CSR A Culturally Driven Policy Initiative

Through the CSR policy, the government expects to raise between '15,000 and '20,000 crore annually for the benefit of the social sector

India is the world's largest democracy, the tenth largest economy by nominal GDP and third largest by purchasing power parity. Since independence, India has been governed by growing disparity amongst the population, with severe differences existing in relation to income, development, literacy, health, sanitation and life expectancy. With a population of 1.3 billion people, 800 million of whom live on less than $2 per day2, the development of India and her citizens remains imperative to the realisation of social and economic development goals set through international organisations.

Culturally, India has had a long standing tradition of giving back to society, with people from the upper classes routinely indulging in philanthropic activities including building schools, hospitals, aiding the less fortunate and developing their surroundings. Lord Macaulay in his address to the British Parliament in 1835 noted that India was a place with such wealth amongst its people, intact with high moral values and spiritual and cultural heritage, it would be impossible to conquer India unless her culture, ancient education system, and self-esteem were replaced3.

The Constitution of India contemplates, among other things, to secure social, economic and political justice and equality of status and opportunity for all its citizens. One can therefore argue that CSR, as we understand it today, forms one of the basic principles behind the Constitution of India as it stands today since it co-relates development with non-concentration of wealth in the hands of a few. The Supreme Court of India has stated, through many judgements that Jurisprudence is the eye of law giving an insight into the environment of which it is the expression. It relates the law to the spirit of the time and makes it richer. Law is the ultimate aim of every civilised society as a key system in a given era, to meet the needs and demands of its time. Justice, according to law, comprehends social urge and commitment. The Constitution commands justice, liberty, equality and fraternity as supreme values to usher in the egalitarian social, economic and political democracy. Social justice, equality and dignity of person are cornerstones of social democracy4.

The Constitution of India contemplates, among other things, to secure social, economic and political justice and equality of status and opportunity for all its citizens. One can therefore argue that CSR, as we understand it today, forms one of the basic principles behind the Constitution of India as it stands today since it co-relates development with non-concentration of wealth in the hands of a few. The Supreme Court of India has stated, through many judgements that Jurisprudence is the eye of law giving an insight into the environment of which it is the expression. It relates the law to the spirit of the time and makes it richer. Law is the ultimate aim of every civilised society as a key system in a given era, to meet the needs and demands of its time. Justice, according to law, comprehends social urge and commitment. The Constitution commands justice, liberty, equality and fraternity as supreme values to usher in the egalitarian social, economic and political democracy. Social justice, equality and dignity of person are cornerstones of social democracy4.

Corporate Social Responsibility or CSR has long been emphasised in companies as a means of self-regulation to inculcate social upliftment. CSR goes beyond the required levels of compliance and engages in actions to further social good, beyond the interests of the organisation and what is required by law5. There has been much debate on whether it is the responsibility of a business to use its resources and engage in activities different from its core, increasing its role and responsibility in addressing social problems and concerns, or whether the responsibility of a business is only to increase its profits, as long as it remains free from deceptive or fraudulent practices6.

Through the years, India has seen the corporate sector flourish but with companies often getting too caught up in the rigmarole of running a business, they can become indifferent and nonchalant to the social and economic stability of the country as a whole.

In such a scenario, to control the growing disparity in the socio-economic structure of India, an initiative such as a CSR Policy became imperative. By adopting and implementing the Companies Act, 2013, India has become the first country to introduce a statutorily mandated corporate social responsibility obligation on companies incorporated in India, albeit subject to certain conditions and riders.

Corporate Social Responsibility -

Statutorily Section 135 of the Companies Act, 2013 states that all companies having a net worth of rupees five hundred crore or more, or a turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year7 shall allocate and spend at least two per cent of the average pre-tax net profits of the company made during the three immediately preceding financial years towards its corporate social responsibility policy, which relates to activities undertaken in furtherance of Schedule VII of the Companies Act, 20138 ("CSR Policy").

Alongside allocating two per cent of the average net profits, the company must also form a corporate social responsibility committee of the board which shall comprise three or more directors, out which at least one shall be an independent director9. This committee shall be responsible for formulating the CSR Policy that the company will be governed by, monitoring the CSR Policy, allocating expenditure and the dispersion of such amounts to various causes identified in Schedule VII of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2013 ("CSR Rules").

In keeping with the reporting requirements and encouraging transparency in business transactions, the company is required to prepare a report about the company's CSR Policy, the CSR committee, and details of CSR expenditure. The company is further required to disclose the contents of its CSR Policy in its annual report and place it on the company's website in the prescribed manner10.

