This article is written by Aprajita Mishra & Harleen Kaur Rait, students of Symbiosis Law School, Hyderabad.
Table of Contents
In the light of various amendments and developments, India has resulted to be one of the first countries to mandate the Corporate Social Responsibility (hereinafter referred as CSR) pursuit for the companies. The present study attempts to understand the manifold impact of this action. The first part of the article shall deal with basic introduction and technicalities. The second part shall analyse the step-by-step development of this mandate. Thirdly, the article shall engage the reader on the different impacts, some being positive and some being the challenges which firms have to tackle. Fourthly, the impact of the CSR mandate on the rates of the corporate taxes. Further, a line of examples of different firms and the initiatives of CSR in particular. The last part of the article shall give an overall conclusion of the present study.
CSR is a concept which was implemented as a step forward towards the societal benefit, the major reason behind the same is that a company’s goal is not only limited to profit making but also includes a responsibility towards the environment and the society. This is because in some way or the other both the factors play an important role in the company’s existence.
Even though the concept of CSR is widely recognised, but there is not a particular concurrence as to its true meaning. Many a time, it is confused with the terms like business ethics, corporate governance, sustainability, etc. These terms do not have the same meaning, but there is a thin line which connects them i.e., the elucidation on the other important aspects and divergence of the organisation’s goal towards social responsibility as well.
There may be different definitions and dimensions existing, but the core idea behind the concept is to act in such a manner which is good in terms of society, which is beyond the interests of the company and the actions which are vital in the eyes of law. The performance and the stability of a company depends on the social environment in which the company functions, thus, these elements should be taken into consideration in order to have a good stability. Thus, it is important for firms to make efforts to comply with this concept because the corporate success can be defined only if it fulfils all its obligations and not only thriving to grow in economic terms. For this reason, the Indian government has made various changes and implementations of the law so as to bring the CSR practice into effect. This step has had different impacts and have been furthered with various viewpoints which will be discussed in the current context.
Gradual growth of CSR
Various studies have shown that there has been a subsequent growth in the field of CSR and this growth has resulted in the deviation from a company’s sole objective of profit-making to an organization oriented towards an environment and shareholder benefit. The threefold condition involved in the development process of CSR are:
Pre-Mandate Era of CSR
The tradition of CSR in India is not a new concept. The history shows evidences of great advisors emphasizing on the ethical principles while commencement of merchandising. Leaders and rulers used to adopt this practice in the form of charity at the time of industrialization phase. Often, contributions include the construction of temples, educational facilities, etc. As time passed, such philanthropy shifted to corporate social responsibility towards society, and businesses began to focus on key topics. On the other hand, many leaders who were motivated by Gandhian thoughts, adopted the ethical modes in their businesses.
This pre-mandate era involved the enhancement in terms of society during the time of independence (1914-1960), and then shifting the economy to the mixed nature, wherein the public-sector undertakings boomed. Conclusively, to a country wherein the businesses partly incorporated the traditional ethical approaches and took initiative to implement the CSR activities in the businesses and some businesses focusing on the value maximisation of the stakeholders. This continued till the Ministry of Corporate Affairs (MCA) stepped forward in this regard.
Post-Mandate Era of CSR
Being a developing nation, India has its own hindrances. There are many factors in which India still lags and there is a requirement for urgent attention. Among these urging concerns, the major factor is that of environment and the sustainable growth of the society along with its members. Addressing the issues towards social responsibility, the MCA by carefully scrutinizing the scenario, mandated the CSR pursuit for certain companies. This historic step was taken in the Companies Act, 2013 (hereinafter referred as Act), which substituted the previous act which existed for about 57 years. Under Section 135 of the Act, the option of undertaking the CSR activities shifted from willingness to obligatoriness for large companies. Now, the companies having the total funds of Rs. 5 billion or a turnover of Rs. 10 billion, or the total profit of about Rs. 50 million, then these companies are obligated to spend at least 2% out of the average net profit.
