CSR and Swachh Bharat Abhiyan

Dheeraj Kumar Tiwari ((Third Year Student, (B.B.A.LL.B. Hons.) Siddhartha Law College, Dehradun))&Anurag Yadav ((Assistant Professor, Siddhartha Law College, Dehradun)).

Abstract

We smell itevery day, we see it every day,we are surrounded by waste generated by ourselves.The present Central Government with a view to clean the surroundings and maintain an ecofriendly atmosphere, which will lead us to a healthy lifestyle, introduced Swachh Bharat Abhiyan. The government has introduced several schemes and laws in order to make it a success yet there is no output available due to lack of implementation process and loop holes in the present schemes. This makes it impossible for the government to achieve the targets in the prescribed limit of time. Initiatives at local level and understanding Cleaning India Campaign as individual and civic responsibility will lead to effective and efficient output, whose proper method of implementation has not been proved effective. Rivers in India are major part of livelihood activities, cultural and spiritual insights. Three decades have been observed since the task of cleaning Ganga and other rivers throughout India are actually in books only. The rivers in many countries have been cleaned and transformed to a new beauty of tourist attraction. The principle of Polluter Pays has changed now a days to pay and pollute for the industries. Swachh Bharat Abhiyan and Clean Ganga Mission have been included as Corporate Social Responsibility (CSR) activities under Schedule VII of the Companies Act, 2013 from October 24, 2014. This was a major step in order to deal with the present problem of pollution and its measure.

This paper following a doctrinal research will focus on the present and futuristic scope of the Swachh Bharat Abhiyan at different levels of society and industries’ initiatives by means of CSR. Examining the present need and searching for alternatives it will draw a model for sustainable socio-economic growth of industries and people around the highly polluted rivers of India.

“We can no more gain God’s blessing with an unclean body than with an unclean mind. A clean body cannot reside in an unclean city.”

  • Mahatma Gandhi

The Swachh Bharat Abhiyan (Clean India Mission), launched on October 2, 2014 marks the beginning of the largest programme on cleanliness and sanitation by the Government of India till date. The programme aims to accelerate construction of toilets, solid and liquid waste disposal systems, Promotion of village cleanliness and provision of adequate drinking water supply to every person by 2019, three years ahead of the deadline set by Nirmal Bharat Abhiyan [NBA] ((Nirmal Bharat Abhiyan (NBA) previously called the Total Sanitation campaign (TSC) is a Community led total sanitation programme initiated by the Government of India in 1999. It is demand driven and people centered.)).

NBA will be restructured into the Swachh Bharat Mission with two submissions;Swachh Bharat Mission (Gramin/Rural) and Swachh Bharat Mission (Urban). The two missions will fall under the Union Ministry of Drinking Water and Sanitation (for RuralIndia) and the Union Ministry of Urban Development (for Urban India). Funding for these new initiatives will be throughbudgetary allocations, contributions to the Swachh Bharat Kosh and through commitments under Corporate SocialResponsibility (CSR). The proposal is for setting up of a Special Purpose Vehicle within the Mission as a Company under theCompany’s Act. It will raise funds from government and nongovernmentsources, including CSR funds. Public PrivatePartnerships (PPP) are also envisaged for the construction of Community Sanitary Complexes (CSCs).

Why Clean India?

The clean India programme is the need of the hour today. India is very soon to become the super power in Asia and a country needs to be well cleaned and equipped to cope up with the international standards. In order to sustain the high class living among different segments of people living in society it was a necessary to pay a greater attention towards cleanliness.

Other reasons are:-

  • A UN report in May had said that currently, nearly 60 percent of India’s population practice open defecation which puts them at risk of diseases like cholera, diarrhea, typhoid etc ((available at http://in.one.un.org/page/latest-reports last accessed on August 8, 2015)).
  • Reports say that India is a gold medalist in open defecation and nearly 60 per cent of Indian population clear their bowels in the open. This 60 percent is roughly 58% of the people who practice open defecation all over the world.
  • India loses at least 1000 children a day to diarrheal deaths and the reason for these deaths is open defecation and lack of proper sanitation facilities.
  • As per reports, water of river Ganga is unsafe for bathing because it contains fecal coliform bacteria (120 times higher than the permitted levels) in large amounts and again the reason is open defecation in our country.
  • Poor hygiene and sanitation facilities costs India 600,000 lives annually because of diarrhea and not only this, lack of toilets expose one third of country’s women to the risk of rape or sexual assault.
  • India accounts for about 60 percent of the world’s residents without toilets, according to a report released in May by the World Health Organization and UNICEF.
  • Swachh Bharat’s connection with economic activity of the country: Advocating the idea of clean India, Prime Minister Narendra Modi had said, “The pursuit of cleanliness can be an economic activity, contributing to GDP growth, reduction in healthcare costs, and a source of employment.”
  • If India and its tourist destinations are clean, it will bring more people and will also bring about a paradigm shift in the country’s global perception. If proper hygiene and sanitation will not become a practice in our country then no one will be able to save the country from the health hazards and losses that will loom over the Indian populace in near future ((Sharma Reetu ‘Clean India: 9 reasons why Modi’s Swachh Bharat Abhiyan is need of the hour’ available at: http://www.oneindia.com/feature/cleanindia9reasonswhymodisswachhbharatabhiyanisneedofhour1533716.Html last accessed on August 8, 2015)).

CSR and Swachh BharatAbhiyan

Based on the Gandhian Principle of “trusteeship concept”. As business houses are run for profit maximization and are trustees of resources taken from society they are expected to return it back. CSR (Corporate Social Responsibility) is not at all a new concept in India it has being continued from log ago but in different names and under different shades. CSR is very important for sustainable development activities with its vast effect on the society at large. Proponents arguing for CSR see the long term profits for a company in this, while critics take it as a hurdle in the economic role of business. However the importance of CSR cannot be diluted.

With inclusion of Swachh Bharat Abhiyan and Clean Ganga Mission, The Ministry of Corporate Affairs, Government of India notifying   the provision of Section 135 of the Companies Act, 2013, Schedule VII of the said Act, and the Companies (Corporate Social Responsibility Policy) Rules, 2014 have come into force from 01.04.2014   for certain companies who fulfill the criteria as mentioned under Sub Section 1 of Section 135 to comply with the provisions relevant to Corporate Social Responsibility.

What Is CSR?

The term “Corporate Social Responsibility (CSR)” can be referred as corporate initiative to assess and take responsibility for the company’s effects on the environment and impact on social welfare. The term generally applies to companies efforts that go beyond what may be required by regulators or environmental protection groups ((Available at http://www.investopedia.com/terms/c/corp-social-responsibility.asp last accessed on August 8, 2015)).

