CORPORATE SOCIAL RESPONSIBILITY (CSR) AND ITS SIGNIFICANCE IN INDIA

This article is written by Zeeshan Rahman of Centre for Juridical Studies, Dibrugarh University, an intern under Legal Vidhiya

ABSTRACT

Corporate Social Responsibility (CSR) has evolved as a pivotal element in contemporary business practices, transitioning from a narrow focus on profit maximization to a broader commitment encompassing ethical, social, and environmental considerations. Rooted in India’s historical tradition of CSR, influenced by figures like Lal Bahadur Shastri and Mahatma Gandhi, CSR in the country has undergone a dynamic transformation, incorporating diverse models such as Gandhian Trusteeship, Statist, Liberal, and Stakeholder approaches. This paper traces the historical development of CSR in India, examining distinct phases from the British era to the present globalization period. It highlights the significant role of religious traditions in shaping corporate giving, juxtaposed against economic shifts and globalization pressures. A key legislative milestone, Section 135 of the Companies Act 2013, mandates CSR engagement for eligible companies, emphasizing transparency and accountability. The importance and benefits of CSR are explored, emphasizing its role in enhancing public image, aligning business values with social needs, mitigating risks, attracting talent, positively impacting productivity and quality, and improving financial performance. The paper also addresses challenges faced by businesses in adopting a holistic view of CSR, ensuring transparency, harmonizing development goals, combating greenwashing, managing resource constraints, fostering consensus, encouraging community participation, and emphasizing strategic planning and execution. The Union Carbide Corporation v. Union of India case is discussed, underlining the ethical and legal dimensions of corporate responsibility, especially in the aftermath of the Bhopal gas tragedy. The conclusion emphasizes CSR’s multifaceted commitment, its evolution under the Companies Act 2013, and its potential benefits, including improved productivity, financial performance, brand image, and increased access to capital. Despite challenges, addressing these complexities is deemed crucial for achieving the harmonious integration of business objectives with societal and environmental imperatives.

KEYWORDS:

Corporate Social Responsibility (CSR), Business Ethics, Companies Act 2013, Social Impact, Industrial Disasters

INTRODUCTION

Corporate Social Responsibility (CSR) has emerged as a vital aspect of modern business practices, reflecting a paradigm shift from a narrow focus on profit maximization to a broader commitment to ethical, social, and environmental considerations. As articulated by Kofi Annan, the former UN Secretary-General, the choice facing the global market is between a purely profit-driven approach and a more humane, socially responsible model that considers the well-being of a broader range of stakeholders. India, with its rich historical tradition of CSR, provides an interesting backdrop to the global evolution of corporate responsibility. Lal Bahadur Shastri, the Prime Minister of India in 1965, emphasized the multifaceted responsibilities of businesses, urging them to actively contribute to society, encompassing customers, workers, shareholders, and the community at large. The early forms of CSR in India included corporate philanthropy and the Gandhian trusteeship model. Corporate philanthropy, rooted in religious beliefs and cultural practices, involved occasional charitable donations. Mahatma Gandhi’s trusteeship model emphasized the ethical responsibility of businesses to act as trustees of societal assets, promoting ideals of generosity and trust.

Over the years, CSR practices in India have evolved from traditional philanthropy and charity to a more comprehensive, multi-stakeholder approach aligning with global trends. Four models, including the Gandhian Trusteeship model, the Statist model by Nehru, the Liberal model by Friedman, and the Stakeholder model by R. Edward, coexist within the Indian CSR landscape. Understanding CSR remains a challenge due to the lack of a consensus on its definition. Often used interchangeably with terms like corporate philanthropy, business sustainability, and corporate governance, CSR encompasses a company’s commitment to ethical behaviour, economic development, and the improvement of the quality of life for its workforce, their families, and the broader community. It extends beyond mere compliance with laws and regulations and involves a sincere effort to fulfil obligations to various stakeholders.

The driving force behind CSR is the recognition that corporations have responsibilities to multiple stakeholders, including customers, employees, investors, governments, NGOs, and the environment. The model emphasizes the need for corporations to contribute positively to the communities, cultures, and environments in which they operate. This holistic approach acknowledges that corporations are not isolated entities but integral parts of the societies they serve. The development of CSR in India mirrors the country’s historical trajectory. Pre-independence CSR was influenced by cultural and religious tenets, while post-independence saw the emergence of the Statist model, emphasizing legal regulation of business activities and promotion of Public Sector Undertakings (PSUs). The post-liberalization era in the 1990s witnessed a shift in CSR practices from philanthropy to a more integrated business strategy, aligning with the multi-stakeholder approach. The importance of CSR in India is underscored by its potential to enhance public image, convert resistance into resources, align with long-term business interests, and avoid government intervention. It integrates economic, social, and environmental imperatives, emphasizing the need for businesses to go beyond profit-driven motives. In essence, it can be said that the introduction of CSR in India reflects a dynamic evolution from traditional philanthropy to a more comprehensive and strategic approach, aligning with global trends. The integration of ethical values, social responsibility, and sustainable practices has become imperative for businesses, marking a paradigm shift towards a more inclusive and responsible corporate culture.

