Monday, March 23, 2015

CSR under Companies Act 2013: From Choice, to Necessity, to Compulsion

CSR is the activity which has to come from heart, executives strive day [and] night for the growth of the company by the help of customers, CSR is a perfect opportunity to pay back to society.”

-       Deepak Kapoor[1]

I.                   Introduction
CSR Corporate Social Responsibility Companies Act 2013 1956
Image taken from here.
The industrial families of the 19th century such as Tata, Birla, Bajaj and Godrej, were strongly devoted to philanthropically motivated, social and economic causes.[2]  Even Mahatma Gandhi’s Khadi movement, which was an integral part of the Swadeshi movement and which encouraged Indians to be self-reliant, received huge support from the Bajaj family.[3] During the Independence phase, Mahatma Gandhi introduced the notion of ‘trusteeship’ which encouraged businesses to establish trusts for educational institute and also helped in setting up training and scientific institutions.
However, according to a survey carried out by Forbes India, only six out of the top 100 companies of India contributed more than 2% of their profits after tax (PAT) to Corporate Social Responsibilities (CSR) activities.[4] It is for this reason that a provision for mandatory CSR spend has been included in the Companies Act 2013. According to industry estimates the mandatory CSR laws would apply to about 9,000-10,000 companies.[5] The new provision has received criticism not only from corporations but even from the supporters of CSR theory who believe that CSR activities, though a necessity, must be taken up voluntarily. This article analyses the impact of the Companies Act 2013 on the Corporate sector with respect to the new CSR provisions.


II.                Definition of Corporate Social Responsibility
Although it has existed as an academic subject for over half a century, there is still no consensus over the definition of CSR.[6] The Companies Act 2013 does not define CSR, nor does it provide what exactly constitutes CSR activities. However Schedule VII of the Act does provide a list of activities which may be included by companies in their Corporate Social Responsibility Policies. The words ‘may be included’ clearly signify that the list is not meant to be exhaustive but only suggestive. It is submitted that this list, even though merely suggestive, is inadequate. Several types of CSR activities have been omitted and such omission may lead to a large amount of confusion and even litigation. Thus, when it is doubtful as to whether an activity falls under the ambit of CSR activities, the benefit of the doubt must always be given to the corporation.
One of the most contemporary definitions of CSR is given by the World Bank Group  which defines CSR as “...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..”[7]

III.             Nature and Theory of CSR
The earliest traces of the theory of CSR as an academic subject can be found in H.R. Bowen’s “Social Responsibilities of the Business” in 1953.[8] Since then, there has been continuous debate of the concept and its implementation.
CSR aims to achieve positive impacts on the environment, consumers, employees, and the communities. Under the force of globalization, this theory has been challenged by the diminishing different roles of the government and firms, especially when the power of multinational companies is rising.[9]
This vagueness gives rise to certain complications since a desirable scope of businesses’ commitment can be subjected to varied interpretations. Since there is no one universally accepted definition for corporations to rely on, it leads to different levels of engagement of policy with different corporations.[10]
Milton Freidman proclaimed in 1970 in 'Capitalism and Freedom' that the doctrine of "social responsibility" in a strict sense would widen the ambit of the political mechanism so as to cover every human activity. The doctrine of “social responsibility” is essentially a part of the collectivist doctrine, the only difference being that 'corporate social responsibility' professes that collectivist ends can be attained without collectivist means. Therefore Milton Freidman has referred to it as a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”[11]
 However, today there are fewer supporters of Milton Freidman's theory of 'capitalism and freedom' and over the past two decades or so, CSR has blossomed at least as an idea, if not as a practical programme.[12]
In 2009, the Ministry of Corporate Affairs had issued Corporate Social Responsibility Voluntary Guidelines (‘the Guidelines’) which explains that under those guidelines CSR was not philanthropy and the guidelines clarified that those CSR activities which companies would undertake beyond any statutory requirement or obligation would be purely voluntary.[13]
It was also stated that although the guidelines were tailored keeping in mind the Indian scenario, the guidelines would be helpful for overseas operations as well.  Until 2013, CSR was not made mandatory.

IV.             CSR under the Companies Act 2013
Section 135 of the Companies Act, 2013 (‘the Act’) has introduced mandatory CSR, which is applicable to companies which satisfy net worth or turnover or profit limit of:
(i)           Net worth of Rs. 500 crore or more, or
(ii)         Turnover of Rs. 1000 crore or more, or
(iii)       Profit of Rs. 5 crore or more.
Image taken from here.
Companies which fall within the CSR limit must discharge CSR responsibilities through Board Committee which must comprise of 3 or more directors including at least one independent director. It seems that Private Companies shall have to appoint independent directors for this purpose although it is not required to have independent director under section 149 of the Act.
The Draft Corporate Social Responsibility Rules, 2013 (‘the Rules’) provide that for the purpose of compliance with section 135 of the Act and the Rules CSR activities within India are only to be taken into consideration.
The Rules, which provide that only activities which are not exclusively for the benefit of employees of the company or their family shall be considered as CSR activity, makes a departure from the Guidelines which completely prohibited employees from being direct beneficiaries of the CSR activities of the company.
It is submitted by the author that Section 135 of the Act provides a very vague and broad legal frame-work. The provision does not give authorities the teeth to prohibit companies from simply having a CSR policy and spending some money and disclosing the reason for not spending 2% of average net profit using second proviso to Section 135 (5). Draft Corporate Social Responsibility Rules, 2013 are also ambiguous. There is no specific provision dealing with scenarios where the prescribed money is not spent, then whether such  lapses or to be carried forward as liability in the balance sheet. What if that carried forward amount keeps growing over the years? The only mention of such amounts is in annual reporting format which requires that the amount carried forward be mentioned.
The preamble to CSR Rules state that "CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits. They use CSR to integrate economic, environmental and social objectives with the company’s operations and growth."
The theory of CSR is based on the idea that corporations should be responsible for our society since they are also actors of the social institutions, but with respect to what aspects they are responsible and to what extent they can be held responsible, are not clearly defined in the definition. 

