Corporate Social Responsibility

WHY IN NEWS:

• The Ministry of Corporate Affairs (MCA) issued the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.
• These rules amend the 2014 Rules, issued under the Companies Act, 2013.

WHAT IS CSR?

• As per United Nations Industrial Development Organization “Corporate Social Responsibility is a management concept whereby  companies integrate social and environmental concerns in their business  operations and interactions with their stakeholders”

EVOLUTION OF CSR IN INDIA

• Before Independence the concept manifested in the form of charitable acts of businessmen and philanthropists.
• Gandhian model of trusteeship encourages responsible behaviour towards employees and stakeholders as business entities were seen to be operating in public trust.
• In 2009, Corporate Voluntary Guidelines released to encourage corporate to voluntarily achieve high standards of corporate governance
• In 2012, SEBI mandates top 100 companies by market capitalization to file Business Responsibility Report based on National Voluntary Guidelines
• In 2013, Indian government becomes the first to mandate CSR under Section 135 of the Companies Act, 2013.

ABOUT THE CSR PROVISIONS UNDER THE COMPANIES ACT

• Under Section 135 of the Companies Act, 2013, every company with net worth of Rs 500 Crore or a turnover of Rs 1000 Cr or net profits of Rs 5 Crore is required to invest at least 2% of its average net profit for the immediately preceding 3 financial years on CSR activities in India
• Those companies are also mandated to constitute a CSR Committee consisting of at least 3 directors including an independent director.
• This committee will formulate the CSR policies for the company.
• CSR is also applicable to branch and project offices of a foreign company in India.
• Amendments made in 2019:
  • Any unspent annual CSR funds must be transferred to one of the funds under Schedule 7 of the Act (e.g., PM Relief Fund) within six months of the financial year.
  • Non-compliance with CSR norms is made a jailable offence for key officers of the company, apart from hefty fines on the officer in default.
• Amendments made in 2020:
  • Companies with a CSR liability of up to Rs 50 lakh a year are exempted from setting up CSR Committees.
  • Further, companies which spend any amount in excess of their CSR obligation in a financial year can set off the excess amount towards their CSR obligations in subsequent financial years. 

ACTIVITIES THAT CAN BE UNDERTAKEN UNDER CSR (LISTED UNDER SCHEDULE VII OF THE COMPANIES ACT)

• Eradicating hunger, poverty and malnutrition.

• Promoting education and enhancing vocational skills.
• Promoting gender equality.
• Ensuring environmental sustainability, contributing to Clean Ganga Fund.
• Protection of national heritage, art and culture.
• Measures for the benefit of armed forces veterans, war widows and their dependents.
• Promoting rural sports, Paralympic and Olympic sports.
• Contributing to technology incubators.
• Slum area development, rural area development.
• Contribution to PM s National Relief Fund.

KEY FEATURES OF THE COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) AMENDMENT RULES, 2021:

• Exclusion from CSR activities:
  • Activities undertaken in pursuance of normal course of business of the company
  • Activities undertaken outside India, except training of National or International level Indian sportspersons.
  • Contribution of any amount to any political party
  • Activities benefitting employees of the company, as under Code on Wages, 2019.
  • Activities carried out for fulfilment of any other statutory obligations
• Mandatory registration:
  • Entities have to register itself with the Central Government and fill the CSR-1 Form electronically with the Registrar of Companies from April 1, 2021.
• Engagement of external organizations
  • for design, evaluation, capacity building and monitoring of CSR projects has also been permitted
• Annual Action plan:
  • CSR committees of Companies shall be required to formulate an annual action plan and recommend the same to the board of the company
• Cap on administrative overheads:
  • Board of company needs to ensure administrative overheads do not exceed 5% of the total CSR expenditure for a financial year.
  • Administrative overheads mean the expenses incurred for general management and administration of CSR functions in the company
• Surplus cannot be utilised for other purposes:
  • Surplus from any project cannot be utilized for any business profits and must be reinvested into the same CSR project or may be transferred into fund.
• Impact assessment:
  • Any corporation with a CSR obligation of Rs 10 Cr or more for the 3 preceding financial years would be required to hire an independent agency to conduct impact assessment of all of their projects with outlays of Rs 1 Cr. or more.
• Mandatory disclosure of CSR projects:
  • It would be placed on the website of the company to ensure accountability of companies and a closer check on the compliance of rules.

