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CORPORATE SOCIAL RESPONSIBILITY AND ITS SIGNIFICANCE IN INDIA

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This article is written by Bharathi Priya S of 8th Semester of School of Excellence in Law, TNDALU, Chennai, an intern under Legal Vidhiya

ABSTRACT

A company strategy known as corporate social responsibility, or CSR, incorporates social, ethical, and environmental considerations into organizational tactics and procedures. In India, it has become a crucial requirement for sustainable business practices. In the business world, CSR has become quite important, particularly in India, where businessmen are beginning to understand how important it is to give back to the community. This legal article attempts to explore the landscape of Corporate Social Responsibility (CSR) in India, analyzing its significance in shaping responsible business conduct and fostering sustainable development. In the context of the changing global economy, India has seen a paradigm shift in the view of corporations from being solely profit-making entities to being larger stakeholders in the welfare of society.

This article explores the legal framework that governs corporate social responsibility (CSR) in India, with a particular emphasis on Section 135 of the corporations Act of 2013, which requires some corporations to allocate a minimum of 2% of their average net earnings to CSR projects. In addition to that, this article  examines their legal obligations, addressing the nature and scope of CSR activities, significance of CSR by highlighting successful initiatives undertaken by reputed entities to improve the society, recent developments and amendments The paper concludes by advocating for a comprehensive approach to corporate social responsibility (CSR) in India, arguing that it is both a legal need and a strategic imperative for companies that are devoted to societal welfare and long-term survival.

KEYWORDS:  

Corporate Social Responsibility, Section 135, 2% of average net profit, CSR, Schedule VII, CSR Activities, Significance, CSR Committee, CSR Policy, Successful projects, Social Responsibility.

INTRODUCTION

The emergence of Corporate Social Responsibility (CSR) as a pivotal aspect of corporate governance, fosters a symbiotic relationship between business houses and societal well-being. A conference on Human environment was held in Stockholm in the year 1972,wherein, while discussing the relationship between business activities and their impact on the community, the united Nations adopted one principle that is, “in order to achieve a more rational management of resources and thus to improve the environment, countries should also adopt an integrated and coordinated approach to their development planning so as to ensure that development is compatible with the need to protect and improve the environment for the benefit of their position”[1]. And that’s how the idea of Corporate Social Responsibility (CSR) emerged. As companies increasingly recognize their responsibilities beyond profit generation, examining the legal framework and significance surrounding CSR becomes imperative. This article aims to unravel the Historical evolution, legal framework and significance of CSR in India through legal lens.

MEANING OF CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility is considered as a management concept by which, companies try to integrate environmental and social concerns in their business  practices and interactions with their stakeholders. CSR is generally  understood as being the way through which a company achieves a balance  of economic, environmental and social imperatives (“Triple-Bottom-Line-  Approach”), while at the same time addressing the expectations of  shareholders and stakeholders[2]. Philip Kotler and  Nancy Lee define CSR as “a commitment to improve community well-being through discretionary business practices and contributions of corporate resources”[3]. According to the World Business Council for Sustainable Development (WBCSD) definition: “Corporate Social Responsibility is 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”.[4] From these definitions, we can understand that we are not referring here to those business activities that are mandated by law or that are ethical or moral in nature and perhaps therefore expected. Instead, we are referring to a voluntarycommitment that a business makes in choosing and implementing its business practices and thereby contributing to the society. Thus, Corporate Social Responsibility can be defined as a business model using which, the companies make a concerted effort to contribute towards enhancing societal welfare and economic development.

HISTORICAL PERSPECTIVE OF CSR IN INDIA

In India, the evolution of Corporate Social Responsibility (CSR) can be traced through distinct phases. The initial phase (1850 to 1914) was marked by a philanthropic approach, where businessmen, driven by family values, traditions, and religious influences, engaged in charitable activities, such as establishing temples and aiding the needy during times of drought and famine. The colonial era ushered in a shift in CSR during pre-Independence times, with industrial pioneers like Tata, Birla, Godrej, and Bajaj establishing charitable foundations, educational institutions, and healthcare facilities. Social initiatives were often influenced by political motives.

The second phase (1910 to 1960) coincided with the Independence movement, during which Mahatma Gandhi advocated for wealthy industrialists to contribute to the welfare of the poor. His concept of trusteeship influenced the establishment of trusts for education, research, and community development, with a focus on social reform, rural development, and women’s empowerment.