While proposing the Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013, the Chairman of the CSR Committee mentioned the Guiding Principle as follows:

“CSR is the process by which an organization thinks about and evolves its relationships with stakeholders for the common good, and demonstrates its commitment in this regard by adoption of appropriate business processes and strategies. Thus CSR is not charity or mere donations. CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits. They use CSR to integrate economic, environmental and social objectives with the company’s operations and growth ((Available at http://www.cuts-international.org/pdf/Draft-CSR_ Rules_2013.pdf last accessed on August 8, 2015)).”

Corporate social responsibility is also called corporate conscience, corporate citizenship, social performance, or sustainable business. It is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms ((Available at http://www.caclubindia.com/articles/corporate-social-responsibility-under-the-companies-act-2013-19132.asp last accessed on August 8, 2015)).

Changes to the Companies Act

Companies having at least Rs 5 Cr net profit, or Rs 1,000 Cr turnover, or Rs 500 Cr net worth  have to spend a minimum of 2% of their three year average annual net profit towards CSR from 2014-15. Schedule VII of Companies Act, 2013, lists the activities and endeavors that can count as CSR.

The Corporate Affairs Ministry has inserted the words ‘including contribution to the Swachh Bharat Kosh set up by the central government for the promotion of sanitation’ and  ‘including contribution to the Swach Bharat Kosh set up by the central government for the promotion of sanitation’ in Schedule VII of the Act through a notification.

Earlier, contributions made to the Prime Minister’s National Relief Fund was also included under Schedule VII. Any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women was also included under the schedule.

Applicability

The companies on whom the provisions of the CSR shall be applicable are contained in Sub Section 1 of Section 135 of the Companies Act, 2013. As per the said section, the companies having Net worth of INR 500 crore or more; or Turnover of INR 1000 crore or more; or Net Profit of INR 5 crore or more during any financial year shall be required to constitute a Corporate Social Responsibility Committee of the Board “hereinafter CSR Committee” with effect from 1st April, 2014. The pictorial representation below gives the representation of Section 135 (1).

CSR and Swachh Bharat Abhiyan
CSR and Swachh Bharat Abhiyan

The above provision requires every company having such prescribed Net worth or Turnover or Net Profit shall be covered within the ambit of CSR provisions. The section has used the word “companies” which connotes a wider meaning and shall include the foreign companies having branch or project offices in India.

CSR Committee

CSR Committee should consist of at least three directors out of which at least 1 director should be independent director. Some companies many not be mandatorily required to appoint independent directors as per provisions of Companies Act 2013 but CSR applicability may be there for those companies. How will this criteria of independent director be met in case of those companies need to be clarified.

Functions of CSR Committee:

  1. 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 of the Act.
  2. Recommend the amount of expenditure to be incurred on the activities referred to in clause (a).
  • Monitor the Corporate Social Responsibility Policy of the company from time to time.
  1. Prepare a transparent monitoring mechanism for ensuring implementation of the projects / programmes / activities proposed to be undertaken by the company.

Responsibility of the Board of Directors

  • To ensure that at least 2% of average net profit of last three preceding years is spent on CSR activities every year.
  • ‘Net Profit’ shall mean, net profit before tax as per books of accounts and shall not include profits arising from branches outside India.
  • 2% CSR spending would be computed as 2% of the average net profits made by the company during every block of three years. For the purpose of First CSR reporting the Net Profit shall mean average of the annual net profit of the preceding three financial years ending on or before 31 March 2014.
  • To approve the CSR Policy after considering recommendations of CSR Committee.
  • To disclose CSR policy and initiatives in Board’s report and Company’s website.
  • To ensure that activities reflected in CSR policy are actually undertaken by company.
  • If the company does not spend 2% of net profits as required, then Board to report the reasons in the Board’s report.

Activities covered under schedule VII of the Company Act 2013

Ministry of Corporate Affairs vide its Notification dated 27th February, 2014 has come up with the modified Schedule VII which covers wide range of activities which can be undertaken by the Companies as a part of their CSR initiatives.

The activities involve the following:

  • Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water.
  • Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects.
  • Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
  • Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water.
  • Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art, setting up public libraries, promotion and development of traditional arts and handicrafts.
  • Measures for the benefit of armed forces veterans, war widows and their dependents;

Training to promote rural sports, nationally recognized sports, Paralympic sports and Olympic sports.

  • Contribution to the Prime Ministers’ National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.
  • Contributions or funds provided to technology incubators located within academic institution which are approved by the Central Government;

Rural development projects.

The above mentioned activities constitute the CSR activities and the companies which are covered under the provisions of Section 135 shall be required to carry out any one or more of the activities as specified above along with following its CSR Policy.

Drivers of Swachh Bharat Abhiyan (SBA) through CSR

Partners in business and consumers want to know what is inside a company. They want to do business with companies in which they can trust and believe. This transparency ofbusiness practices means that for many companies, corporate social responsibility, CSR,is no longer a luxury but a requirement. However, the challenge is to create a commonlyrespected CSR framework that would allow on detailed assessment of business practices. Basically, the drivers of CSR are the mix of incentives and risks directed at companies toimprove standards. These drivers are market-based, usually beginning when a firmanticipates or responds to a risk associated with the social, labor or environmental impactof a specific business practice ((Dr. Atul A. Agwan ‘Corporate Social Responsibility: A Gateway to Swachh Bharat Abhiyan’ International Research Journal of Commerce and Law (IRJCL) ISSN: (2349-705x).)).

The mission of Swachh Bharat Abhiyan can very well be carried forward through three primary Drivers. The above mentioned concept of drivers has been explained through the help of pyramid given below ((Ibid.)):

  1. Economic Driver: These drivers are the back bone for cleaning the targeted area of the ward/district. Through this requirement the working condition of the mission can be made competitive. Here the consideration in the form of funds from the Government and Municipal Corporation can be pumped in for the purpose of successful completion of day to day work. In the present day condition following areas can be taken care of- company image/reputation, improved risk management, competitive advantage, pressure from investors etc.
  2. Social Drivers: These drivers consist of socio-cultural awareness amongst the citizens of the targeted ward/district. Requirement and focused attitude of the NGO/CSOs which are working in that area contribute for drawing the policy on cleanliness. Any business entity can take the help of these stakeholders at the time of execution of work. Which include –license to operate, pressure from local communities, and demographic research of the targeted area.
  3. Political Drivers: Both the state Government and Municipal authority has to play a key role in pushing forward this mission of Swachh Bharat Abhiyan (SBA) through their vision and guidance. Business entity which takes this challenge of cleanliness has to coordinate this skillful task with the help of economic, social and political backing.