BENEFITS OF CSR

• Benefits for the company
  • Business reputation and image building:
    • CSR is a tool for companies to meet aspirations of the community and in turn obtain a license to operate from them or gain their loyalty and trust.
  • Employee retention and satisfaction
    • CSR initiatives increase employee morale and create a sense of belongingness in them.
  • Strengthening the potential market:
    • A healthy business can only succeed in a healthy society.
    • Thus, it is in the best interest of a company to improve the socio-economic health of society through welfare spending.
• Benefits for the society:
  • Improves basic amenities:
    • The community benefits through various welfare initiatives taken by companies under CSR.
  • Contributes to overall peace and harmony:
    • CSR fosters social trust and inspires ethical conduct amongst employees and members of society.
  • Helps to reduce inequality in the society:
    • CSR spending on vulnerable sections leads to their empowerment >> brings inclusive growth
• Benefits for the government:
  • Reduced pressure on government exchequer:
    • CSR spending act as supplementary resources for welfare spending >> thus reduces the burden on state-led welfare spending
  • Attracts investment:
    • Better utilization of CSR spending can pacify the people’s negative attitude towards business friendly policies >> thus better implementation of pro-business enactments >> attracts business to India

CONCERNS

• Skewed pattern of spending
  • About 40% of CSR spending was incurred on education and healthcare while eradication of hunger received barely 5% of funds particularly when nearly 40% of Indian children are in the grip of malnutrition
• Affects business interests:
  • CSR is criticized as a tool to tax corporates which already face high taxation in the country. This can make India unattractive for business.
• Wide gap between public sector companies and private sector companies:
  • Filings with the Ministry of Corporate Affairs show that in 2017-18 >> the average CSR spend by private companies was just ?95 lakh compared to ?9.40 crore for public sector units
• Regional disparity
  • CSR spending is concentrated in states of Maharashtra, Gujarat, Andhra Pradesh etc., while North Eastern states escaped the attention of corporates.
• Non-compliance
  • Filings with the Ministry of Corporate Affairs show that in 2017-18 >> only a little over half of those liable to spend on CSR have filed reports on their activity to the government.
  • A KPMG survey of 100 companies found that 50% of the companies were unable to spend the mandated amount on CSR.
• Issues with the legislation:
  • The categories included under CSR are vaguely worded and lack clarity.
  • Besides, the act does not spell out any enforcement mechanism
  • Penal provisions introduced in 2019 are not in harmony with the spirit of CSR >> because CSR is a means to partner corporates for social development
• Difficulty in distinguishing social responsibility from commercial interests
  • Companies often undertake measures for employee welfare and place these under CSR. It is here that the line between CSR and company s interests gets blurred.
• Malpractices:
  • It is found out that companies made donations to charitable trusts, which are well known and then received them back after deduction of minor commissions
• Reduction in social spending:
  • It was observed that companies that spent more than 2% on social responsibility reduced their spending after the legislation came into force. This was an unintended consequence of the CSR legislation.

WAY FORWARD

• Relaxation and incentives:
  • Government should further provide relaxation and incentives in corporate tax to corporates complying with CSR regulations
• Decriminalize non-compliance
  • Non-compliance by corporates should be decriminalised and made a civil offence
• Ensure collaboration:
  • Facilitating collaboration between NGOs, agencies involved in environmental and social work will enable better utilization of CSR funds
• Sharing of best practices:
  • Enabling exchange and sharing of best practices between corporates through CSR summits.
• Monitoring:
  • CSR activities and projects needs to be monitored periodically to prevent fraudulent activities and complete project within stipulated time.
• Focusing on neglected areas:
  • Encouraging corporates to spend in hitherto neglected areas such as sports, conservation of heritage etc.
• Adopt the recommendations of committee chaired by Injeti Srinivas:
  • The expenses towards CSR should be eligible for deduction in the computation of taxable income.
  • CSR obligation shall lie only after companies have been in existence for three years.
  • A provision to carry forward unspent CSR balance for three to five years
  • CSR should not be used as a “means of resource-gap funding for government schemes”.
  • Aligning Schedule VII of the Companies Act with the United Nations Sustainable Development Goals.
  • The companies having CSR-prescribed amount below ?50 lakh may be exempted from constituting a CSR Committee.
  • Developing a CSR exchange portal to connect contributors, beneficiaries and agencies, allowing CSR in social benefit bonds and promoting social impact companies.
  • Board of the company has to assess the credibility of an implementation agency, which have to be registered with the MCA to carry out CSR activities.

PRACTICE QUESTION:

Q. ‘Provisions for Corporate Social Responsibility under Companies Act has evolved into a co-option of the corporate sector to promote inclusiveness in society’. Comment