Consentia on Multidisciplinary Research

CORPORATE SOCIAL RESPONSIBILITY: IS IT REALLY MANDATORY?

 “Industry should consider themselves as trustee and servants of the poor”.[1]

  1. INTRODUCTION

Since the inception of the Swadeshi Movement in the year 1905, till its end in 1911, the whole movement was funded by the rich class mainly businessmen and the capitalists[2] and that was the first time, when the capitalists involved with the society at large and played a very significant role in the freedom struggle movement be it Swadeshi movement or non-cooperation movement, and this seems to be the commencement of Corporate Social Responsibility (CSR) in India.

The concept of Corporate Social Responsibility (CSR) which aims to make companies responsible towards the society and India a better place to live was incorporated in Indian laws through The Companies Act, 2013 which was passed by the voice votes[3] in the parliament. The CSR activities of the companies are governed by section 135 of the Companies Act and the Companies (Corporate Social Responsibility Policy) Rules 2014 which had already came into force on 1st April 2014. The provision under section 135 has made it mandatory to spend two percent of the net profit of the company during the three immediately preceding financial years, only if the company’s net worth is Rs 500 Crore or more, or turnover of Rs 1000 Crore or more, or a net profit of Rs.5 Crore or more.[4]

CSR has no specific definition; different jurist have their own definition of CSR and are used in different forms. According to Sir Mc Williams, the CSR policy functions as a self-regulating mechanism by which a business can be monitored and ensured the active compliance of the spirit of the law, international norms, and the ethical standards.[5]  Some define CSR as the compliance of ecological and social responsibility of a company.[6] CSR has some regional definitions as well, like in Philippines, “CSR is all about giving back to society”.[7] In Ghana, CSR means capacity building for sustainable livelihoods.[8] So the concept of corporate social responsibility differs with the regions and the need of the society. But the best definition of CSR has been given by UN Industrial development Organisation which states CSR as a ‘management concept by which companies integrate social and environmental concerns in their business operations and interactions with their stakeholders’.[9]

The Companies Act, 2013 does not define CSR; but the Companies (Corporate Social Responsibility Policy) Rules 2014 provides an inclusive definition of CSR and it states that “CSR means and includes but is not limited to the projects or programs relating to activities specified in the schedule VII of the Act or any activities recommended by the CSR committee of the company.[10]

The relationship between business and the society exists from time immemorial and both are inter-dependent. Rig Veda also talks about the same: “Corporates should work like a honeybee, which takes the nectar of a flower without the flower being losing its shape and fragrance and provides honey for the wellbeing of the society”,[11] which clearly means that both the corporate world and the society have to work on a symbiosis manner for each one’s survival and success.[12]

Today, society is clamouring for the companies to follow fair and good business practices, and the role of social media in highlighting those works is important these days, making companies conscious of their responsibilities. In the year 2010, the green peace foundation used the social media to stop the use of unsustainable palm oil and attacked Nestle with a viral video, which in a click reached to the world on social network and leading Nestle to cancel contract with the Palm oil traders.[13] Social media now has become a driving force behind CSR agendas of many companies. The awareness amongst people helps to change the society.

The need for the policies like CSR in India can be deduced from the fact that during the passage of the Companies Bill, 2013 in the parliament, there was no discussion on section 135 of the bill which talks about CSR. Proper implementation of this policy will make the companies in India to spend a total of Rs 20,000 Crore on various problems like environment problem, water problem, education problem and sanitization problem.[14]  Perhaps, India is the first country to make CSR mandatory in this manner. [15]

II. THE EVOLUTION OF CSR: THROUGH THE FOUR PHASES

The CSR is not a new concept in the global as well as in Indian scenario. The mandatory CSR in the new Companies Act is the result of the previous philanthropy activities done by the rich people. The evolution of the CSR has been divided in to four phase[16]:

A. First Phase (prior to 1914)

Prior to 1914, there were very less number of companies and at that time mainly landlords controls the economy of the country and so were responsible for the charity. The CSR engagement at that time was driven by the religious teachings of philanthropy and charity.

