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This article has been written by Aditi Lakhanpal, B.com LL.B (9th Semester), Rayat Bahra University, Mohali.

Abstract

In 2014 India turns out to be the first state in the world to mandate corporations to employ a portion of their returns on corporate social responsibility. Nevertheless, prior before the Companies Act 2013, traditional philosophies in contributions and good karma, have constantly been a deep-seated fragment of India’s corporate ethos. The model of CSR has progressed over an inordinate length of time. Currently, it is reflected as a dynamic share of the tactical business which creates corporate entities socially accountable populaces, perceptibly contributing to the social prosperity. Socially accountable corporations do not restrict themselves to using resources to engross in undertakings that increase merely their earnings rather they use CSR to assimilate economic, legal, ethical and philanthropic objectives with the company’s operations and growth. Recognition of this imperative model would support further the cause and buoyantly prompt corporations to embark on CSR proactively. This essay marks a modest endeavor to critically scrutinize the model of corporate responsibility and put forward a number of sustainable approaches for the development of CSR schemes in companies as well as vouch for potential CSR initiatives that will expectantly be of interest to practitioners in the events of business.

Keywords: Legal Implications, Branding; Social Image

Exordium

The first day of April 2014 saw the dawn of a new era when India introduced the policy of CSR, Corporate Social Responsibility in its Companies Act of 2013 (hereinafter referred to as the ‘Act’). It became the first country to make it mandatory and inculcate it as an integral part of the statute. Section 135 (8) of the Act, engulfs within its ambit the following companies which are directed to spend an amount equal to 2% of the company’s average net profit before tax of the preceding three years on CSR. These are-

“Companies with a net profit before tax of at least Rs 5 crore, or a net worth of at least Rs 500 crore, or a turnover of at least Rs 1,000 crore.”

The act requires the companies to

  • constitute a CSR committee (different composition for listed & unlisted companies)
  • chalk out its progress in this arena in its Annual Reports.

However, the companies are forbidden to invest in the areas where they function.

Schedule 7 provides a list of activities which can be undertaken by the companies under this initiative-

  1. “Eradicating hunger, poverty, and malnutrition, promoting preventive health care and sanitation and making available safe drinking water,
  2. Promoting education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects.
  3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, daycare centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward.
  4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining the quality of soil, air, and water.
  5. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts.
  6. Measures for the benefit of armed forces veterans, war widows and their dependents.
  7. Training to promote rural sports, nationally recognized sports, Para-Olympic sports, and Olympic sports.
  8. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities, and women.
  9. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government.
  10. Rural development projects.
  11. Slum Area Development.”

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Historical Development

The concept of corporate conscience and corporate responsibility are a newly evolved nomenclature of the ethical and moral practices which have been followed by some companies voluntarily. In the early times, it was famous as social philanthropy especially in the east and the west. It incorporated schemes for the welfare of the employees and staff of the companies ranging from women’s welfare and medical care etc. however; it bears its evolution to the United States of America where its language and practice first emerged. This is for the plain reason that the labour and capital market in the US was fairly unregulated coupled with minimal state welfare policies. Therefore, social welfare schemes of education, healthcare, hygiene, etc had been the centrifugal areas of investment by companies.

In the other parts of the globe like Europe and the Far East there had been a policy of social welfare through government intervention and welfare schemes. In European nations, there has been a recent rise in CSR activities by the MNCs because of the same notion. This pattern of corporate responsibility differs on a great pedestal when it comes to a comparison between the US and Europe.

Japan, South Korea, and Taiwan are more or less similarly situated in terms of institutional effort towards corporate responsibility.  These are based upon long term employment and relations rather than changing market scenarios. Japanese ‘Kieretsu’ and Korean ‘Chaebol’ have a rich heritage of employee benefits, social services, women health largely as a response to the regulatory and institutional environment of business.

The United Kingdom, on the other end best exemplifies the role of giant corporations taking up responsibility for regeneration of local community, funding education and enhancing transparency and public accountability.  This was a result of the initiative by Prime Minister David Cameron christened as Big Society in the early 2010s.

Furthermore, the wave of globalization universalized the notion of corporate conscience.  The countries of Australia and South Asia were the most benefitted by it. The Chinese counterpart experienced a boom in CSR since the new millennium, whereby the State Owned Enterprises started rolling out a wave of CSR reports in 2006.

Coming back home, the previous legislation also contained provisions with respect to CSR however, they were only voluntary in nature until now.