 

Swachh Bharat Abhiyan and Companies Act
Swachh Bharat Abhiyan and Companies Act

 

The integration of all this will lead to success it is a collective efforts and need the fulfillment of general interest neglecting all individual interests.  The concepts of three ‘P’ People, planet and profit, are to be taken care of as the companies run for a profitable index of zenith. The investment for now will lead them to greater business profit margins for future as goodwill in market and the social welfare works also are a major factor in creating the brand image and maintain existence of product in the multi-segmented market of India, where trust and goodwill are major factors of success.

Conclusion

India’s business environment is very complex and the regulations are to be made in accordance with the future, so that it does not affect the economy but helps in establishing sustainability. The present PPP (Public Private Partnership) has more scope when the polluter pays for the pollutant created by him apart from CSR activities. Apart from this the following things are also to be considered:-

  • Emphasis to be given for green development oriented growth of society and business.
  • We the individuals have to take initiatives to keep our local surrounding clean in a small scale.
  • Most of the waste material are seen thrown outside the houses which could be seen in roads and dumping areas, avoiding it and using three ‘R’ (Reduce, Recycle, and Reuse) will ensure sustainability.
  • Education and awareness programme must be of weekly or monthly period as we have travelled a long way without it, which is impossible be covered within few days or hours of campaigns or by some pamphlets distribution.
  • The use of Social media for creating awareness must be maximized as we the people interact more trough social media and other electronic media.

The Ministry of Corporate Affairs have tried to achieve such a thing with the present CSR policy which is appreciable for greater contributions, although the results will determine the percentage. The Mission of cleaning Ganga and Swachh Bharat Abhiyaan are the major projects of the government and needs a lot of funding with the present framework which is expected to allocate the funds with the help of Private sector. It is an endless activity which needs to be taken care off. However the need for the CSR is now linked with these two initiatives will lead to the path of achievement of objectives. It would have been difficult for the government alone to look into the matters of sustainability and development with establishing equilibrium among the both. Also, as rightly mentioned by United Nations Industrial Development Organization (UNIDO), 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 ((Available at http://www.unido.org/en/what-we-do/trade/csr/what-is-csr.html last accessed on August 8, 2015)).

Analysis of Corporate Social Responsibility under Companies Act

Ruchi Goel and Divya Gupta ((Students of Law, Campus Law Centre, Faculty of Law, University of Delhi)).

Abstract

Corporate Social Responsibility has become a business agenda these days. Companies not only look at CSR from the traditional perspective of reputation or brand value but also as an opportunity to provide sustainability in environment, economic and social value to the stakeholders. It helps to create a positive impact on business. In this paper, authors try to analyse the status of CSR in India, starting from its evolution to the current status. They also seek to study why companies should initiate CSR activities with focus on its legal impact under the Companies Act 2013. CSR has now been accorded a statutory status under section 135 of the Companies Act 2013. Therefore, there has been greater responsibility on companies to set out clear framework and processes to ensure strict compliance. However, there are certain areas such as taxation issues, their impact on SMEs amongst others which need to be discussed.

Introduction

In a developing economy like India, Corporate Social Responsibility (CSR) plays an important role. The concept of CSR has evolved, ranging from philanthropy to a more comprehensive concept that now inculcate within its ambit the environment, employee relations, corporate governance and society at large. The concept got popular in India in 20th century and business houses realized that they need to plough back certain percentage of their profits due to pressure built by stakeholders. Realization dawned upon the companies that they owe responsibility to society and environment.

An ideal CSR has both ethical and philosophical dimensions, particularly in India where there exists a wide gap between sections of people in terms of income and standards as well as socio-economic status ((Bajpai, G.N. , Corporate Social Responsibility in India and Europe: Cross Cultural Perspective, 2001)).

It may appear easy to define CSR but there is no single universally accepted definition of CSR. The concept has evolved over the years and therefore it has been defined in myriad number of ways:

A widely cited definition of CSR has been given by the European Union (EU). It describes CSR as “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 work force and their families as well as of the local community and society at large ((A renewed EU strategy 2011-14 for Corporate Social Responsibility,”European Commission press release, (October 2011)http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=7010))…”

The World Business Council for Sustainable Development (WBCSD) defines CSR as “the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large ((WBCSD’S CSR definition, http://www.wbcsd.org/work-program/business-role/previous-work/corporate-social-responsibility.aspx)).”

According to the United Nation Industrial Development Organization (UNIDO), “Corporate social responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations 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. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that ((UNIDO’S CSR Definition,http://www.unido.org/en/what-we-do/trade/csr/what-is-csr.html)).”

CSR is a win -win situation whereby contributing towards sustainable development, companies can address their stakeholder expectations and meet their objectives at the same time.

Evolution in India

India has a long tradition of philanthropy. In the Pre- industrialized period philanthropy, religion and charity were the key principles of CSR, where industrial families established temples, schools, hospitals and other infrastructure of public utilities with the sole aim of social consideration. In the post industrialization period companies became conscious of the fact that they need to pay heed to societal and environmental concerns in addition to profit maximization. Therefore, the Indian companies have started focusing on areas such as public health, education, livelihood, water conservation and natural resource management.

Clearly, evolution of CSR in India has followed a chronological evolution of 4 thinking approaches:

  • Ethical Model (1930 –1950): This model focused on the promotion of “trusteeship”. Under this notion the businesses were motivated to manage their business entity as a trust held in the interest of the community. The efforts of Tata group directed towards the well being of the society are also worth mentioning in this model.
  • Statist Model (1950 –1970s): This post independence era model was driven by a mixed and socialist kind of economy. The important feature of this model was that the state ownership and legal requirements decided the corporate responsibilities.
  • Liberal Model (1970s –1990s): As per this model, corporate responsibility is confined to its economic bottom line. This implies that it is sufficient for business to obey the law and generate wealth, which through taxation and private charitable choices can be directed to social ends.
  • Stakeholder Model (1990s – Present): The model came into existence during 1990s as a consequence of realization that with growing economic profits, businesses also have certain societal roles to fulfill. Priority of business got widened from 1 P to 3Ps by inclusion of people and planet in profit, also popularly known as “Triple Bottom Line.” Today, businesses focus on accountability and transparency through several mechanisms ((Corporate Social Responsibility – Towards a Sustainable future, https://www.kpmg.com/in/en/services/advisory/risk-compliance/documents/whitepaper%20on%20csr.pdf)).