B. Second Phase (1914-1960)

The second phase starts with ‘Swadeshi Movement’ initiated by Gandhi,[17] where big Indian companies were funding the freedom struggle movements and various other activities to remove foreign companies. This model was based on the Gandhian principle of voluntary commitment to the welfare of the public.[18]

C. Third Phase (1960-1980)

            In the third phase, companies were not voluntarily contributing towards the society but due to the fear of law, they were made responsible towards the same. During the third phase various labour laws, environmental laws and laws related to corporate governance were made, and these laws forced companies to act in a responsible and reasonable manner. This model was based on Nehruvian model (Statist model) of legal requirement and state ownership, in which companies are obliged to act responsibly and socially.[19]

D. Fourth Phase (1980-2012)

This phase starts when the companies used to do CSR voluntarily and integrate it with their strategies. Here, the CSR was not look down as a burden or an extra task, CSR was believed to be the part of the company and its responsibility. This phase is based on the liberal model given by Milton Friedman.[20]

With the changes in the Companies Act and government making CSR mandatory, a fifth phase of CSR evolution seems to be knocking the door.

India is the pioneer in making CSR mandatory but in countries, like Sweden, Denmark, Norway, France, Netherlands, and Australia, there are provisions related to mandatory CSR reporting requirements, though it is not legally mandatory to carry out CSR activities.[21] With the inclusion of provision related to CSR in the new Companies Act in India, there is a lot of scope that the corporate sector can do to eliminate poverty, illiteracy, unemployment and sanitization.[22]

Corporate social responsibility has broader implications for the nation as a whole; it helps to reduce the dependency on the government for social change in the society. Most governmental schemes and programmes quickly become enmeshed in political manipulation, communal overtones, corruption, and bitter infighting.[23] There is a need for more involvement of companies in the societal development and one of the ways to involve is public-private partnership with well-defined controls and processes for the best use of resources for social change. The Social reforms driven by the community at large will bind people together and reinforce peace and harmony.

III. CSR: THE PENULTIMATE NEED OF THE HOUR

India today is facing an unprecedented stress related to numerous social, environmental and governance problem.  India is trampled with problems like poverty, population growth, malnutrition, water scarcity, illiteracy, sanitisation, energy security, corruption and the never ending list.[24] These problems have serious impact on the economy and the growth of India. Now it is not only the responsibility of the government to eradicate all the problems, the citizen participation is also required. Therefore to improve the condition, the participation from the big companies is also required.   CSR is also necessary for the company’s reputation and business as well, today the consumers wants to buy the products from the companies which are responsible towards the society, we have the example of ITC, whose stationery product Classmate Notebooks are so popular because of its contribution towards the education of the poor people.[25] Suppliers want to form business partnerships with companies on which they can rely, like suppliers believe on TATA group because of their philanthropy activities.[26] Employees want to work for the companies which they respect, NGO’s also want to work with companies that seek practical solutions to the problems persisting in the society, to satisfy all these people, companies have to show their responsibility, and the best way is the CSR.

We have various examples in the history where the companies had not performed their duties and had lead to serious repercussions like the Bhopal gas tragedy, which was one of the best examples of the carelessness and the lack of responsibility of the companies towards the society. The Oleum gas leak case is another example in which the company don’t perform its duty well and leads to a disaster.[27]

The biggest question in front of us is that whether CSR is good ethics or sustainability? The CSR helps the companies to earn a socially responsible image which begets respect and as a result net revenue also increases. The trend is changing slowly but surely catching on in Indian corporate circles, some of the big players like TATA and Reliance are coming up with comprehensive CSR practices that have positive impact on the environment and society at large and at the same time help to augment their corporate image.

IV. CSR IN COMPANIES: THE PROCEDURE TO BE FOLLOWED

According to Section 135 of the Companies Act, Companies whose net worth is more than Rs 500 Crore, or companies having turnover of Rs 1000 Crore, or companies having net profit[28] more than 5 Crore have to constitute a CSR committee which should include at least three board of directors and one of them should be an independent one.[29] The committee task is to make a CSR policy indicating the task to be undertaken under schedule 7 of the act, the panel also recommend the amount to be spent on the policy.[30] The Companies act not only provides for setting up of a committee but also assigns the committee the task to monitor the same. The board of directors should act on the advice of the committee and they should also ensure that the activities are being performed in the prescribed manner. The board has to publish a yearly report of all the initiatives taken by the companies and it should contain all the details like the amount spend, the area on which it is spent and the progress of the work. If CSR is not being carried out because of some reasons like loss to the company or any other reason than the report should contain the reason for the same, failing to do so, will attract a punishment up to 3 years and the company shall be levied with a penalty of not less than 50,000 and which can go up to 25 lakhs.[31]

