of the company’s corporate social responsibility committee, and can be modified at any moment during the fiscal year: 

  1. Implementation deadline and approach of fund allocation;
  2. the mechanism by which the activities in the program are being executed;
  3. a list of corporate social responsibility initiatives that have been accepted;
  4. a system for handling and analysing the project’s progress; and
  5. the specific details of the requirements for each program and independent analysis of the program that the organisation is undertaking.

Changes in the process of implementation of corporate social responsibility under Rule 4 

‘Corporate social responsibility activities’ under Corporate Social Responsibility Policy Rules, 2014 are changed to ‘corporate social responsibility implementation’ in Rule 4 under the Corporate Social Responsibility Rules, 2021. A corporation must carry out its corporate social responsibility implementation operations in accordance with the modified rules either directly or via other authorities and agencies, which may be: 

  1. A registered public trust or,
  2. a legally recognized society,
  3. by the business itself,
  4. by the national or state governments.
  5. A business may also seek the assistance of any organisation created by an Act of Parliament, a State legislature,
  6. or a Section 8 corporation, a public trust that has been registered, 
  7. or a registered society that has been in operation for at least three years with a proven track history of corporate social responsibility implementation.

In accordance with Rule 4(5) of the revised rules, the board is responsible for ensuring that the funds are exclusively used for the approved purposes and that, in the event of any continuing projects, the project is implemented in accordance with the agreed timescales. The board is empowered to make changes under the new regulations to ensure the successful execution of corporate social responsibility initiatives.

Changes in the corporate social responsibility fund management under Rule 7

As per the amended Rule 7 – 

Surplus corporate social responsibility amount management 

The board must ensure that any excess resulting from corporate social responsibility operations is reinvested into the same program or moved to the unallocated corporate social responsibility fund and later on allocated in compliance with corporate social responsibility policy and the company’s annual plan of action, or such surplus amount can be deposited to a fund indicated in Schedule VII, within 6 months of the closing of the fiscal year.

Management of excess fund requirements 

The Committee must ensure that every surplus rupee is spent towards corporate social responsibility initiatives only. Such spending must be settled in the next three fiscal years, with the condition that any surplus from corporate social responsibility efforts, if any, is excluded from the excess funds that can be offset. The company’s board must pass a resolution to implement the same.

Changes in provisions regarding the acquisition of capital assets

If a company has bought any asset before the commencement of the Corporate (Corporate Social Responsibility Policy) Amendment Rules, 2021, it must comply with the necessities mentioned in the rules within 180 days of the commencement of the regulations. However, with the board’s approval and a reasonable justification, the 180-day deadline may be extended by 90 days.

Changes in reporting of corporate social responsibility as per Rule 8

It is mandatory for all organisations with an average corporate social responsibility commitment worth ten crore rupees or more over the course of the three fiscal years to evaluate the effectiveness of their corporate social responsibility initiatives. The annual report on corporate social responsibility must have an annex containing the impact assessment reports, and these reports must also be presented to the company’s board of directors. Additionally, a corporation conducting an impact assessment is allowed to record expenditures for corporate social activities of up to 5% of the overall corporate social responsibility expenditure of Rs. 50 lakhs, or whichever is less.

Also, the following additional disclosures must be made:

  1. Impact assessment,
  2. The sum eligible for settlement, 
  3. Corporate social responsibility expenditures made in relation to or unrelated to ongoing projects,
  4. Administration costs,
  5. Unused funds that were used for ongoing projects or projects other than ongoing projects.

Changes in disclosure made on the official website under Rule 9

The corporate social responsibility committee’s membership as well as the corporate social responsibility initiatives and policies that have received board approval must be made public on the company’s website, according to mandatory disclosure rules.

Examples of Corporate Social Responsibility in India

India actively participates in corporate social responsibility initiatives related to poverty, gender equality, and education, among other issues. The following businesses engage in considerable corporate social responsibility activities.

Tata Group

The Indian company, TataGroup, engages in a variety of corporate social responsibility initiatives, the majority of which are initiatives to enhance the level of local communities and fight poverty. It has participated in activities aimed at empowering women, generating revenue, and fostering rural community development, as well as other social welfare initiatives through self-help organisations. The Tata Group supports several institutions with scholarships and endowments in the area of education.