Pyramid of corporate social responsibility

The crucial drive of each business is to make profits and embellish their setups from corner to corner. The initiative to attain the same often leads to aggressive industrial actions, technical improvements, and practices, all of which come at the price tag for society and the welfare of its elements in overall. CSR is a broad concept that helps corporates and business envision their role and power in creating an impact in society by stepping into capacities that work for the larger good of society.

Economic Accountability

India is a state with a tremendous disparity of income. On the one hand, we have very rich people and the tragic poverty on the other hand. We have to be sensitive to the datum that this gap cannot endure widening while there are largely disconnected populaces who are looking at the iniquities’ of the environment. For companies, therefore, there has to be sensitivity to doing something in the community hemmed in and making an all-inclusive effort to raise the quality of life so that society could look at the company in a more optimistic sense. One such initiative which can be taken up by companies to do away with income disparity concern is that they can drive deep within the act of responsibility by employing weaker fragments of society after providing them with sufficient training. By means of their business acumen, companies can stabilize the employment and inclusion of individuals from varied experiences coming together and contributing to the larger message as well as the goal line of the brand.

Legal Accountability

Consumers are more likely to purchase products and utilize services from companies they trust. Apart from building that trust is abiding by the laws that regulate the business by means of paying the mandatory taxes, adhering to labour laws besides permitting inspections. It is clear that business has a social responsibility to obey the law. Relationships with a workforce, clienteles, merchants, creditors, etc. craft a contractual onus. Legal obligations furthermore exist to evade negligence, fraud as well as other liabilities under tort edict. The principal interrogation of CSR is the magnitude to which business organization and their administrators have ethical responsibilities that go beyond manufacturing desired goods and services in the interior of the law. 

Ethical Accountability

CSR signifies the ethical expectations that society has for business. Being ethical means going above and beyond the legal requirements and meeting the beliefs of society. One such initiative which can be adopted by companies in the course of action against sexual harassment in the workplace. Sexual harassment cases are often fueled by a toxic culture. Ethically better upshots will be realized if companies are clear as crystal as to why they are engaging in CSR. If companies are apparent from the beginning vis-à-vis why there are proposing to confer certain profits upon the community for instance if a company want to have a noble liaison with the community and know they need a societal permit to operate then cynicism will be less in the cards. 

Philanthropic Accountability

CSR can extend its arms by evolving and founding a brand that identifies its responsibility to give back to society in a certain approach. One such initiative is assisting the edification of children by taking on schools, funding undertakings and pool resources for events. Edification as an instrument of empowerment not only benefits in dealing with the perpetual problem of poverty but also paves the way for the future of the state by shaping their lives. Education symbolizes the stepping stone to advance the quality of life, exclusively for the underprivileged and the vulnerable. The dogma behind the CSR is to bring makeover in education that will promote constructive transformation in the lives of the children by means of constant enhancement of knowledge and empowerment. When a company’s take part in such endeavors’ it helps in establishing a notion that addresses the matter of egalitarianism and education as well as craft a platform for people to step up and add to the greater good by being a helping hand. CSR is also appreciated as gender equality tool wherein companies focus on bringing women “up to speed” through training, employment, quotas, and scholarships the Significant number of companies have some portion of their CSR portfolio keen to financial savvy for womenfolk around the world. These investments lay emphasis on issues ranging from household investments to entrepreneurial corporate aptitudes to salary negotiations. In addition to aforementioned another imperative facet that every brand must make surefire is that give consumer privileges an equivalent share of significance, as a brand that puts itself in the shoes of its customers is the one that thinks through customer trustworthiness, and guarantees the protection of their trust by fulfilling its social responsibility. This is for the reason that customers are the fundamental part of the companies’ actions and operations, as they are the direct cause for which the organization exists.

Limitations Of The Present Law

  1. Companies spending more than two percent before the present law have now started investing less.
  2. The schedule shows a very rosy picture and has a myopic view of the problems which the society is facing. Various problems of the society like increasing crime rate, Sexual harassment of women at workplace, etc find no mention in the Schedule.
  3. It is only limited to companies registered under the Companies Act of 2013. Partnerships, LLPs and SMEs should also be included.
  4. No tax evasion or any perks for fulfilling the criterion.
  5. Two percent is not sufficient.
  6. Lack of any punitive measures in case of non-fulfilment.
  7. Negligible role of the State Governments, NGOs, Local Agencies and youth.
  8. No provision for the welfare of Scheduled Tribes, Rehabilitation of the displaced and Prevention of crimes.
  9. Investment on Psychological health of the community is not a part of CSR activities.