V. WEIGHING CSR: ISO 26000:2010

Companies does not exist in vacuum, their relationship with the society in which they operate is very crucial for their existence; hence it is increasingly being used as a measure for the company’s performance. In 2010, International organisation for standardisation has launched an international standard providing guidelines to the companies for social responsibility (SR) called ISO 26000 or ISO SR.[32] This standard makes people aware of the social responsibility taken up by the companies; provide guidance and possible actions to the companies. This standard doesn’t have any requirement therefore it is not certifiable. ISO 26000 is a guidance document and is voluntary in use and it encourages the companies to talk about their responsibility and possible actions with stakeholders.  The concept of ISO 26000 is widely increasing and the companies whether private or public are participating in it, because of the increase in the demand in the public to behave socially.[33]

VI. STAKE HOLDERS v. STOCK HOLDERS

The Stock holder theory also known as share holder theory which was prevailing in India till late twentieth century was based on the profit motive of a company, which says that the interest of the share holders should be supreme and the only motive of the company is to gain profit and nothing else. The logic behind this theory was that the ultimate object of the company is profit and to succeed in the market.[34] But now the trend is shifting from the stock holder theory to Stake Holders theory.

Concept of Corporate social responsibility is based on stake holders the theory. Stake holders are ‘individuals and groups that are benefitted or harmed by the act of the company or the individuals and groups whose rights are violated or respected by the act of the company’.[35] They include employees, creditors, shareholders, customers, suppliers, government and society at large. The theory obliges the company to act in the interest of all. The theory also put forth that the company has the responsibility towards the stake holders and not to stock holders only. It means that the company or the management while making any decision has to take interest of not only stock holders but also the stake holders.

VII. INITIATIVES TO IMPROVE AND STRENGTHEN CSR

A. Shanti Ashram Workshop

As the awareness about CSR is increasing, its importance is also increasing day by day and it can be asserted by the fact that various non-profit organisations are organising the workshop and seminar on “How to Plan, Execute and Manage Corporate Social Responsibility Initiatives”, and how to spend the funds for the welfare of the society in a proper manner.[36] Shanti Ashram organised a workshop with CII, Tamil Nadu to promote CSR and to manage CSR initiatives for the companies.

B. India’s First CSR Index

Bombay stock exchange ltd. and Indian Institute of Corporate Affairs had signed a MOU to develop a CSR index which aims to promote CSR. A committee will be setup under this to help companies to meet their CSR agendas and to promote it. The CSR index will give companies a bigger platform and also promote competitiveness. [37] The committee will assess the performance of the companies listed at BSE in CSR activities. The CSR index would seek to promote investor participation, consumer interest and socio-economic benefits to the disadvantaged communities by generating awareness and accountability in CSR spending[38]

C. CSR Consultancy

Various consultancies are setup in India to aid companies in doing CSR, one such consultancy is setup in Ahmadabad, to give advice and to setup a chain of NGO’s to manage the funds of the companies allotted for the welfare of the societies in the form of CSR.  It is a first of kind initiatives.[39]

VIII. MANDATORY CSR: OR IS IT REALLY?

Many corporate argue that making CSR mandatory is very harmful for the growth of the company, and companies look towards CSR as a burden or an additional tax levied on them.[40] Whereas the Government argues that there is a lot of scope under the provision for a company to perform CSR in a manner as they want, they can develop the local areas in which the company is functioning.[41] There is provision under section 135, under which the companies can give reason for not doing CSR, and if the reason is reasonable then it will not attract penalty. So, the provision is not mandatory.[42]   The government’s intention under section 135 of the Companies Act, 2013 is not to make CSR mandatory but to provide a set of guidelines for the companies doing CSR.