The company also works on healthcare initiatives like supporting children’s education, immunisation, and raising awareness about AIDS. The development of infrastructure, including hospitals, research facilities, educational institutions, sports academies, and cultural hubs, is another area. Other regions involve economic empowerment through agricultural programs, environmental protection, offering athletic scholarships, and infrastructure development. Recently, Tata Group gave INR 1500 crores towards the PM Cares Initiative for combatting COVID-19.

Ultratech Cement

The largest cement manufacturer in India, Ultratech Cement, engages in social activities in 407 villages throughout the nation, intending to foster sustainability and independence. Its corporate social responsibility initiatives prioritise social welfare, education, transportation, and healthcare, including family programs, social welfare, environmental well-being, as well as livelihood generation.

The organisation has set up medical clinics, vaccination campaigns, sanitization campaigns, plantation drives, school enrollment campaigns, water management campaigns, industrial training programs, and organic farming initiatives.

Mahindra & Mahindra

In order to advance education, Indian automaker Mahindra & Mahindra founded the K. C. Mahindra Education Trust in 1954 and the Mahindra Foundation in 1969. The company’s primary area of focus is on educational initiatives to support communities in need in both the social and economic spheres.

Through its corporate social responsibility initiatives, money is given to programs that train people in livelihoods, provide healthcare in rural regions, save water, and respond to natural disasters. Programs run by the organisation include Nanhi Kali, which focuses on teaching for girls, Mahindra Pride Schools, which offer industry attachment, and Lifeline Express, which provides healthcare in rural areas.

ITC Group

ITC Group has been concentrating on developing sustainable livelihoods and environmental protection programmes. ITC Group is a conglomerate having shareholdings in the hotel, FMCG, agriculture, IT, and packaging industries. Through its corporate social responsibility initiatives, the company was able to create opportunities for six million people to live sustainably.

Over four million peasants are served by their e-Choupal programs, which connect rural farmers to suppliers of agricultural products online. Its social and agricultural forestry initiative helps farmers create pulpwood plantations out of the wasteland. Over 40,000 rural women now have a sustainable means of sustaining their lives thanks to social empowerment programmes that use microbusinesses or loans.

Corporate social responsibility in foreign countries and international organizations

The United Nations

The United Nations has played a big and crucial role in ensuring that corporate social responsibility initiatives are accepted by all nations. The ‘Global Compact’ to which several nations have signed, was promoted. It is the largest corporate sustainability program in the world. The global compact ensures commitment by its signatories towards globally recognised social responsibility standards that their firms should aspire to meet. The implementation of such initiatives is monitored by the United Nations itself. A widespread legal need to operate in a socially responsible manner is known as ‘mandatory corporate social responsibility’. Both corporate law and the fiduciary duty of directors may be used to generate this legal obligation.

Despite the fact that corporate social responsibility goes above and beyond legal requirements, there are few nations, including China, the United Kingdom, South Africa, and Indonesia, that have taken proactive steps and made corporate social responsibility a legal requirement. Companies must participate in corporate social responsibility initiatives, according to their corporate statutes.

China 

The term ‘corporate social responsibility’ was first used in a corporate statute in China. According to the People’s Republic of China’s 2006 Company Law, businesses in the country are required to exercise ‘social responsibility’.

The corporate social responsibility requirement is more like a judicial requirement than a corporate behaviour standard, as per the standards introduced by China. The judiciary in China adjudicates enormous cases concerning the interpretation of corporate social responsibility.

Indonesia

The Limited Liability Company Act of 2007 of Indonesia expressly mandates that businesses engaged in the extraction of natural resources or any activity related to such resources must practice environmental responsibility.

With the passage of this law in August 2007, Indonesia became the first country in the world to require firms in the energy and extractive sectors to report their corporate social responsibility initiatives. The corporate social responsibility obligation has been in effect for ten years, but Indonesia has not yet published an accompanying implementing rule, rendering it ineffective.

United Kingdom

With regard to the fiduciary responsibility of directors, the UK Companies Act, 2006 adopts the strategy of making corporate social responsibility a legal obligation. In accordance with the law, directors must take into account two things: long-term programs and numerous corporate social responsibility components, such as the interests of suppliers, the environment, customers, and employees. The new obligation largely replaced the previous obligation to serve the interests of the firm.

