In this blog post, Sakshi Jain, student, Amity Law School, Lucknow Campus writes about the critical analysis of Corporate Social Responsibility under Companies Act, 2003.

Corporate Social Responsibility (CSR) is an emerging topic in the corporate field there is no precise definition for it. Every definition has its own meaning, but the one thing in common is that it is a philanthropic activity such as charity, donation, relief work, etc. of the corporation for the society. The EC[1] defines CSR as the responsibility of enterprises in terms of their impact on the society. To completely meet their social responsibility, enterprises should have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategies in close collaboration with their stakeholders. Therefore, CSR is the obligation of the company towards the society.

Introduction                         

The Ministry of Corporate Affairs has notified Section 135 and Schedule VII of the Companies Act, 2013 as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 with effect from April 2014. With effect from April 1, 2014, every company, whether private limited or public limited, which has either a net worth of Rs. 500 crore or a net profit of Rs. 5 crores or a turnover of Rs. 1000 crore, needs to spend at least 2% of its average net profit for the immediate preceding three financial years on CSR activities. The CSR provisions apply to holdings and the subsidiary companies based in India and the foreign companies as well whose branches or project offices are situated in India. If the companies under Section 8 of the Act apply a part of their profit in promoting the objects such as arts, commerce, sports, education, science, etc., they shall not be liable to follow the CSR provisions in their companies. India is the first country to have CSR legislation, mandating that companies give 2% of their net profit to the charitable cause.[2]

The CSR activities are taken by the companies as per the CSR Policy. There should not be intervention with the policy of CSR and the companies’ policy. The CSR activities should not be undertaken in the normal course of the business and must be with respect to any of the activities mentioned in Schedule VII of the Companies Act, 2013. The contribution under the CSR policy should be for the benefit of society. Contribution to any political party is not considered to be a CSR activity. Under Section 135 of the Act, the policy which only benefits the employees of the company is not considered as a CSR policy.

Provisions to be included in CSR policies

• Eradicating hunger
• Promoting precautions of health care
• Removing poverty from the society
• Setting up homes for women, children, orphans, senior citizens
• Decreasing the level of malnutrition
• Ensuring sustainable development programs
• Caution for environment pollution
• Animal welfare and ecological balance
• Protection of monuments, national heritage, etc
• Contribution to clean Ganga fund and for Swachh Bharat Abhiyan

As CSR policies and provisions are made for the society’s well being, therefore, while determining CSR activities, the preference should be given to the local areas where the company is located or is functioning. CSR projects or activities are undertaken in India amounts to CSR expenditure.  Therefore, if the hospitals and educational institutions are a part of any business organization, then it will not fall under the CSR activity. But if a company works for these organizations or institutions as charity, then it is considered as CSR activity of the company.

Administration

CSR policy is headed and administered by the CSR committee of the company. The CSR committee consists of at least three directors out of which one is an independent director. Unlisted public companies and private companies are not required to appoint an independent director for the purpose of CSR activity under the committee. Thus, it can have at least two directors for its public, private or foreign company. The board of company may decide to undertake CSR activities approved by the CSR Committee. A company can undertake its CSR activities through any registered trust or the society. The company should specify the duties and activities to be undertaken by the registered society. There is utilization of funds as well as a reporting and monitoring mechanism. All these activities are to be done by a company established by its holding, subsidiary or associate company.

Two companies can collaborate or merge with each other to share the same CSR activities for their business, provided that each of the company will prepare an individual report for it. All the expenditure is included under the CSR activity policy. Therefore, the salary or remuneration given to the staffs of the CSR activities will be included in the cost of CSR expenditure policy. A company can only be liable for CSR activities if the company fulfills the criteria of net worth for the three consecutive financial years. But it does not mean that they cannot undertake the CSR policy. But it can only be undertaken without any obligation if it fulfills the satisfying criteria.

Reporting of CSR activities is a must at the end of every financial year. The financial statement of the year would also include the annual report of the CSR activities of the company in the format prescribed in the CSR Rules. It includes the brief note of CSR expenditure and average net profit for the last three financial years of the company. If a company has its websites, then they are obligated to disclose the annual report on their website also.

The concept of CSR is based on the principle, comply or explain. It means that the company has undertaken the CSR policy have to comply with it but if any company does not comply with it or unable to fulfill the minimum requirements of its CSR initiative, the reason for not doing so shall be explained in the board reports.

Best CSR policy

Google has made a very good initiative towards good citizenship. As being one of the world’s largest corporations, every single effort is paying off. Google green is a corporate effort which utilizes resources efficiently and thus supports the renewal of power. With these initiatives, Google is making an effort to make the environment green and help sustain the natural resources for the future generation.

Coco Cola, being the largest beverage company, also makes the CSR policy an integral part of their company. The company has taken up various initiatives such as rainwater harvesting, restoring ground water resources, recycling and serving communities and societies where it has operated. The agenda of the company was to become water neutral in India by 2009. Coca-Cola spent millions of dollars on the project but failed to make changes in the operation system.

But there are bad examples of CSR too. Most of the companies do not want to contribute to the welfare for the community and just want to make profits. In this case, CSR turns to be bad and unhealthy. Hence, making CSR mandatory is not always a good idea because the company might not do the social work and gain goodwill by doing nothing. There is a heavy risk involved in the CSR policy when it is executed. The company which is financially fit can only afford this policy. Therefore, implementing a CSR policy in the company’s policy is not a good idea for the beginners and startups. CSR includes good governance and improves the goodwill of the company. Hence, a proper planning must be done by the manager before taking a CSR policy in their company’s policy. The startups and small companies not having the required turnover will not come under the preview of CSR policy. Therefore, it is not mandatory for them to have a CSR policy within their organization.

Conclusion

CSR in India has traditionally been seen as a philanthropic activity. CSR tends to focus on what is done with profits after they are made. It is a preconceived notion of all companies that if they are working within the society, then some benefits should also be provided to them on the part of the company. And hence, in 2013, Companies Act introduced this topic in the act and made it mandatory for the companies to provide and disclose a CSR report at the end of the financial year. There is a disadvantage to CSR also. Not every company can afford the CSR policy includes a high financial risk and needs proper governance. CSR has evolved many times to correct its weakness, but it is eventually going extinct, existing in name only.

Footnotes:

[1] http://ec.europa.eu/enterprise/policies/sustainablebusiness/corporate-social-responsibility/index_ en.htm

[2]http://www.forbes.com/sites/eshachhabra/2014/04/18/corporate-social-responsibility-should-it-be-a-law/#600162c79849