Prior to the Companies Act, 2013, some of the companies were involved in the CSR, but their activities were occasional, and were not reported in the company’s annual report, the reason was simple that the CSR was not mandatory at that time. The companies who were involved in CSR used to contribute very less to the society (SBI contributing 0.7 % of the net profit, ICICI only 0.2 % and AXIS bank contributing nil), only Ambuja Cement (2.6%) and Tata Steel (4%) are above the 2% mark as mention in the Companies act, 2013.[43]  So, disappointing had been the performance in this regard that a scheme had to be framed for companies who failed to utilize the allocated funds for CSR with in stipulated time to transfer the unspent money to a ‘sustainability fund’ which has to be set-up for this purpose.  So to regularise the funds, and to put all companies at equal footing, the government has laid down a policy framework for the companies crossing the threshold mentioned under section 135 of the Act. By analysing section 135, we can easily draw an inference that CSR in India is not mandatory, as companies can save themselves from punishment even if they don’t do CSR as mentioned in the proviso to section 135 of the act; it seems that the government wants to make the reporting of CSR mandatory rather making CSR mandatory like in other countries. In countries like Australia, Indonesia and USA, the CSR is not mandatory rather its reporting is mandatory, this seems the case in India as well.

IX. CHALLENGES FACED BY THE COMPANIES

At present, the state of CSR in India is very poor; a very small percentage of companies are spending on CSR. Some companies are involved in mere donations towards philanthropy or charity which won’t even qualify under CSR. Today the companies are also facing the problem while implementing the policies related to CSR, for companies it is difficult to find out reliable NGOs which will help them in doing CSR. Companies argue that the electing a separate committee for CSR will burden them and would lead to lack in human resource and establishing a CSR committee might divert them from the profit motive of the company. Also one of the major problems for the company will be to align the attitudes of various stakeholders towards successful implementation of CSR. Various stakeholders may have different choice of themes for doing CSR, also they might have different geographical location where they want to invest the funds, and hence it will be difficult for a company to align all the stakeholders in one direction. The main point of discussion among Indian companies is that, if they will use two percent of their profit towards CSR, then it will affect their growth at International market as the funds will decrease for the investment as compared to the MNC’s working outside India and not contributing towards CSR. Indian companies argue that doing CSR and contributing for the society will put them at lower footing than foreign companies in International market.

X. CONCLUSION

CSR is a changing concept, earlier the companies used to integrate voluntarily social and environmental concerns in their operations for contributing in building a better society and cleaner environment, but after the passage of the Companies Act, CSR has become mandatory. According to the author, CSR provision under the new Companies Act is a guideline of activities that should be done continuously for society. CSR is the best way to communicate to the customers directly and to increase the reputation of the company. Consequently, the companies should regard these CSR activities seriously and a responsibility for their sustainable development. For improving the society; CSR is not only the solution, companies should also comply with labour laws, environmental laws and various other laws of the land.

CSR initiative under section 135 of the Companies act is to create better investment opportunity to create a better work environment, rather than a forced disbursement. The CSR provision is not a forced one as it provides the company a wide area to choose from in which the companies want to invest and also it contains provisions by which the companies if fails to do CSR can save itself from penal provision by giving sufficient reasons. CSR is a step to increase the involvement of the companies in the development of the nation and to give back to the society.

[1] Mahatama Gandhi, FICCI, 4th Annual General Meeting, 1931

[2] David Lockwood, ‘The Indian Bourgeoisie: A Political History of the Indian Capitalist Class in the Early Twentieth Century’, (I B Tauris Pub) 147,

[3] The telegraph, ‘Final stamp on new code for firm’ August 9 , 2013

[4] Section 135 (5), Companies act, 2013

[5] McWilliams, Abagail Siegel, Donald “Corporate social responsibility: A theory of the firm perspective” (2001) (Academy of Management Review) 26

[6] DIE’s, Corporate Social and Environmental Responsibility in India – Assessing the UN Global Compact’s Role, (CSR Asia) 48

[7] Tay Kay Luan, ‘UNDP-ICR Malaysia conference on CSR: raising the bar’, 2007

[8] Dr. Linda S, ‘International Trends in Corporate Social Responsibility (CSR) and Sustainable Development’., (India law journal), volume 5 issue 4

[9] http://www.unido.org/en/what-we-do/trade/csr/what-is-csr.html

[10] Section 2 (c) Companies (Corporate Social Responsibility Policy) rules 2014

[11] S. S. Khanka, ‘HOW BEING GOOD IS GOOD FOR BUSINESS?,’ (Vidyasagar University Journal of Commerce ) Vol 11, March 2006