Therefore, CSR comprises philanthropic, corporate ethical, environmental and legal as well as economic responsibility.

Why Companies should embrace CSR?

CSR has helped companies to grow socially, economically and financially. The concept which was once based on charity approach is now willingly adopted by companies for their own good as well as to win over consumers by giving back to the society.

Enhances brand image & reputation: CSR enables the firms to take on the triple bottom line approach considering environment, society as well as the economic aspect of the business. These actions by firms can create positive impact on the thinking of its consumers which helps in creating a positive picture of the company and improves its brand image and reputation.

Increases sales and customer’s loyalty: It is being observed that people nowadays prefer to buy products based on criteria, such as “eco friendly”, “child labor-free”, “renewable packaging”, “primary education “and others.

Increased ability to attract and retain employees: By working in a company which is involved in CSR activities, employees get a sense of fulfillment as they are able to contribute back to the society. This results in increase in contentment among them leading to higher retention level. On the whole, it affects training costs and turnover of the company.

Stance in India

CSR under Companies Act 1956:

There was no provision for corporate social responsibility in the Companies Act 1956. However, companies used to make contribution towards charitable and other funds under section 293(1)(e) of the said act. These were not to be directly related to the business of the company or for the welfare of its employee. It provided that contribution can be made by a public company or a private company, being a subsidiary of a public company , for an aggregate amount up to Rs 50,000 or five per cent of its average net profit determined under sections 349 and 350 of said Act during the three financial years immediately preceding – whichever is greater. Consent of shareholders in general meeting was required for the contribution exceeding the limit. However, private companies which were not subsidiary of public company were free to contribute as per their own will.

Statutory Introduction:

The new Companies Act, 2013 introduces the provision of CSR under section 135.The Ministry of Corporate Affairs (MCA) has vide its notification dated 27 February 2014, notified 1 April 2014 as the date on which the provisions of section 135 and Schedule VII of the Act shall come into force.

ELIGIBILITY: The section states that every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute Corporate Social Responsibility Committee.

CSR COMMITTEE: The Section states that committee is to consist of three or more directors, out of which at least one director shall be an independent director. However, the CSR Rules have relaxed the requirement regarding the presence of three or more directors on the CSR Committee of the Board. A private company or unlisted public company, which is otherwise not required to have an independent director, is exempted from the requirement of having an independent director on their CSR committee. It also provides that where a private company has only two directors on the Board, the CSR Committee can be constituted with these two directors. The CSR Committee of a foreign company shall comprise of at least two persons wherein one or more persons should be resident of India and the other person nominated by the foreign company.

DUTY OF THE COMMITTEE: This committee is required to formulate CSR policy which shall refer the activities to be undertaken by the company as specified under schedule VII. It shall recommend the policy and amount of expenditure to be incurred on the same. The Board after taking into account the recommendations of the committee must approve the CSR policy and disclose the same in director’s report. Further, they are bound to display it on the website.

MANDATORY SPEND ON CSR: The Board of every company has been given responsibility to ensure that at least 2% of the average net profits of the company made during immediately preceding three financial years are spent to discharge their corporate social responsibility. Rule 2(e) of CSR rules provides that “Net profit” means net profit as per the financial statements of the Company and excludes profits generated outside India through overseas branches or subsidiaries and any dividend received from other companies in India that are complying with the CSR provisions.

The Government of India has also focused on persuading companies to participate in addressing social and developmental issues, not only as part of their social responsibility but also their business practices. Setting an example for the private sector, guidelines regarding expenditure on CSR activities for Central Public Sector enterprise (CPSE) were issued by Department of Public Enterprise which came into effect on 1st April 2013. It is provided that every year, each Central Public Sector Enterprise shall with approval of its directors shall make budgetary allocation for CSR and Sustainability activities / projects for the year. These guidelines would supplement CSR Rules notified by Ministry of Corporate Affairs (MCA). The budgetary allocation will be based on the profitability of the company. More specifically, it will be determined by the Profit After Tax (PAT) of the company in the previous year as shown here under ((Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprise (April 2013), http://www.dpemou.nic.in/MOUFiles/Revised_CSR_Guidelines.pdf)):

[table id=8 /]

CSR ACTIVITIES: Schedule VII prescribes activities which may be undertaken by company in pursuance of their corporate social responsibility. CSR Rules have essentially brought change in the schedule. Some of the activities permitted as per the earlier schedule have been elaborated and widened in scope, a few activities have been added and some have been deleted.

CSR activities include:

  1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;
  2. Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
  • Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
  1. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and water;
  2. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
  3. Measures for the benefit of armed forces veterans, war widows and their dependents;
  • Training to promote rural sports, nationally recognized sports, Paralympics sports and Olympic sports;
  • Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;
  1. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
  2. Rural development projects.

‘Social business projects’ and residual clause giving power to the government to prescribe other matters on CSR related activities amongst others have been deleted through the notification. It is nowhere expressly permitted that companies may undertake activities outside the Schedule. Therefore, whether or not CSR activity is exhaustive remains uncertain.

Penalty for violation of CSR provisions:

Section 134(3)(o) provides that Board of Directors have to disclose the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during an year. Section 134(8) states that if company contravenes the provision as laid down under this section, it shall be punishable with fine not less than Rs.50,000 but may extend up to Rs. 25,00,000. Similarly, every officer in default shall be punishable with an imprisonment for a term which may extend to three years or with a fine not less than Rs.50,000 and may extend upto Rs.5,00,000 or both.

Tax Implications

Indian courts have in catena of cases discussed whether expenditure incurred as a CSR activity would be allowable as deduction under section 37(1) of the Income tax act 1961.Although different in factual situations, it has been held that if the expenditure is incurred in advancement of taxpayer’s business, the same is allowable as business expenditure under Section 37 of the Act.

CIT v Madras Refineries Ltd ((266 ITR 170 [Mad])):

Facts: The assessee, Madras Refineries Limited provided funds for establishing drinking water facilities to the residents in the vicinity of the refinery and also provided aid to the school run for the benefit of the children of those local residents. The question arose whether this expenditure was disallowed u/s 37 (1).

The Madras HC opined:

“The concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Monies spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business is situated cannot be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee is one which is to some extent a polluting industry.”

Therefore, funds provided for establishing drinking water facilities and providing aid to school meant for residents of the locality in which the taxpayer operated were allowed as deduction.

CIT v. Infosys Technologies Ltd (([2014] 360 ITR 714)):

Facts: There was severe traffic congestion near the establishment of the assessee and it seriously affected the free movement of public including employees of Infosys. Infosys as a CSR initiative installed traffic signal near the establishment which otherwise was responsibility of the State. The question arose whether said expenditure was allowable u/s. 37(1) of the Income Tax Act.