The third phase (1950 to 1990) saw the emergence of Public Sector Undertakings (PSUs) to address wealth distribution issues. However, corporate malpractices prompted legislation on corporate governance, labor, and environmental issues. The private sector gradually took on a more active role in socio-economic development.

In the fourth phase (1980 onwards), CSR transformed into a sustainable business strategy. The liberalization, privatization, and globalization wave, coupled with a relaxed licensing system, spurred economic growth. This economic boom empowered companies to contribute significantly to social responsibility. What began as charity has evolved into a recognized and accepted corporate responsibility, aligning with the changing socio-economic landscape in India.

LEGAL FRAMEWORK FOR CSR IN INDIA

A legislative attempt aimed at promoting CSR in India is the enactment of Section 135 in the Companies Act, 2013. Section 135 mandates the companies that are meeting the criteria mentioned in that section to comply with the CSR provisions in India. As per section 135(1), the provisions of CSR applies to every company fulfilling any of the following conditions in the immediately preceding financial year:

Such companies are required to constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. If a company is not required to appoint an independent director, the CSR committee should consist of two or more directors. According to Section 135(3), the role of CSR Committee is to formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII. The Board of Directors of every such company to which the CSR provisions apply is required to ensure that the company spends in every financial year, at least 2% of its average net profits made during the immediately preceding three financial years as per its CSR policy. If the company has not completed three financial years since its incorporation, it must spend 2% of its average net profits made during the immediately preceding financial years as per its CSR policy.

The committee is responsible for monitoring CSR policy implementation and preparing an annual report on the company’s CSR activities, including specific initiatives, funding, and societal impact. The Act provides that the companies should give preference to the local area and areas within the surrounding of which, it carries out its operations, for spending the amount earmarked for CSR activities. The Central Government can issue general or special directions to companies to ensure compliance with provisions of this section.

Companies (Corporate Social Responsibility Policy) Rules, 2014 came to force on the 1st April, 2014, which provide a definition for CSR as “the projects or programs relating to activities specified in Schedule VII of the Companies Act or projects relating to activities undertaken by the board of directors of a company subject to the condition that such subject is covered in Schedule VII of the Act”[5]. Clause 3 of the Companies Rules, 2014 includes all companies which fulfils the criteria specified in sub-section (l) of section 135 and having its branch office or project office in India to implement CSR. The Companies Rules, 2014 mandate companies to form a CSR committee and adhere to the provisions of the Act. CSR activities should be carefully chosen, including contributions to corpus and projects, and contributions made to political parties are not considered as CSR activities. The rules also cover CSR expenditure, reporting, and display on the website.

In addition to the Companies Act, India has various laws and regulations that actively encourage Corporate Social Responsibility (CSR). Notably, the Securities and Exchange Board of India (SEBI) requires listed companies to furnish a Business Responsibility and Sustainability Report (BRSR), detailing their CSR initiatives. Furthermore, the Ministry of Corporate Affairs (MCA) has issued several guidelines and circulars pertaining to CSR.

NATURE AND SCOPE OF CSR ACTIVITIES

The Schedule VII of the Act enumerates the list of activities that a company may include in its CSR policy. The CSR activities may include:

SIGNIFICANCE OF CSR IN INDIA

EXAMPLES OF CSR ACTIVITIES UNDERTAKEN BY CORPORATE COMPANIES IN INDIA

JUDICIAL PRONOUNCEMENTS ON CSR IN INDIA

The Supreme Court has emphasized the importance of corporate social responsibility (CSR) in enforcing fundamental rights, including Article 21 of the Constitution, in cases like M. C. Mehta[6], encompassing life, wildlife, forests, and sustainable development.

The NCLT in the case of M/s. Hira Power and Steels Limited[7]  has emphasized that the assessment of the extent of CSR obligation should occur post the completion of accounts at the conclusion of a specific financial year. Consequently, the disclosure of the charitable contribution required for CSR responsibility can only be communicated to the relevant authorities subsequent to the finalization of accounts for a specific financial year.

In the case of Security Printing Minting Corporation vs. CIT[8], it was held that the expenditure incurred for CSR is allowed as deduction and no disallowance can be invoked. The donation made to CM relief fund is allowable as deduction.