[12] Dr. Reddy’s Laboratory, ‘Business ethics; Corporate social responsibility’,

[13] Green Peace Foundation ‘How the palm oil industry is cooking the climate’ available at http://www.greenpeace.org/france/PageFiles/266591/cooking-the-climate.pdf

[14] Business line, ‘Pilot estimates CSR spend of companies at Rs 15,000-20,000 cr a year’ Sept 10 2013,

[15] T.N. Pandey, ‘Corporate Social Responsibility under clause 135 of the companies bill, 2012’, Company law manual, 2013

[16] Arpita Ghosh, ‘Mandatory CSR in India’ (2013) 114 CLA (Mag) 1

[17] David Lockwood, ‘The Indian Bourgeoisie: A Political History of the Indian Capitalist Class in the Early Twentieth Century, (I B Tauris Pub) 147

[18] Dhond Arvind A, ‘CORPORATE SOCIAL RESPONSIBILITY OF INDIAN BUSINESS HOUSES’, available at http://www.mmbgims.com/docs/full_paper/3_Arvind_pp.pdf

[19] A.C. Fernando, ‘Business Ethics, an Indian perspective’, 2007(Pearson education) 421

[20] Supra note 19

[21] Jeannet Lingan, ‘TRENDS IN CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE: HOW ARE COUNTRIES INCORPORATING SUSTAINABILITY REPORTING0?’ available at http://stakeholderforum.org/sf/outreach/index.php/int3day2home/84-inf1day3/671-ifn1day3item2

[22] Afra Afsharipour, ‘Directors as trustees of the nation? India’s corporate governance and corporate social responsibility reforms efforts’( Seattle university law review 995

[23] Sandipen Deb, ‘The failure of India’s economic reforms’, (Live mint and Wall street journal) Sept 2013

[24] Ganesh S Kumar, Sitanshu Sekhar Kar, and Animesh Jain, ‘Health and environmental sanitation in India: Issues for prioritizing control strategies’, (Indian Journal of Occupational and Environmental Medicine) Sept 2011

[25] How ITC’s filling up schoolbags, April 12, 2006 available at http://www.rediff.com/money/2006/apr/12spec.htm

[26] Joseph R. Perone, ‘Charity is part of Tata Sons bottom line’, , September 26, 2010, available at http://www.nj.com/business/index.ssf/2010/09/charity_is_part_of_tata_sons_b.html

[27] Bede Nwete, ‘Corporate Social Responsibility and Transparency in the Development of Energy and Mining Projects in Emerging Markets; Is Soft Law the Answer?( GERMAN LAW JOURNAL) Vol 08 No 04 311

[28] Calculated according to section 198 of the act

[29] Section 135 (1) Companies act, 2013

[30] Section 135 (3) Companies act, 2013

[31] Kordant Report, ‘The 2% CSR Clause: New Requirements for Companies in India, kordant philosophy advisors’, available at http://www.kordant.com/assets/2-Percent-India-CSR-Report.pdf

[32] ISO 26000 – Social responsibility, available at http://www.iso.org

[33] TUV Rheinland, ‘Corporate Social Responsibility and Guidance on Social Responsibility as per ISO 26000’, available at http://www.tuv.com/media/india/informationcenter_1/systems/Corporate_Social_Responsibility.pdf

[34] Jawahar & McLaughlin, 2001

[35] Freeman, 1998

[36] The Hindu, August 31, 2013

[37] The Hindu, ‘India’s first CSR index on its way’, 23 SEPT 2013

[38] Press information bureau, Mumbai September 23, 2013

[39] The Hindu: business line ‘Concept PR forays into CSR consultancy’ AUG 26

[40] Subhabrata Bobby Banerjee, ‘Corporate Social Responsibility: The Good, the Bad and the Ugly’, 2008  (Crit Sociology journal) 151

[41] Schedule VII, Companies act, 2013

[42] Section 135 Proviso, Companies act, 2013

[43] Kiran Kabtta Somvanshi, ‘A Report in the Economic Times on the company listed in NIFTY’,  ET Bureau Dec 20, 2012

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