South Africa

In accordance with South Africa’s Company Law, 2008, the formation of a corporate social responsibility governing board is mandated to oversee and implement the organisation’s corporate social responsibility policy. A new report that concentrates on risk and sustainability was also released in 2010, in addition to the previous one.

Ghana

A complete corporate social responsibility policy and law are not present in Ghana. A recent financial crisis occurred in this rising economy. According to research, when implementing its corporate social responsibility programme, Ghana should concentrate primarily on evaluating the various stakeholder factors.

According to the same research, multinational companies in Ghana must follow specific legal requirements when implementing corporate social responsibility initiatives, in contrast to their indigenous competitors, who are typically guided by social and discretionary factors. However, businesses also pay attention to their reputation and image in the eyes of the general public while engaging in corporate social responsibility. The factors affecting corporate social responsibility in the West may be different from those in the rest of Africa and other underdeveloped nations.

Ethical concerns are given a high ranking as a component of corporate social responsibility in developed nations. Whenever it comes to corporate social responsibility international ratings, an MNC may want to perform well and be more ethical, but the needs and priorities of the nations in which such MNCs operate may not be the same. In order to meet the requirements and conditions of their host nations, large multinational corporations must modify their corporate social responsibility initiatives.

Multinational corporations have interests such as prioritising global consistency through management of international standards, upholding the interests and values of the corporate headquarters and home country, while elected representatives have interests such as having local sensitivity by managing the interests, laws, and characteristics of the host country. Only the systematic creation of a framework will be able to control this conflict.

In order to address issues including poverty and lack of development inside the most developed and emerging economies, the mandate to carry out specific activities as part of corporate social responsibility is urgently required.

Conclusion

Corporate social responsibility outlines the duties that local businesses have to the society at large as well as to the nation. It is crucial that the idea of ‘individual social responsibility’ must also be introduced. Ultimately, it is the society that is held accountable for all the actions and omissions.

Simply looking beyond profits is what corporate social responsibility is all about. Although India is the first nation in the world to have statutory compliance that is necessary for corporate social responsibility expenditure, there are still numerous problems that need to be overcome. These challenges can only be overcome by the government, businesses, and society working together. A similar situation applies to other nations, where proper corporate social responsibility implementation requires a framework to be carried out in an appropriate manner.

The idea of corporate citizenship is now firmly established on the business agenda around the world. But several challenges must be addressed before the theory can become reality. The demand for more effective measures of corporate social responsibility development and the promotion of corporate social responsibility efforts are major issues that businesses are facing. These issues can only be resolved by ensuring transparency and better communication by all the stakeholders, which is the need of the hour. 

Frequently Asked Questions 

  1. Since the commencement of the operations of the company, if it has not completed at least three financial years, Does it require to adhere to the provisions of corporate social responsibility?

According to Section 135(5), if the corporation meets any of the conditions listed in section 135(1) but has not yet completed the term of three financial years after formation, then it must abide by the corporate social responsibility standards. The corporation will be obliged to establish a corporate social responsibility committee and adhere to other Section 135 obligations, including investing at least 2% of the company’s average net profits generated during such period.

  1. Under its corporate social responsibility initiative, the company intends to pay for a specific healthcare program for its unskilled labour. Whether it is legal in accordance with the act and rules?

Any action that benefits personnel of the company as specified Section 2(k) of the Code on Wages, 2019 shall not be considered a corporate social responsibility activity within the terms of Rule 2(d)(iv) of the modified Rules. According to Section 2(k) of the Code on Wages, 2019, a ‘employee’ is any person who is paid by an establishment to perform any skilled, semi-skilled, or unskilled manual, operational, supervisory, managerial, administrative, technical, or clerical work for hire or reward, regardless of whether the terms of employment are express or implied. This definition also includes a person who has been declared an employee by the Government.

  1. Under corporate social responsibility, what are the tax benefits that can be availed?

There are no specific tax concessions available for expenses incurred for corporate social responsibility. Additionally, the Finance Act, 2014 makes it clear that corporate social responsibility expenses are not considered a part of company expenses. Although there is no specific tax exemption for spending on corporate social responsibility, there are already exemptions for a number of activities that are included in Schedule VII, such as contributions to the Prime Minister’s National Relief Fund, academic research, rural electrification projects, technical training projects, and agricultural support projects.

References


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