Karnataka High Court held:

The said expenditure facilitates the employees of Infosys for free movement and allows them to reach the office in time, which otherwise was affecting the business of Infosys on account of delay in reaching office and thereby resulting in delay in completing projects; just because the general public other than Infosys was also benefited by the said expenditure, it does not imply that the said expenditure would not be allowed as deduction u/s 37(1) of the Act.

In view of the above decision, one may find that the if the CSR activity is undertaken in advancement of business of the assessee, then the said expenditure could be allowed u/s 37(1) of the Act.

Section 135 of the Act provides that corporate need to spend at least 2% of the average net profits of the company made during immediately preceding three financial years to discharge their corporate social responsibility. It does not indicate that it is a statutory charge against the gross income. On the contrary, CSR expenditure is also treated as an appropriation of net income. Therefore, there is lack of clarity on the same.

As discussed above there have been court decisions that have examined the nature of CSR expenses and ruled them as deductible on case to case basis.

Finance (No.2) Act of 2014 appended new Explanation to Section 37(1) clarifying that any expenditure incurred by an assessee on the activities relating to CSR referred to in S.135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the assessment year 2015-16.

This amendment poses serious concerns and defeats the objective for which CSR was statutorily incorporated .i.e., for the overall development of the society and environment. The tax disallowance on CSR expenditure motivates corporate to undertake activities for which they can get maximum tax benefits in form of deductions or exemptions.

For instance: Schedule VII prescribes activities that may be undertaken by corporates as a part of their corporate social responsibility and one such activity is contribution to Prime Minister’s National Relief Fund. Section 80G of I-T Act provides that contribution to Prime Minister’s National Relief Fund shall be eligible to 100 % deduction and thereby making other activities prescribed therein irrelevant.

It is also to be noted that section 35AC of I-T Act provides that where expenditure is incurred on project or scheme for promoting the social and economic welfare or upliftment of the public as approved by the national committee set up for this purpose, 100% of such expenditure is admissible. However, the activity of association to which the donation is made should be connected to corporate social responsibility of the company to get deduction of expenditure incurred towards the CSR activity.

CSR AND SMEs

Section 7 of Micro, Small and Medium Enterprises Development (MSMED) ACT, 2006 defines small and medium enterprises as under:

7(a) Enterprise engaged in the manufacture or production, processing or preservation of goods as specified below:

  1. ii) A Small Enterprise is an enterprise where the investment in plant and machinery is more than Rs 25 Lakh but does not exceed Rs 5 Crore;

iii) A Medium Enterprise is an enterprise where the investment in plant and machinery is more than Rs 5 Crore but does not exceed Rs 10 Crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries.

(b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below.

  1. ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and

iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

By requiring companies, with a minimum net profit of 5 crore INR, to spend on CSR activities, the Companies Act, 2013 is likely to bring in many SMEs into the CSR fold.

Hurdles for SMEs for getting involved in CSR:

  1. These companies have to remain competitive in terms of price and quality, therefore, cost of implementing CSR activities creates gordian knot when survival is often the greatest economic imperative;
  2. It is being perceived that CSR activities do not yield benefits in the short run as there is lack of awareness of the business benefits.
  3. The fact that existing CSR tools and guidelines are mainly focussed towards large business;
  4. The most cited obstacle for SMEs is bureaucratic burden and red tapism.

Rule 4(3) of CSR Rules provides: A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.

Therefore, by introducing the concept of collaboration for undertaking CSR activities, government has made it easier for SMEs to overcome the problem. SMEs can get the following advantages:

Reduction in operational cost: The quantum of revenue available for CSR with individual SMEs is expected to be small. By constituting a common organisation, operational cost of management will reduce as the number of companies carries out their activities collectively.

Undertake long-term projects: By collaborating, SMEs can overcome uncertainty in the CSR budget, can pool their resources to create a sizeable CSR fund and invest in long term projects, which leads to better community relations.

Collaboration among the SMEs in a cluster also provides an opportunity to manage social and environmental issues and respond better to the pressure from buyers, who are trying to establish ethical supply chains and gain appreciation from the international community ((Handbook on Corporate Social Responsibility in India,http://www.pwc.in/assets/pdfs/publications/2013/handbook-on-corporate-social-responsibility-in-india.pdf)).

Author’s View

While Government of India deserves an applause for the introduction of CSR in the companies act 2013 but at the same time it is fraught with certain infirmities.

It is worth mentioning that corporate pay tax on 1/3 of their profits every year. Apart from this, companies also pay wealth tax of 1% of their taxable net wealth. This doesn’t end here; there are certain big business houses such as TATA, ITC, Bajaj, Infosys, Wipro, Reliance etc. which keep contributing towards the welfare of the society. However, by making spending 2% of average profits made during immediately preceding three financial years on CSR activity a mandate, there may be reluctance in compliance, especially in case of companies which are not profitable, but fall under the category due to triggering net worth or turnover criteria.

World Bank Group issues a report on “ease of doing business” every year. India’s rank was 132 as per 2013 report. Current 2014 report places India at 142nd Position suggesting that conducting business in India has become more difficult than it was before. Now, by forcing companies into CSR activities has further made it a worse place for business

By disallowing expenditure incurred towards CSR activities u/s 37 of I-T Act, there is differential tax treatment and now companies prefer to spend earmarked CSR amount on areas where tax exemptions are available. Omission of Explanation (2) to Section 37 of the act can help to resolve this issue.

Schedule VII provides specific activities without giving any freedom to companies to choose their CSR activities and therefore, they may have to undertake an activity which may not yield the desired outcome.

Some Indian NGOs lack formal organized framework. Thus, it is difficult to monitor how they spend the CSR funds. It is also to be noted that funds made to political parties do not amount to CSR expenditure and therefore, companies in veil of conducting their CSR activity through an NGO may contribute to political parties and may receive benefits from the same and this may lead to misappropriation of CSR funds

In order to meet the objectives of the new CSR law, clarifications on certain issues is the need of the hour. It cannot be denied that Company Act 2013 has given a new dimension to CSR by making it mandatory for the companies falling under designated category to comply with CSR policy, but the same mandate has created burden on certain enterprises which still cannot undertake it due to financial constraints.

