CSR: A tool for companies to give back

Corporate Social Responsibility (CSR) is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR functions as a self-regulatory mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards and national and international norms.

Although CSR is perceived to be a recent phenomenon, its roots can be traced way back to the early 1900’s. J.M. Clark had expressed the idea that “…if men are responsible for the known results of their actions, business responsibilities must include the known results of business dealings, whether these have been recognized by law or not.”[1] This idea was once again substantiated by the Committee for Economic Development which observed that “business is a function by public consent and its basic purpose is to serve constructively the needs of society to the satisfaction of society.”[2]

Way back in 1976, the Organization for Economic Co-operation and Development (OECD) established a set of guidelines for multinational corporations to behave ethically towards the environment and these guidelines were a path-breaking ideology, leading thereby to the development of the concept of CSR. The chain of thought at the time was to ensure that businesses gave back to the society what they took away from it, thereby adhering to the requirements of the triple bottom line i.e.social, environmental and financial.

The European Union definition of CSR is all-encompassing and implies that the concept that an enterprise is accountable for its impact on all relevant stakeholders. It is the continuing commitment by business to behave fairly and responsibly 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.[3]

CSR in India

India has always leaned towards charity and helping the poor and this has been reflected in our religious books and several ancient literatures. India is the first country in the world to enshrine corporate giving into law. Before compliance to CSR was made mandatory, the donations, monetary and otherwise, were sporadic activities of charity or philanthropy that were taken out of personal savings. They neither belonged to shareholders nor did they constitute an integral part of business.

The Ministry of Corporate Affairs, in 2011, drafted the National Voluntary Guidelines (NVG) whereby all businesses, irrespective of size, sector or location would consciously work towards ethical practices inter alia revolving around environment, society and sustainable practices. The essence of the NVG was then considered while drafting Section 135 of the Companies Act, 2013 (‘the Act’) which provides that every company meeting the following criteria shall comply with CSR –

Net worth of rupees five hundred crores or more, or
Turnover of rupees one thousand crores or more, or
A net profit of rupees five crores or more.

Companies falling under any of the aforementioned criteria shall spend at least 2% of the average net profits made during the 3 immediately preceding financial years in pursuance of its CSR policy.

Companies, in order to ensure compliance with their social responsibilities, either set up a foundation or work through non-profits or implement their schemes directly. Companies with large funds usually prefer to set up a foundation where they can exude more control over how the money is spent. This arrangement was validated by the Ministry of Corporate Affairs vide General Circular No. 21/2014 which clarified that the contribution to a corpus of a trust/society/Section 8 company will qualify as CSR expenditure as long as such an entity is created exclusively for undertaking CSR activities.

Section 135 of the Act should be read with the Companies (Corporate Social Responsibility Policy) Rules 2014 which details various aspects of CSR.

Activities which can and cannot be undertaken as CSR

Activities that can be undertaken under CSR are enumerated in Schedule VII of the Act. Post the 2014 amendment to the Act, Schedule VII contains 10 categories under which CSR activities can be conducted including eradicating poverty and hunger; improving education, health and gender equality; protecting the environment, animals and national heritage; measures to benefit armed forces veterans and technology incubators; promoting sports and rural development projects; and contribution to Central Government funds.

Further, the Ministry of Corporate Affairs, as per their General Circular Number 21/2014, clarified that “the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule.”

Activities that cannot be construed as CSR activities are stated in the Ministry of Corporate Affairs’ General Circular No. 01/2016 and are as follows –

The CSR activities that benefit only the employees of the company and their families.
One-off events such as marathons/awards/charitable foundations etc.
Expenses incurred by the companies for the fulfillment of any other Act/Statute of regulations such as labour laws etc.
Contribution of any amount directly or indirectly to a political party.
Activities undertaken by the company in pursuance of its normal course of business.
The project or programmes or activities undertaken outside India.

Planning the CSR policy

As per the Ministry of Corporate Affairs notification number G.S.R. 129 (E) dated February 27, 2014, the CSR expenditure shall include all expenditure approved by the Board on the recommendation of its CSR Committee but does not include any expenditure on an item not covered under Schedule VII of the Act. The CSR Committee and the Board, therefore, play an important role in determining the expenditure, activity and the overall CSR policy.

The CSR Committee shall consist of three or more directors out of which at least one director shall be an independent director. The responsibilities of the CSR Committee will include –

Formulating and recommending to the Board, a CSR policy which shall indicate the activities to be undertaken by the company.
Recommending the amount of expenditure to be incurred on such activities.
Ensuring the implementation of such CSR activity.
Monitoring the company’s CSR policy from time to time.

The Board has the following responsibilities towards shaping the CSR policy –

Approve the CSR policy formulated by the CSR Committee.
Disclose the contents of such CSR policy in its report and also place the same on the company’s website.
Ensure that the activities that are included in the CSR policy of the company are undertaken by the company.