OBJECTIVE

The primary objective of this paper is to elucidate the significance of Corporate Social Responsibility (CSR) in India’s business landscape, showcasing its evolution from historical traditions to contemporary practices under the Companies Act 2013. By analyzing the multifaceted impact of CSR on public image, stakeholder relations, risk mitigation, talent attraction, and financial performance, the paper aims to underscore the crucial role CSR plays in aligning business objectives with societal and environmental imperatives. The study navigates challenges faced by businesses, emphasizing the imperative for a holistic approach to CSR for sustainable and responsible corporate practices.

DEVELOPMENT OF CORPORATE SOCIAL RESPONSIBILITY IN INDIA

The landscape of Corporate Social Responsibility (CSR) in India has evolved significantly over the years, with the introduction of key regulations like the 2013 Companies Act marking a notable shift in the way businesses engage with social issues. Before 2013, the approach to CSR was shaped by historical, economic, and political currents.

British Era 1850-1914

From 1850 to 1914, marked by industrialization, the economic currents were driven by the need for economic growth. The state’s role was primarily colonial and focused on extraction, and corporate CSR took the form of dynastic charity. The industrialists of the time engaged in philanthropy through trusts, contributing to religious institutions.

Pre-Independence 1914 to 1947

Trade barriers for new industries were in place, and the colonial state played an exploitative role. However, this period saw a shift in corporate CSR as businesses started supporting the freedom struggle. The relationship between M.K. Gandhi and industrialists became prominent, and the concept of trusteeship for business emerged, emphasizing their role as fiduciaries of society’s wealth.

Post Independence 1947-1960

India adopted socialist policies with protectionist measures. The state’s role expanded with five-year plans, and corporate CSR focused on supporting the new state and launching rural initiatives. However, heavy regulations and the license raj characterized the period from 1960 to 1990, leading to the emergence of corporate trusts as a form of CSR.

Globalization 1991-2013

The liberalization of the Indian economy in 1991 brought about a new era where economic reforms led to shrinking production and expanding social provision. Corporate CSR during this time involved family trusts, private-public partnerships, and sponsorship of NGOs. The period from 2013 to the present is marked by globalization, emphasizing the need to manage inequality. The introduction of the mandatory 2% rule under the 2013 Companies Act[1] has brought about a significant shift in corporate giving. This regulation mandates that firms with specific financial criteria spend at least 2% of their annual profits on CSR activities, fostering a more structured and accountable approach to social responsibility.

Religious traditions of philanthropy, such as daan, seva, and zakat, have played a crucial role in shaping corporate giving in India. The focus has historically been on contributing to religious institutions. However, with changing economic and social dynamics, the CSR landscape has witnessed innovation and increased efforts by the corporate sector to address broader social problems.

As India grapples with economic shifts, globalization, and societal divisions, the role of businesses in addressing social issues has become a key area of focus. The mandatory CSR regulations aim to create a more inclusive and responsible business environment, where companies actively contribute to the well-being of society.

OVERVIEW OF SECTION 135

The Companies Act of 2013 in India represents a significant regulatory framework aimed at reshaping corporate practices, emphasizing transparency, accountability, and corporate social responsibility (CSR). One of the pivotal sections within this legislative landscape is Section 135, which outlines the specific requirements and obligations related to CSR. Section 135[2] mandates that companies meeting certain financial criteria, such as a net worth exceeding rupees five hundred crores, turnover over rupees one thousand crores, or a net profit surpassing rupees five crores in the immediately preceding financial year, must establish a Corporate Social Responsibility Committee (CSR Committee) as per subsection (1). This committee, consisting of three or more directors, including at least one independent director, is entrusted with crucial responsibilities outlined in subsection (3). The CSR Committee is required to formulate and recommend a Corporate Social Responsibility Policy to the Board. This policy should delineate the areas or subjects specified in Schedule VII, recommend the amount of expenditure on CSR activities, and involve the periodic monitoring of the company’s CSR Policy. The Board of Directors, following the committee’s recommendations, is responsible for approving the CSR Policy, disclosing its contents in the company’s report, and placing it on the company’s website if applicable, as per subsection (4). Moreover, the Board plays a pivotal role in ensuring the actual implementation of the CSR Policy, overseeing that the prescribed CSR activities are undertaken by the company. An interesting facet of Section 135 is the stipulation that companies must spend at least two per cent of the average net profits of the three immediately preceding financial years on CSR activities, as per subsection (5). There is also a provision encouraging companies to give preference to the local areas where they operate when allocating funds for CSR activities. Non-compliance with the spending requirements requires the company to specify reasons for such in the Board’s report. Penalties are outlined in subsection (7), with the company liable to a penalty for non-compliance, and officers of the company facing penalties as well. Subsection (8) grants the Central Government the authority to issue general or specific directions to companies to ensure compliance. Additionally, subsection (9) provides an exemption from constituting a CSR Committee for companies with CSR spending requirements below fifty lakh rupees. In such cases, the Board of Directors assumes the responsibilities outlined in Section 135. In essence, Section 135 of the Companies Act 2013 underscores the legislative intent to integrate corporate social responsibility into business operations, aligning economic success with a commitment to social and environmental well-being.