Section 135 provides for a scope to either comply or provide an explanation for the non-fulfilment of the CSR obligations. In case a Company fails to either comply or explain, then it shall be subject to penalties as mentioned under Section 134 of the Act. More modifications and reforms took place currently as a result, the industries now report the CSR as CSR disclosure in their respective annual reports.
This period witnessed collective reactions of agreement and disagreement. Where some firms accepted the new legislation, some adopted a defensive approach towards the mandate.
Amendments to the CSR Act in the Year 2020
The MCA in March, 2020 introduced the “Companies Amendment Rules, 2020”. Till April 2020, these rules were open for the inputs from public. These 2020 rules are bringing in modification in the CSR definition, it shall now include “any” initiative which a company will undertake as a part of their compliance of the principles of the Companies Act, 2013. Moreover, these rules modify the meaning of the CSR policy, insert new provisions for the organisations from the worldwide and this rules also enables the government to frame the “National Unspent CSR Fund” which would allocate the funds from the CSR budget which have not been spend in the CSR activity. Along with new benchmarks set, this rules also specify about the regulations made for the CSR-compliant corporations.
These developments and changes depict that the concept of CSR has grabbed the attention of the Indian government and there are steps being taken so as to enhance the situation of the companies and the country itself.
Implications of the csr mandate: a positive or negative impact?
It is important to understand the practical implications of this mandate. The responses of the companies owing to CSR mandate can be broadly categorised as those who saw it as an opportunity and the companies which saw it as a hindrance.
Companies in a developing company are often negligent while carrying out their business and often contribute to environment depletion. This provides the Companies an opportunity to carry forth their business activities alongside the CSR activities and it is a way to give back to the society.
CSR heavily contributes to building up good reputation of the Company in the eyes of the general public. ITC’s classmate notebooks often feature the CSR activities they carry out by educating students in the rural areas. CSR communication with the public can assist the big companies in developing the most intangible asset of the company i.e. reputation.
CSR can also assist the Companies in creating their space in international markets. Indian companies are not regarded as potential partners owing to their poor resource structure. CSR activities can assist the companies by appearing more socially responsible and attracting MNCs. Hence, CSR activities increases the likelihood of companies expanding in the international horizon as they become more socially responsible and have better domestic relations in their country owing to CSR.
These activities however require the leader of the Company to persuade the employees in the company to take initiatives in CSR activities when they are hesitant. This poses as a challenge to the Company leaders to motivate its employees for carrying forth CSR activities.
The impact of CSR has been observed to have a positive impact in those developing countries which have a weak institution for ensuring sustainable economic development. This is because these CSR activities pose as an opportunity for the companies to be more careful while carrying out their business activities and at the same time contribute to the society at the same time. The CSR activities pave way for filing the institutional voids in a country where companies and government take collaborative CSR initiatives.
Moreover, CSR does not only benefit the society, it also comes off as an advantage to the company as it improves the reputation of the company in the public. Firms often partake into “Nation Building” activities, so that they personally connect with the public and create a stronger reputation. Another intriguing question can be if CSR is capable of make up for a firm’s lacking level of competence. The answer is that stakeholders have more faith on the company owing to their CSR activities and are willing to look past firm level incompetence.
Impact of the CSR mandate on the rates of the corporate taxes
The debate of CSR mandates vis-à-vis is quite pertinent. The benevolent act of CSR is taxed at 2%, calculated out of the net profits. This debate is concerned with two points, firstly, does these taxes which are corporate in nature impact the value of the firm? On the other hand, the other point is whether this pretty direct slash out of profits in the name of tax is preferable? For the effect on valuation, there is little or no substantial research as to the effect of tweaks in corporate tax on valuation. This can be understood to be because of various other responsible components like the rate of change in the tax, then the tax base, shareholder return treatment of tax, etc.