Allocating the Corporate Social Responsibility Expenditure

Schedule VII of the Companies Act, 2013 provides a list of activities which may be included by companies in their CSR Policy, which include eradicating hunger, poverty and malnutrition, preventive health care and sanitation, making available safe drinking water, promotion of education, promoting gender equality and empowering women, protection of national heritage, art and culture, training to promote sports, ensuring environmental sustainability, employment enhancing vocational skills, rural development projects, contribution to certain relief funds and funds for welfare of certain classes and contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government11. The Central Government may include further activities. The Ministry of Corporate Affairs recently issued clarifications stating that while the CSR Rules state that the activities permitted to be undertaken are as enumerated under Schedule VII of the Companies Act, 2013, the entries must be interpreted liberally with the intent to capture the essence of the subjects in the schedule12.

The company may undertake its CSR activities through a registered trust, registered society, or a company established by the company or its holding or subsidiary or associate company under section 8 of the Companies Act, 2013. In the event a foreign holding company incurs the expenditure for CSR activities in India, in furtherance of the companies CSR Policy, the same would qualify as CSR spends of the Indian subsidiary, only if the CSR expenditures are routed through the Indian subsidiary and comply with section 135 of the Companies Act, 201313.

While one-off events, and expenses incurred by companies for the fulfilment of any statutory obligations do not count as CSR expenditure, salaries paid to CSR staff and volunteers of companies may be factored in the CSR project cost as part of the CSR expenditure14. Further, the statute clarifies that the activities must take place in India, and the spending earmarked for CSR activities shall preferably be used for activities in the local areas around which it operates15.

In the event the company is unable to spend the allocated amount for the CSR Policy, the board of the company shall make adequate disclosures in the annual report, specifying reasons for not spending the said amount16. While the Companies Act, 2013 does not specify any penalties for failure to spend the allocated amounts under the CSR Policy, not disclosing such non-compliance can make the company liable for fines not being less that rupees fifty thousand but not more than rupees twenty five lakh, while defaulting officers can be subject to up to three years in prison and/or fines not being less that rupees fifty thousand but not more than rupees twenty five lakh17.

India's need for a Corporate Social Responsibility Policy

With the implementation of the CSR Policy in India, the government expects to raise between '15,000 to '20,000 crore annually for the benefit for the social sector18, which should go a long way towards alleviating the social and economic environment and in fulfilling the development requirements of an emerging economy such as India. The CSR Policy should be viewed as a positive step as it mandates the much required consciousness of participating in the upliftment of society as a whole. While it could be argued that this should be the government's job and can be discharged through tax revenues, it can as well be said that mindsets should change for a better future across India.

Footnote:
1 Sachs, Noah M; Cos to spend '20k cr a year on CSR: Pilot; September 11, 2013; The Hands India; 2 USAID; India Country Profile available at www.usaid.gov/sites/default/files/documents/.../Country Profile.pdf; 3 Lord Macaulay's address to the British Parliament in 2 February, 1835; 4 Consumer Education and Research center and others vs. Union of India; AIR 1995 SC 922; 5 McWilliams, Abagail; Siegel, Donald; Wright, Patrick M. (March 2006). Corporate Social Responsibility: International Perspectives. Working Papers (0604). Troy, New York: Department of Economics, Rensselaer Polytechnic Institute; 6 Tsoutsoura, Margarita. (March 2004). Corporate Social Responsibility and Financial Performance. Haas School of Business, University of California at Berkeley; 7 Section 135 (1) of the Companies Act, 2013; 8 Section 135 (5) of the Companies Act, 2013; 9 Supra at n.6; 10 Section 135 (4)(a) of the Companies Act, 2013; 11 Schedule VII of the Companies Act, 2014 as amended by notification G.S.R 130 (E) dated February 27, 2014; 12 Clarifications with regard to provisions of Corporate Social Responsibility under section1 35 of the Companies Act, 2013; Ministry of Corporate Affairs, Government of India; General Circular No 21/2014; 13 Id at Clause (vi); 14 Id at clause (ii), (iii) and (iv); 15 Section 135(5) of the Companies Act, 2013; 16 Ibid; 17 Section 134(8) of the Companies Act, 2013; 18 Sachs, Noah M; Cos to spend '20k cr a year on CSR: Pilot; September 11, 2013; The Hands India

Disclaimer - The views expressed in this article are the personal views of the authors and are purely informative in nature.