CSR and the Companies Act 2013

Has it really achieved the objectives or are we still far from achieving a strict compliance with the CSR policies

Sandeep Menon Nandakumar, Assistant Professor (Sr.), VIT Law School, Chennai

It is an undisputed fact that multinational corporations wield more power and wealth than many of the nations across the world ((For example, the annual sales of the Royal Dutch/Shell Group Oil Company are twice New Zealand’s gross domestic product; See Dr. Clarence J. Dias, ‘Corporate Human Rights Accountability and the Human Right to Development: The Relevance and Role of Corporate Social Responsibility’ 4 NUJS L. Rev. 495 (2011).)). Due to the very same reason, they are capable of doing more harm than any other private economic institutions as their activities surpass national boundaries thereby going beyond the control of national jurisdictions in many cases. Multinational corporations do a great deal of service to the society by paying huge taxes, providing employment, contributing to charitable causes and so on. However, at the same time they are also prone to corruption, accused of providing poor and inadequate workplace conditions, causing human rights abuses, consumer disputes and violating environmental values. It is not quite sure whether it is the latter part that the Corporate Social Responsibility (CSR) tries to control but it is surely a mechanism, which balances the latter with that of the former. Corporate social responsibility is based on the premise that most of the companies derive resources from the society and they are expected to return it back. CSR has been defined thus:

“Corporate Social Responsibility is a term used to express that an organization is taking responsibility for the impact of its activities upon its employees, customers, community and the environment. It is usually used in the context of voluntary improvement commitments and performance reporting. Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the honouring of a triple bottom line- People, Planet and Profit. CSR involves a commitment to behave ethically and contribute to economic development, while improving the quality of life of the workforce and their families as well as the local community at large ((Dr. Clarence J. Dias, ‘Corporate Human Rights Accountability and the Human Right to Development: The Relevance and Role of Corporate Social Responsibility’ 4 NUJS L. Rev. 505 (2011).)).

This paper primarily endeavours to find whether above-mentioned concept of CSR is reflected in the Companies Act 2013. The first part of the paper focuses on the requirement of the mandatory CSR policies at the national level. In this part, the extent of responsibility of the states for the activities of corporations is also analysed and some changes have been suggested in this regard. The second part of this paper is on the provisions relating to CSR in the new Companies Act 2013 including its VII Schedule. It also examines whether the UN Global Compact principles are given due recognition in the provisions relating to CSR in the Companies Act. Final part deals with an analysis of Chhattisgarh Corporate Social Responsibility Policy, 2013. Its pros and cons and how it differs from the CSR objectives mentioned in the 2013 Act. This article ends with raising some concerns about the concept of CSR enshrined in the 2013 Act, and that if given proper attention can add new momentum towards the goal of achieving the objectives of CSR.

Inadequacy of State Responsibility: Requirement of mandatory CSR policies at the national level

As one author puts it, “a corporation can recognizably become involved in violations of human rights law either directly as a private actor; as an actor coloured by a connection with a state, state entity, or other public actor; or as a participant in a joint venture or complicitous relation with another human rights violator ((Jordan J. Paust, ‘Human Rights Responsibilities of Private Corporations’ 35 Vanderbilt Journal of Transnational Law 801 (2002).)).” In both international as well as national law, the states are responsible only for the acts of their organs and are generally not made responsible in case of private corporate wrongs. In order to make the state responsible, the legal system looks into whether the acts of the corporations were ‘on behalf of the state’ or ‘under the control of’ the state. However, in most of the cases the situation is different. The corporations are complicit in violating human rights along with the state or vice versa and it should have been a point to include the factor of complicity along with acts ‘on behalf of the state’ or ‘under the control of’ the state.

The Draft Articles on Responsibility of States for Internationally Wrongful Acts, 2001 ((Report of the International Law Commission on the work of its fifty-third session in 2001))attributes the conduct of any organ of the state to the act of state but an organ of the state has been defined to include any person or entity which has that status in accordance with the internal law of the State ((Article 4 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (2001).)). The 2001 Draft Articles has expanded the ambit of the term organs of the state under articles 5 and 8. According to Article 5, the acts of any organ, which is empowered by the law of that State to exercise elements of the governmental authority, shall be considered an act of the State under international law. The commentary to the Draft Articles state that “since corporate entities, although owned by and in that sense subject to the control of the State, are considered to be separate, prima facie their conduct in carrying out their activities is not attributable to the State unless they are exercising elements of governmental authority within the meaning of article 5”.

The major change should have been brought to article 8, which in its original form states thus:

“The conduct of a person or group of persons shall be considered an act of a State under international law if the person or group of persons is in fact acting on the instructions or under the direction or control of, that State in carrying out the conduct.”

The acts of non-state actors such as TNCs in which the state becomes complicit are not given due attention in the above article. The Draft Articles on responsibility of States for internationally wrongful acts is incapable to fix responsibility on the states involved in human rights abuses carried out by the TNCs ((Daniele Amoroso, ‘Moving Towards Complicity as a Criterion of attribution of private conducts: Imputation to states of corporate abuses in the US Case Law’, 2011 LJIL 989)).

Thus, it is stated that where the state responsibility is highly inadequate to combat the activities of corporations and there is in fact none to be responsible for the activities of the corporation, it is better to have a concrete national policy on corporate responsibilities.

Corporate Social Responsibility under Companies Act 2013

The Companies Act, 2013 has ushered a wave of change by making far-reaching consequences on all companies in India. The talk of the nation, amongst all the new changes brought out by the new legislation, has been the incorporation of provisions relating to Corporate Social Responsibility. The mandate of CSR has been provided under Section 135 of the 2013 Act which ensures that in every financial year, a company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more spends at least two per cent of its average net profits made during the three immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy ((Section 135 of the Indian Companies Act, 2013: The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.)).

The trend that has been seen in India over the years is that most of the companies set up their establishments in an area which results in violating the environmental standards or forced displacement or disturbing the societal set up in that local area. Then they establish cancer research centres or other concerns in an entirely different area that qualify them as companies observing CSR practices. Tata group is one of the best examples. The instance in Singur (popularly known as Tata Nano Singur controversy), where they set up a car manufacturing unit violated several human rights and caused large-scale displacements. This was done without any regard to the land laws of the state. However, they are known to have undertaken many philanthropic activities and have established institutions of higher learning, promoted art and culture of the country and funded scientific research. POSCO steel plant in Odisha is another example, which boasts of initiating educational programmes and scholarships but has caused displacement of several inhabitants and environmental hazards in the local area ((Jaya Srivastava, ‘Social Movements, CSR and Industrial Growth: An Indian Experience, 11 The IUP Journal of Corporate Governance 60 (2012).)). The current Companies Act of 2013 has taken care of this situation by adding a proviso to section 135, which states that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.