IMPORTANCE AND BENEFITS OF CSR

Enhancing Public Image and Stakeholder Relations:

One of the primary drivers for companies to engage in CSR is the desire to enhance their public image. In an era of heightened awareness and information accessibility, consumers and stakeholders expect businesses to be socially responsible. Companies that actively contribute to societal well-being build trust and credibility, fostering positive relationships with their audience.

Aligning Business Values with Social Needs:

CSR allows businesses to align their values with the pressing needs of society. By identifying key social issues and integrating solutions into their business strategies, companies can address societal challenges while staying true to their core values. This alignment creates a positive impact and reinforces the company’s commitment to being a responsible corporate citizen.

Mitigating Risks and Enhancing Resilience:

Proactive engagement in CSR helps companies anticipate and mitigate potential risks. Socially responsible practices, such as ethical supply chain management and environmental sustainability, contribute to resilience against regulatory, reputational, and operational risks. This foresight and preparedness contribute to long-term business sustainability.

Attracting and Retaining Talent:

In a competitive job market, prospective employees seek more than just monetary compensation. They are drawn to companies that demonstrate a commitment to social and environmental causes. CSR initiatives, such as employee volunteer programs and sustainable workplace practices, play a crucial role in attracting and retaining top-tier talent.

Positive Impact on Productivity and Quality:

CSR initiatives often extend to improving working conditions, employee well-being, and involvement in decision-making processes. These enhancements contribute to increased employee satisfaction, fostering a positive work environment that, in turn, enhances productivity and reduces defects.

Improved Financial Performance:

Beyond moral considerations, embracing CSR positively correlates with financial performance. Companies with robust CSR practices benefit from a stable socio-political and legal environment, enhanced competitive advantage through a strong corporate reputation, improved employee recruitment and retention, and a more secure operational landscape.

Enhanced Brand Image and Reputation:

A company committed to CSR is not only viewed favourably by the public but also gains credibility within the business community. A positive brand image resulting from CSR activities enhances a company’s ability to attract trading partners, fostering mutually beneficial relationships and collaborations.

Access to Capital:

The global rise of socially responsible investing has altered the financial landscape. Companies with strong CSR performance find increased access to capital, tapping into investment opportunities that may not have been available without a commitment to ethical and sustainable practices.

Corporate Social Responsibility is not merely a checkbox for companies; it is a strategic imperative that transcends traditional business boundaries. The symbiotic relationship between responsible business practices and positive outcomes underscores the transformative power of CSR. As businesses navigate an ever-evolving landscape, embracing CSR is not just about compliance; it is a conscious choice to contribute to a better world while securing enduring success.

ISSUES AND CHALLENGES

Corporate Social Responsibility (CSR) brings forth a myriad of issues and challenges as businesses attempt to balance profit-making objectives with broader societal and environmental concerns. Navigating these challenges is essential for companies aiming to maintain a positive impact on both their stakeholders and the communities they operate in.

Holistic View of CSR:

One fundamental challenge lies in companies failing to embrace the holistic view of CSR. Often, organisations have a narrow perception, overlooking the comprehensive impact CSR can have on various stakeholders, society, and the environment. This myopic approach can hinder identifying new opportunities and creating shared value, impeding the integration of business objectives with sustainability and social goals.

Lack of Transparency:

Transparency is a cornerstone for successful CSR initiatives. However, companies often struggle to maintain transparency in their CSR activities. Inadequate disclosure of relevant information hides crucial details from stakeholders, hindering trust-building between corporations and communities. The transparency deficit undermines the credibility of CSR efforts and can lead to scepticism and a lack of community support.

Harmonizing Development Goals:

Balancing the development goals of a company with the interests of its shareholders is a complex challenge. Achieving alignment between social responsibility and economic performance necessitates the creation of shared and sustainable value. This delicate equilibrium requires strategic planning to ensure that the pursuit of economic success aligns with broader social objectives.