 The Delhi High Court’s decision in Mohd. Ahmed v. Union of India  provides insight into the definition of ‘normal course of business’ in the context of CSR. It was held that “….a pharmaceutical company donating medicines/drugs within section 135 read with Schedule VII to the Act is a CSR Activity, as the same is not an activity undertaken in pursuance of its normal course of business which is relatable to health care or any other entry in Schedule VII.”[9]

The India (P.) Ltd. v. Registrar Of Companies[10] was a case where the company, meeting net profit criteria and having a CSR committee, spent below the threshold for CSR mentioned in Section 135 (5) of the Act, in the 2017-18 fiscal year, for which a reason was duly provided by the company in its Director’s Report. However, it was discovered that the Director’s report misrepresents the amount spent on the CSR and related details. The company applied to NCLT Bangalore, which allowed the company to revise its report and file for compounding under section 441 of the Act.

CONCLUSION

To sum up, the examination of Corporate Social Responsibility (CSR) within the Indian context highlights the immense importance of CSR as a driving force behind ethical business conduct and sustainable development. The advantages of effective corporate social responsibility (CSR) initiatives are immeasurable, even in the face of obstacles from varied stakeholder expectations and legal compliance. Businesses that actively participate in significant CSR projects not only satisfy their legal requirements but also gain multifaceted benefits. Beyond mere compliance, CSR has a positive impact on stakeholder interactions, corporate reputation, and brand loyalty. The transformative power of strategic social investments is exemplified by notable instances of significant Indian companies engaging in effective CSR initiatives. These programs, which range from community development to environmental conservation, highlight the real advantages that accrue to companies and society as a whole. While challenges such as resource allocation and regulatory intricacies persist, the imperative for effective CSR activities remains paramount, ultimately realizing its true potential as a driving force for positive change in the Indian business landscape.

REFERENCES

1.   Investopedia, https://www.investopedia.com/terms/c/corp-social-responsibility.asp ( Last Visited on Jan 5, 2024)

2.  Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/esg/corporate-social-responsibility-csr/ ( Last Visited on Jan 6, 2024)

3. National CSR Portal, https://www.csr.gov.in/content/csr/global/master/home/home.html (Last Visited on Jan 5, 2024)

4.  The CSR Journal, https://thecsrjournal.in/what-is-the-importance-of-csr/ ( Last Visited on               Jan 7, 2024)

5.   High Speed Training, https://www.highspeedtraining.co.uk/hub/importance-of-corporate-social-responsibility/ ( Last Visited on Jan 7, 2024)

6.   United National Industrial Development Organization, https://www.unido.org/our-focus/advancing-economic-competitiveness/competitive-trade-capacities-and-corporate-responsibility/corporate-social-responsibility-market-integration/what-csr ( Last Visited on Jan 6, 2024)

7.   Legal services India, https://www.legalservicesindia.com/article/2265/Corporate-Social-Responsibility.html ( Last Visited on Jan 7, 2024)

8.   Mondaq, https://www.mondaq.com/india/corporate-and-companylaw/1269846/corporate-social-responsibility–how-legislature-and-judiciary-mandated-the-path-from-company-to-community ( Last Visited on Jan 6, 2024)

9.   Lawoctopus, https://www.lawctopus.com/academike/corporate-social-responsibility-in-india/ ( Last Visited on Jan 7, 2024)

10.   Taxguru, https://taxguru.in/income-tax/csr-provision-companies-act-2013-latest-case-laws-decided-nclt.html#Penalty_for_violation_of_CSR_provisions ( Last Visited on Jan 6, 2024)

11.  Cyril Amarchand Blogs, https://privateclient.cyrilamarchandblogs.com/2023/07/perspective-examining-the-case-for-csr-in-kind/ ( Last Visited on Jan 6, 2024)

12. Taxguru, https://taxguru.in/company-law/omprehensive-guide-corporate-social-responsibility-csr-india.html ( Last Visited on Jan 7, 2024)

[1] Nikunj Keyal, Corporate Social Responsibility, LEGAL SERVICES INDIA (Jan 5, 2024, 7:45 PM).

[2] UNITED NATIONS INDUSTRIAL DEVELOPMENT CORPORATION, https://www.unido.org/ (last visited Jan 6,2024).

[3] PHILIP KOTLER AND NANCY R LEE, CORPORATE SOCIAL RESPONSIBILITY 22 (1st ed. 2007).

[4] GREEN ALTERNATIVE ENERGY ASSESTS, https://www.gaea.bg/ (last visited Jan 6, 2024).

[5] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 2(1)(c).

[6] M.C. Mehta v. Union of India, (1997) 3 SCC 315.

[7] CP No.: 2707/441/NCLT/MB/MAH/2018.

[8] ITA NO 272/del/2019.

[9] CYRIL AMARCHAND MANGALDAS, https://privateclient.cyrilamarchandblogs.com/ (last visited Jan 6,2024).

[10] 2020 (7) TMI 423.

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