CSR: a clairvoyance outlook

  1. There should be flexible and meager but effective provisions for CSR amongst Partnerships, LLPs and SMEs which should be proportionate with the turnover of a financial year.
  2. Availability of Governmental platforms (online/offline apart from those already mentioned) where the companies can invest directly without any extra efforts. Sometimes, the companies face over the edge situations where the balance needs to be achieved. It is in those circumstances that such platforms, which are exclusively built for the purposes of creation of a fund in such circumstances, shall always come in handy.
  3. Just like Special Economic Zones, the companies should be given incentives to invest in a particular state/zone/area for e.g. Female mutilation in Haryana.
  4. Role of State Governments: the state governments must not become mute spectators. They have a crucial role in determining each state’s priority areas as to where it lags. For e.g. Punjab suffers from the menace of drugs and intoxicating substances, while its neighboring state of Haryana struggles with low education levels and agricultural problems. The role of state governments must not be undermined and they should be directed to amend the list of their priority areas before the start of each financial year, which should be notified to the ROC so that each company/organization can plan way ahead in advance.
  5. Reduce taxation if they invest in your priority sectors: the role of State governments does not end after the identification of priority sectors. In order to attract companies/organizations, they should introduce lower tax levels or rebates.
  6. Role of youth: the youth should be encouraged to spread awareness about the benefits of CSR and they should also be allowed to volunteer for companies/organizations working in their locality. They should be encouraged to see it as an opportunity for growth and as volunteering work. Such an experience should be given academic weight age as well while applying for higher studies.
  7. Role of attitude. CSR should not be considered charity: Attitude is the key to success. The companies/organizations see as a liability and hence back out from their social obligations. However, they should be made aware of its benefits not only to the companies but also to society at large.

Moreover, this concept can only flourish if the harbingers of the same carry an air of pride and satisfaction. The companies/organizations need to understand that what they are doing is not charity.

A very recent example of active corporate responsibility has been displayed by MI wherein it has undertaken to fund the education of children of martyrs Pulwama attacks. The same suit has been followed by Reliance group as well.

Openness to innovative ideas and a passion to change the face of the society is what is really required.

  1. Not only companies but also tier 1 educational institutions should be included. CSR, essentially incorporated for the engagement of companies in social tasks, should also bring under its wings those big fat private educational institutes run by giant businesses (For e.g. Jindal, Birla Group) which charge an enormous amount on the pretext of education should also be included.
  2. Entrepreneurial Awards need to be floated and given recognition in order to induce companies to follow the ideology of CSR. Such companies can receive an advantage over other competitors while working with/for the government.
  3. Go local: going local is the only spell which needs to be cast in order to make CSR a success. Wherein, instead of aiming a large population, the Companies/organizations focus on the most reachable area they can cover and visit regularly. Regular visits and daily updates about the same shall eradicate major problems step by step. A policy of one step at a time should be followed.
  4. CSR initiatives should be implemented where the actual business offices are located, and not where the companies have their registered offices. This is for the simple reason that the employees know all the problems and they shall be able to help out in the best way possible.
  5. Encourage activities which enhance the goodwill of the organization and also help them establish good public relations.
  6. Geographic diversity calls for diverse and unique measures. Some special areas like Northeastern states and Upper areas of Jammu and Kashmir mostly get neglected. Therefore, these call for special measures from the State Governments to induce the companies to invest there. For eg. Sponsoring schools and colleges in the interior areas of Kashmir shall not only educate the youth but shall also result in the reduction of terrorist activities.
  7. Flexibility is the key: The companies/organizations should be given the freedom to work beyond the areas specified in the schedule after approval from a Competent Authority. This is because not everything can be jotted down in black and white. To ensure the growth of the economy, it is important to take up a flexible approach when it comes to combating social roadblocks. Eradication of offenses such as rapes, murders, acid attacks, etc should also be enlisted.
  8. Role of local level government bodies like Panchayat at the grass root level should be ensured for companies which wish to work in sensitive areas.
  9. Collaboration with NCC/NSS volunteers at the school/college level by the state government or by the Companies/organizations shall benefit them a lot.
  10. CSR Policies should be drafted by the State/Central Government before the start of each financial year which can be abided by the companies/organizations and these must be structured in such a way that the companies/organizations do not feel it as a burden. However, such policies must be drafted by experts in the respective fields.
  11. The role of technology should also not be underestimated during awareness and data collection campaigns.

Conclusion

In a nutshell, this concept of Corporate Social Responsibility if used diligently is a Brahmastra for the Indian economy provided the stakeholders to understand its importance and strive for innovative ideas to achieve the best.

This technique has harbored the sister concern of FDI, i.e. IDI which stands for Indian Direct Investment. Those huge loans from the IMF and World Bank can be reduced if this technique is used as a weapon of change and not as a tool for mere ornamentation.


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