It is important to draft and execute a CSR policy as per statutory requirements failing which companies could face action. A recent article in Times of India reported that the government has started taking strict penal action against violators of the CSR norms under Section 134(8) of the Act i.e. mandatory filings by the directors of a company, and Sections 450 and 451 of the Act i.e. punishment where no specific penalty or punishment is provided. As there are no specific penal provisions laid down for violating the CSR norms, companies found violating the provisions of Section 134(8) of the Act shall be imposed with a fine anywhere in the range of Rs. 50,000 upto Rs. 25,00,000, and every officer of the company can be punished with imprisonment for a term which may extend to 3 years along with fine. Further, under Sections 450 and 451 of the Act the company and every person who is in default shall be punishable with fine which may extend to Rs. 10,000.

Partnering up for CSR

Prima facie, it appears that companies in India appear spoilt for choice when it comes to choosing implementation partners for their mandated CSR activities. Hence, ascertaining the credibility and efficacy of an NGO for a company’s CSR implementation is as daunting in sheer volume as it is in the depth of work involved, simply because of the staggering variety and nature of work of the NGOs.

After CSR expenditure was made mandatory, a lot of Non-Governmental Organisations (NGOs) started burgeoning overnight. To filter out the fakes, the Ministry of Corporate Affairs vide its notification numbered G.S.R. 129 (E) dated February 27, 2014, mandated that only NGOs that have an established track record of 3 years can be partnered with for CSR activities. Further, it is quintessential that the companies do a thorough background check of the NGOs.

The following factors should specifically be covered in such a background check – competence of the NGO, its vision and mission, audited financial records for the previous 3 years and the NGO’s transparency and financial capability. A review of the NGO’s annual reports, other corporate partners and its website (if present) will also help the company make an informed decision.

Few technical details companies must look into while selecting an NGO are –

Registration under the Foreign Contribution Registration Act, 2010. Under this, foreign funds can be utilized only for purposes specified under the said Act. It is also strongly recommended that the company enter into an agreement with the selected NGO detailing out the scope of work, implementation timelines, cost allocation and periodic reporting requirements.
Registration under any one of the following Acts – Indian Trust Act, 1882, Co-operative Societies Act, 1912, Societies Registration Act, 1860 or Section 8 of the Companies Act, 2013.
Not blacklisted by the government. The Ministry of Social Justice and Empowerment lists the blacklisted NGOs on its website, which is available here.

Voices of dissent

“Charitable giving used to be a big reputation builder for us, now it’s just legal compliance” said the director of a conglomerate to The Guardian.[4] In certain cases, companies that were giving more than 2% have scaled back their charitable spend. Critics questioned the ‘lofty’ and sometimes ‘unrealistic expectations’ in CSR. It is more often the case that reputed and bigger NGOs have a huge inflow of money on account of CSR and smaller, lesser-known NGOs often face problems while coping with companies bureaucratic and operational demands.

As per General Circular No. 01/2016 dated January 12, 2016, the Ministry of Corporate Affairs has clarified that the Board of a company can take a decision on supplementing any government scheme. This, in turn, has led to companies vying to earn the goodwill of the government by backing government-led projects rather than independent NGOs.

Section 135 of the Act has also mandated that companies shall give preference to the local areas around which it operates while doing CSR spending. This, in turn, will induce local governments to have a favorable attitude to the company considering the amount of money invested. Further, spending on local areas may increase inter-State disparities in social indicators. For instance, States with larger number of industries and companies could see a more positive impact from CSR than other States.

Conclusion

CSR definitely has certain obvious benefits to the business i.e. better brand recognition, increased sales, retention of employees, easier access to capital etc. Apart from these obvious benefits, the society as a whole benefits from the activities conducted under CSR. Jim Owens, the CEO of Caterpillar, had famously quoted “In the next decade, the most successful companies will be those that integrate sustainability into their core business.”

In this day and age of cut-throat competition, the author strongly opines that companies should not forget that the society is a cornerstone to their growth. There are definitely pros and cons to every reform and this is also the case with CSR. While a few companies claim to be socially and morally responsible only in order to obtain more businesses, many companies are imbibing the philosophy of giving back which, over time, will be instrumental in bringing about many positive changes in the society.

DISCLAIMER:The information provided in this article is for educational purpose only. The same cannot be construed as legal advice.

[1] Clark, J. M., The changing basis of economic responsibility, 24(3) JOURNAL OF POLITICAL ECONOMY 209–229 (1916).

[2] COMMITTEE FOR ECONOMIC DEVELOPMENT, SOCIAL RESPONSIBILITY OF BUSINESS CORPORATIONS (1971).

[3] A renewed EU strategy 2-11-14 for Corporate Social Responsibility, (2011), http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?docz-id=7010 (last visited Jul 14, 2018).

[4] Oliver Balch, Indian law requires companies to give 2% of profits to charity. Is it working?, The Guardian, April 5, 2016, https://www.theguardian.com/sustainable-business/2016/apr/05/india-csr-law-requires-companies-profits-to-charity-is-it-working (last visited Jul 13, 2018).