Greenwashing:

Greenwashing, or the presentation of an illusion of progress without a genuine commitment to CSR, poses a significant challenge. Companies, especially in regions with high inequality, may exploit the lack of stringent enforcement mechanisms, undermining the true essence of CSR. Addressing greenwashing is crucial for ensuring the authenticity and effectiveness of CSR initiatives.

Resource Constraints:

Implementing CSR often requires substantial financial investments. Lack of strategic planning and failure to prioritize resources can pose significant challenges. Proper allocation of resources, both financial and non-financial, is crucial to ensure that CSR initiatives are impactful and sustainable in the long run.

Lack of Consensus:

The absence of consensus among different stakeholders and corporate entities results in the duplication of CSR efforts. This lack of coordination can lead to unnecessary competition among firms, undermining the overarching goal of building societal value. Achieving consensus and fostering collaboration is critical to ensuring a cohesive and synergistic approach to CSR.

Community Participation:

Engaging and gaining the participation of communities in CSR initiatives is often challenging. Communities may exhibit disinterest due to inadequate communication or insufficient efforts to involve them in the planning and execution of CSR programs. Bridging this gap and fostering active community participation are essential for the success of CSR initiatives.

Strategic Planning and Execution:

A lack of strategic planning, experimentation, and innovation can hinder the meaningful impact of CSR efforts. Companies need to commit to long-term strategies, engage their workforce effectively, and translate intentions into actions to enhance the efficiency and effectiveness of their CSR endeavour. Strategic execution is vital for ensuring that CSR initiatives yield tangible benefits for both the company and society.

CASE LAWS

UNION CARBIDE CORPORATION V. UNION OF INDIA[3]

The Bhopal gas tragedy case underscored the ethical and legal obligations of corporations concerning the victims of industrial calamities. The Indian Supreme Court affirmed the significance of compensation, rehabilitation, and environmental remediation as essential components of corporate responsibility.

Facts:

In 1934, Union Carbide incorporated with the Union of India, forming Union Carbide India Limited (UCIL), with Union Carbide as the majority shareholder. In 1984, a gas leak at UCIL’s Bhopal plant led to the immediate death of 2600 people and irrecoverable damage to thousands. The plant was initially approved for pesticide production in a non-industrial area. The Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985, was enacted for swift trial, and the government filed a suit for damages against Union Carbide Corporation (UCC).

Issues:

Challenges arose regarding the settlement amount’s justification, the dropping of criminal proceedings against Union Carbide, and jurisdictional concerns. Appellants questioned the court’s authority to withdraw criminal proceedings, arguing the settlement’s retrospective effect and the impermissibility of holding UCC liable by piercing the corporate veil.

Judgment:

The Supreme Court, in the majority opinion, found the quashing of criminal proceedings unjustified and directed their initiation. It deemed the compensation amount fair and reasonable, holding that any rehabilitation deficiencies would be addressed by the government. The dissenting opinion disagreed on the adequacy of compensation. The Court ordered Union Carbide Corporation to indemnify 470 million dollars to the Union of India, settling all claims by March 31, 1989.

CONCLUSION

In conclusion, Corporate Social Responsibility (CSR) emerges as a multifaceted commitment that extends beyond profit-making, incorporating ethical practices and community welfare. Examining various data sets, it is evident that the evolution of CSR in India, as mandated by the 2013 Companies Act, reflects a significant shift in corporate philosophy. Pre-2013, philanthropy was often driven by dynastic charity, support for the freedom struggle, and later, corporate trusts. The introduction of a mandatory 2% spending rule under Section 135 marked a pivotal moment, compelling businesses to be more accountable to stakeholders and contribute to societal well-being. The necessity for CSR is underscored by its role in enhancing public image, converting resistance into resources, securing long-term business interests, and averting government intervention. Importantly, CSR aims at consumer protection, environmental preservation, human rights respect, prevention of bribery and corruption, and adherence to labour standards. The benefits are vast, encompassing improved productivity, financial performance, brand image, and increased access to capital. However, challenges persist, from a lack of transparency and consensus to issues in community participation and strategic planning. Addressing these challenges is crucial for realizing the full potential of CSR. As companies navigate these complexities, the overarching goal should be a harmonious integration of business objectives with societal and environmental imperatives, fostering a sustainable and ethical corporate landscape.

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[1] The Companies Act, 2013, § 135, Act No. 18 of 2013

[2] The Companies Act, 2013, § 135, Act No. 18 of 2013

[3] Union Carbide Corp. v. Union of India, 1992 AIR 248, 1991 SCR Supl. (1) 251

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