For the second point, it can be expected wiser if employees get to make the choice of spending the funds as in the case of CSR under Section 135. Whereas, when one considers corporate taxes there could be a plethora of issues like siphoning of funds, or not making an informed choice for fund spending as an employee would have made, keeping in view the company’s profit and goodwill as the major aim. Also, there would be more regulated checks under Section 135. Because its disclosures and mandatory compliances will be checked by SEBI and governed under Securities law. The corporate taxes however are on the whims of the political system primarily. In summation, it can be expected for a firm to make an informed and a better choice than government spending on CSR aimed activities. Further, these choices may sway other businesses, pave the way for more productive CSR programmes.
Examples of Indian companies incorporating CSR initiatives
As stated above, the CSR mandate encourages the companies to invest their wealth in social causes like education, hunger, poverty, etc. In the light of the pandemic, the MCA has released a notification which states that any expenses spend by the firm for fighting the pandemic would be covered under the CSR activities. Various companies have acted in a rationale manner in implementing the CSR initiatives. Few Indian companies which have led to a change in society due to these activities are stated hereunder –
Tata Steel is growing day-by-day; it currently operates in about 26 countries. It also has a focused CSR Policy wherein, the key areas which are focused are – Health, Education, Livelihoods etc. The company has been growing along with a well-framed CSR Policy. This industry has resulted in a change by not only taking the company to new heights but also by helping the society improve. It provides scholarships, has activities for women empowerment, focuses of the development of the rural sector, spreading awareness, adopting eco-friendly approach and by helping in the healthcare sectors. For instance, Tata Steel has recently announced that for the treatment of the Covid-19 patients, the company has been supplying about 300 tonnes of oxygen cylinder on a regular basis to various regions.
The Steel Authority is a company owned by the Indian Government. It is said to be the 3rd Largest steel manufacturing company in India and 20th Largest producer of Steel in the entire world. The company has a separate department for CSR under which it runs various NGOs and various programmes. The Company is dedicated towards its social responsibility. This industry is engaged in curbing hunger, providing education, self help groups, employment generation, spreading awareness, etc. Even SAIL has been engaged to provide healthcare to the infected patients during these tough times.
The ITC group is engaged in the activities associated to agriculture, packaging and majorly the hotel sectors. This group has been involved in creating a livelihood and taking initiatives towards the protection of the environment. Record shows that the company has resulted in providing livelihood to more than six million people by the means of its CSR initiatives. It has also introduced a program which would facilitate the connection between the framers and the farmland products. These initiatives have brough a change not only in the environment but also in the lives of millions of people.
Interpretation of impact in the firms growth through these initiatives
There are numerous numbers of companies which are dedicatedly engaged in the CSR activities and have been successful in complying with the law. Above-mentioned is a mere depiction of the efforts taken by the Indian companies so as to help our society grow. The CSR initiative does not only result in the growth of the society or people, this also helps the company to develop. The reason as to why these companies are known even in the smaller areas of the country is due to their engaging CSR activities. The impact of the CSR mandate is that the companies have now been able to grow in various other fields and have also recognized the importance of framing a healthy relationship with the society at large. Afterall, it is the society and its members because of which any company exists in the market. As a result, India has benefitted a lot from transitioning from a voluntary CSR procedure to mandatory CSR activities as it has made the companies more careful with their business activities and provided them with an opportunity to work for the benefit of the nation. It has given a chance for the country to develop sustainably rather than carelessly and hastily.
From the above analysis, it can be clearly stated that a long line of developments and implications have been required in order to change the concept of discretionary CSR to mandatory CSR. Still there is a need to do more so that a greater number of companies can judiciously invest towards the societal betterment. These regulations portray that the companies have a deep role in the economic and societal roots of the country. They play a complex role by competing with the other international firms as well. But at the same point, it is essential to be connected to the country and to be useful for its citizens. These changes and mandates are not very easy and it will definitely take time so as to be efficiently implemented. But the transformation can be seen and the CSR activities have impacted in a positive manner towards the growth of the company as well the society as a whole. As there is a symbiotic relation between the nation and the companies, therefore, the success of one lead to the success of another and vice versa.
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