V.                Scope of CSR Activities
The type of activities companies generally undertake in an attempt to be seen as socially responsible include:
•Donations; this consists of simple chequebook philantrophy
•Cause-related marketing. For example when the company's logo is associated with a particular charityevent or programme. The company builds a reputation and its brand name is also spread. The "Aditya Birla Centre for Community Initiatives and Rural Development"
•Sponsoring prizes and awards given for excellence in social activites
•Codes of conduct
•Social and environmental reporting
•Community projects. For example green projects undertaken by company that depend on natural resources, as a way of 'giving back' to the community
•Eco-efficiency . For example, replacing use of non-renewable sources of energy with use of sources such as solar or wind energy
•Investing in social development corporations
The activities listed in Schedule VII of the Act are:
·         Eradicating extreme hunger and poverty
·         Promotion of education
·         Promoting gender equality and empowering women
·         Reducing child mortality and improving maternal health
·         Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases
·         Ensuring environmental sustainability
·         Employment enhancing vocational skills
·         Social business projects
·         Contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
·         Such other matters as may be prescribed

VI.             Conclusion
The author is of the view that disclosure is not the remedy of non-spending and this has been clearly amplified by Mr. Sachin Pilot in his interview. Of course, the second proviso to section 135 requires disclosure in the board's report in case it fails to spend the required amount along with providing reasons for not spending. The disclosure requirement should not be taken as a remedy for non-spending but inability to spend the required sum must be acceptable for logical reason. According to T.P. Ghosh, such  reason, cannot be liquidity problem during the current year but could be linked to overall CSR policy, issues relating to project implementation or setting aside a portion of money for emergency relief work, etc.[14]
It is submitted that the current CSR provisions contained in the Act and the Rules, although ambiguous, are not unreasonable. The limits prescribed in section 135(1) ensure that mandatory CSR only applies to large corporations; therefore, there is no pressure of mandatory expenditure of 2% of average net profits on smaller companies. CSR is not necessarily a win for society, but also for the companies. Properly implemented, participating in CSR activities is also an excellent method for companies to promote their brand name and to show the people that they care, thus building a good reputation in the market. Whether it is right to let social service activities be commercialized or not is an entirely separate debate, but it cannot be denied that CSR activities do make a huge difference.
Wipro in its 2010-2011 sustainability report stated that mandatory CSR laws would in time prove to be counter-productive since companies, in the pressure to comply with the laws, would find contrived ways of meeting the requirements prescribed by the laws. It further declared that Wipro’s stance was that CSR must flow naturally from a company’s ‘values and convictions’ and that CSR activities would get the optimal results if they are in line with the company’s mission and goals.[15]
The mandatory CSR laws allow companies to invest the 2% of PAT in a variety of manners. It is in every way better than an additional tax of 2% being imposed on companies, in which case companies would have no say on how that money would be spent or where it would be invested. The author would like to part by paraphrasing Edward Thurlow, 1st Baron Thurlow, not quoting him, but as he has often  been misquoted: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and  nobody to be kicked?"[16]
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†   This article reflects the position of law as on 21st March 2013.
[1] Chairman, PricewaterhouseCoopers India
[2] Chahoud, Dr. Tatjana; Johannes Emmerling, Dorothea Kolb, Iris Kubina, Gordon Repinski, Catarina Schl├Ąger Corporate Social and Environmental Responsibility in India - Assessing the UN Global Compact's Role (2007), 26
[3] Forbes India, India Inc. needs to wake up to its social responsibilities, (18th March 2013) available at
http://forbesindia.com/article/boardroom/india-inc-needs-to-wake-up-to-its-social-responsibilities/34891/1 (last seen on 18th December 2013)
[4] Forbes India, CSR Report Card: Where Companies Stand, Forbes India,, (18th March 2013) available at
http://forbesindia.com/article/real-issue/csr-report-card-where-companies-stand/34893/1 (last seen on 18th December 2013)
[5] Press Trust of India, Pilot estimates CSR spend of companies at Rs 15,000-20,000 cr a year , (New Delhi, 10th September 2013)available at http://www.thehindubusinessline.com/companies/pilot-estimates-csr-spend-of-companies-at-rs-1500020000-cr-a-year/article5111965.ece (last seen on 18th December 2013)
[6] Lok Sabha Secretariat Parliament Library And Reference, Research, Documentation and Information Service (Larrdis), Reference Note No. 11 /RN/Ref./2013, 1
[7] Philip Watts and Lord Holme, Corporate Social Responsibility: Meeting changing expectations, 3
[8] Supra n. 5
[9] The Theory Of Corporate Social Responsibility And The Challenges It Faced Under Globalization 19th  April, 2011 at http://iphoneproj2011.wordpress.com/2011/04/19/the-theory-of-corporate-social-responsibility-and-the-challenges-it-faced-under-globalization/ 1 (last seen on 18th December 2013)
[10] Ibid.
[11] Dr. T P Ghosh on the Companies Act 2013 (November 2013 Taxmann), 573, Para 19.1
[12] Ibid.
[13] Government of India, Ministry of Corporate Affairs, Corporate Social Responsibility Voluntary Guidelines, 2009
[14] supra n. 11.
[15] Wipro, ‘The Imperative of Hope’, Wipro Sustainability Report 2010-11, 167
[16] The actual quote is “Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like” and is quoted in John Poynder, Literary Extracts (1844), vol. 1, p. 268. [1].

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