The Companies Act of 2013 has given due care to the interests of the community and environment and not just in business/profit affairs of the company. As per Section 166 of 2013 Act, the director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. This is in tune with the provisions of similar legislation in UK. Section 172 of the UK Companies Act 2006 states that the director of a company must act in good faith to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to the impact of the company’s operations on the community and the environment ((Section 172 of the UK Companies Act, 2006: Duty to promote the success of the company: (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.)).

The amendments made to Schedule VII of the Companies Act, 2013 has in fact widened the scope of CSR activities ((In Schedule VII, for items (i) to (x) and the entries relating thereto, the following items and entries shall be substitutes, namely:-“(i) eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;(ii) promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and differently abled and livelihood enhancements projects;(iii) promoting gender equality, empowering women, setting up homes, and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources, and maintaining quality of soil, air and water;(v) protection of national heritage, art and culture including restoration of buildings and sites for historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;(vi) measures for the benefit of armed forces veterans, war widows and their dependants;(vii) training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports;(viii) contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;(ix) contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government; (x) rural development projects))and the much criticized clause (x) in Schedule VII before the amendment that stated “such other matters as may be prescribed” has been removed in the newly framed version. At the same time, the new amendment has made the list exhaustive and it has to be seen whether all the essential CSR activities have come under the schedule ((It has been mentioned in the Companies (Corporate Social Responsibility Policy) Rules 2014 that “Corporate Social Responsibility (CSR) means and includes but is not limited to (i) Projects or programs relating to activities specified in Schedule VII to the Act”, but it is silent as to what all the other activities could be)). It would have been better if the ten fundamental principles of UN Global Compact were given more attention in the VII Schedule and in the overall framework of the provisions relating to CSR in the Companies Act 2013.

UN Global Compact and the 2013 CSR mandate

The UN Global Compact was launched in July 2000 as a framework for the companies worldwide for responsible business practices. The UN Global Compact consists of principles set for the companies to follow in their activities in the areas of human rights, environment, labour standards and anti corruption. These principles enjoy universal consensus and has been derived from UDHR, ILO’s Declaration on Fundamental Principles and Rights at Work, Rio Declaration on Environment and Development and the United Nations Convention against Corruption ((Available at http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html last accessed on July 24, 2014 at 7:59 AM)). The UN Global Compact also ensures that the companies undertake due diligence to comply with its national laws and work to identify any violations of human rights and prevent it. It is doubtful whether Schedule VII encompasses all the human rights principles that were thought about in the Global Compact. Moreover it seems that the Companies Act of 2013 has given a lot more preference to CSR polices by remaining silent on ethical business practices or in other words called ‘responsible business practices’ ((Available at http://www.nfi.org.in/sites/default/files/nfi_files/Comments%20on%20draft%20CSR%20rules.pdf Last accessed on July 24, 2014 at 8:01 AM)). For example, the first principle of UN Global Compact states, “businesses should support and respect the protection of internationally proclaimed human rights.” This principle reiterates the fact that like the government, individuals and other organisations, companies also do have a responsibility in ensuring protection of human rights. By ensuring protection of human rights it should be understood that the business community should not infringe human rights. This has been stressed by the UN Human Rights Council that the corporate responsibility to respect human rights is a requirement of business everywhere ((Available at http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html Last accessed on July 24, 2014 at 8:11 AM)). This principle encompasses within its ambit promotion of rule of law, addressing consumer concerns, increase in worker production and retention and building good community relationships. Schedule VII only deals with the steps that the companies have to undertake towards CSR policies. Due regard has to be given to respect the human rights and not to violate them during set up of the company’s activities as well.  For example, the activities of the corporations such as POSCO in Odisha and Tata Nano in Singur have created massive violations of human rights, land and environmental laws ((Tata Nano project in Singur (West Bengal) had caused severe displacement of farmers and deprived many of land and homes due to the takeover of 997 acres of farmland by the State Government for Tata to build its factory.Though the law authorized the takeover only for public improvement projects, the project was in blatant violation of this)). It is better not to forget the corporate human right abuses that have taken place at the national and international level too. Activities of Barclay’s Bank, in South Africa, Wal-Mart in failing to discontinue dealers from committing labor misuses ((Doug Cassel, ‘Corporate Aiding and Abetting of Human Rights Violations: Confusion in the Courts’ (2007) 6 Nw. U. J. Int’l Hum. Rts. 304)), TNCs as well as Coca Cola in Sudan, the incident of release of toxic gas from Trafigura in Abidjan affecting more than a lakh of people, the environmental degradation and poisoning caused by operations of Rio Tinto in Papua New Guinea, Texaco in Ecuado, Shell in Ogoniland, Nigeria, Union Carbide in Bhopal, issues in Bano v. Union Carbide Corporation ((273 F.3d 120 (2d Cir 2001).)), Exxon’s Valdez oil-spills off Alaska are all examples of environment and human rights abuses by multinationals. Asking the multinationals to invest on CSR after violating human rights and environmental standards by not following ethical/responsible business practices seems to be unrewarding.

The VII Schedule has incorporated the labour and the environmental principles/activities in a comprehensive manner and this is something, which is commendable. On the other hand it seems to have missed the anti corruption principle of the UN Global Compact. Principle no.10 of the UN Global Compact states, “Businesses should work against corruption in all its forms, including extortion and bribery.”

However, the effectiveness of UN Global Compact has always been in question as they are purely voluntary commitments. The companies or the participants are required to communicate their progress in implementing the ten principles annually to all the stakeholders and if they don’t they will be listed as “non-communicating” on the website and the company will be delisted after the expiration of one year from the initial deadline. Though the company has to follow the Global Compact principles once it becomes a part of the commitment, the basic issue is whether a company voluntarily joins the commitment and strives to protect human rights and other related rights. It is true that the companies like Royal Dutch Shell, Novo Nordisk, and BP Amoco have publicly proclaimed their cooperation with the UN to safeguard human rights, but it is still to be seen whether they will be really following what they have proclaimed in the light of future events. If the facts alleged in the recent case of Esther Kiobel v. Royal Dutch Petroleum Co. ((133 S.Ct. 1659 (2013).))are assumed to be true, it can be concluded that nothing has changed much even after the advent of the UN Global Compact and that it is not a very effective step towards making companies follow responsible business practices.

The proviso to Section 135 clearly stipulates the requirement of specifying the reasons for not spending the required CSR amount but it is unclear about the penal consequences that the particular company need to face for not spending the amount towards CSR. The after effect of not mentioning the reasons for not spending the amount is also unclear from the said provisions. It is in this regard that the Chhattisgarh Corporate Social Responsibility Policy 2013 assumes significance.

Chhattisgarh Corporate Social Responsibility Policy 2013

Chhattisgarh Corporate Social Responsibility Policy 2013, published in the Gazette of Chhattisgarh on May 3, 2013, mandates that public and private companies with net profits in the previous year of less than Rs 500 crore will contribute 3% of their annual profits towards CSR to the Chief Minister Community Development Fund, and those with net profits above Rs. 500 crore will contribute 2% of their annual profits towards CSR with a minimum threshold of Rs. 15 crore.

This 2013 state policy goes against the central legislation in many respects and may be held to be invalid as it is doubtful whether the state can assume such kind of power when the central legislation is in force. Moreover, the fact that the amount has to go to the CM’s community development fund may act as a hindrance for companies from earning the goodwill of the local area/community through developmental projects as part of CSR. Nevertheless, the state policy has to be appreciated for reasons manifold. Firstly, the cut off of a net profit of Rs. 500 crore for CSR initiatives fixed by Companies Act 2013 has been removed. As per this policy, even companies whose net profits in the previous year is less than Rs 500 crore have to contribute 3% of their annual profits towards CSR to the Chief Minister Community Development Fund. This is one important aspect, which has been completely missed out in the Companies Act 2013.

The 2013 state policy also provides for punishment for non-compliance. According to the policy, industrial units that are obtaining facilities or grant from various departments of State of Chhattisgarh or according to the prevailing industrial policy will have to mandatorily deposit the money for CSR initiatives in the Chief Minister Community Development Fund. Non-compliance of this will result in taking back of grant or facilities that have been provided by the administration. The state government cannot be blamed for taking such a bold step in this regard, as many of the huge corporate houses like Jindal Steel Power Limited, JSW Steel Ltd, Bhushan Power & Steel, Vandana Group, DB Power Ltd etc are in Chhattisgarh.

One major criticism to the Chhattisgarh CSR policy would be that the amount deposited in the CM Community Development Fund could be used for many purposes other than CSR objectives and there are no adequate safeguards against the same. However, a perusal of Schedule VII of the Companies Act 2013 shows that one of the CSR activities stipulated under it is “contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women”. If the corporate can be asked to contribute to the PM’s National Relief Fund or any other Central Government, then requiring them to contribute to the CM’s fund should not provoke much criticism. It is also to be noted that as per the 2009 decision of the Central Information Commission in Shri A. K. Goel v. Prime Minister’s Office, ((Available at  http://indiankanoon.org/doc/1459130/ last accessed on July 25, 2014 at 01:07 AM))although the Prime Minister’s National Relief Fund can be treated as public authority, it cannot be treated as a government Department and for the same reason, information on both those making contribution to this fund and those receiving benefits from it is to be treated as personal information held in confidence by the Prime Minister’s National Relief Fund and therefore exempt from disclosure u/s 8(1) (j) of the Right to Information Act ((Section 8(1) (j) of the RTI Act: Exemption from disclosure of information. – Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen,— information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information)).

This policy may seem to be a compelling measure by the government on the companies and against the concept of CSR as envisaged under the Companies Act 2013 whereby corporate are entitled to perform welfare schemes in their neighbourhood for the benefit of the society. But, it should be admitted that the 2013 state policy has taken care of one major situation. CSR, if left entirely to corporates, will become an extremely distrustful activity in the future due to lack of adequate monitoring/verification by the state.

Conclusion

By incorporating the provisions relating to CSR and CSR reporting procedures, the new Companies Act of 2013 has in fact corrected a historic wrong of making CSR a matter of discretion of companies. It is certainly a new step towards transforming the voluntary CSR initiatives to binding principles but there is still a long way to go for achieving a strict compliance with the CSR policies. In the subsequent amendments, it is worthwhile if the following concerns are given adequate focus.

Main Concern: The definition of Corporate Social Responsibility in the present Indian scenario could be seen from the Companies (Corporate Social Responsibility Policy) Rules 2014 where it has been defined thus,

“Corporate Social Responsibility (CSR) means and includes but is not limited to (i) Projects or programs relating to activities specified in Schedule VII to the Act; or
(ii) Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.”

Other concernsIt is true that the concept of CSR is not limited to the activities laid down under Schedule VII of the 2013 Act. However, keeping in mind the meaning and the essence of the concept of CSR (as mentioned in the introduction), it is quite doubtful whether the essence of CSR is reflected in the definition. Moreover, if the true meaning of CSR was embedded in the definition, then there is no reason why discrimination has been shown between companies whose net profit is above Rs. 500 crore and others for CSR initiatives. The essential elements of CSR as enunciated in the above definition which includes responsibility for the impact of its activities upon the company’s employees, customers, community and the environment; voluntary improvement commitments and performance reporting, the deliberate inclusion of public interest into corporate decision-making, honouring of a triple bottom line- People, Planet and Profit are equally applicable to all companies irrespective of their net profit or annual turnover. In the alternative, the 2013 legislation could have at least opted for a bottom down approach (employee-centered CSR approach) for companies with less net profits or annual turnover than top down approach mentioned for companies coming under the ambit of Section 135 ((For more information, See Walter R. Nord & Sally Riggs Fuller, ‘Increasing Corporate Social Responsibility Through an Employee-centered Approach’ 21 Employ Respons Rights J 279 (2009).)). The employee-centered approach is where CSR initiatives come from the part of the bottom level employees. The famous story of one of the largest fashion retailers, Nordstrom that refunded the customer’s money who tried to return a set of tires despite the fact that Nordstrom does not sell tires is a great example of high level of customer service and employee-centered CSR approach.

1)      The uncertainty when companies do not give preference to local area where it operates. Are we talking about a legal framework that does not completely prohibit the corporate/multinationals to disturb environmental safety, promote forced displacement and upset the societal set up in the local area where the company is situated but satisfies the mandate of CSR by setting up a cancer research institute or like establishments in an entirely different area?

2)      The after effects/sanctions meted out to those corporations who fail to comply with Section 135 of the 2013 Act are not clear despite the introduction of mandatory CSR

3)      It is yet to ascertain what would be the so called “social responsibilities” of companies whose net profits fall below Rs. 500 Crore or who do not satisfy the criteria laid down under Section 135(1) of the Companies Act 2013.

4)      The effectiveness of the CSR activities when it comes to its implementation due to lack of adequate verification/monitoring by the state.

5)      The reflection of UN Global Compact principles in the Schedule VII and generally in the CSR provisions in the 2013 legislation.

6)      The failure to give importance to the concept of ethical/responsible business practices in the scheme of the Act.