The company is the most successful and impactful form of business in India. Hence the government has set the agenda of Corporate Social Responsibility on the companies to achieve the goal of sustainable development. India is the first country to legislate and quantify and mandate Corporate Social Responsibility for its businesses.
The definition of Corporate Social Responsibility used in regard to this research paper may be define as the obligation of the companies to manifest its resources in such manner that it benefits the community, through committed assistance as a member of the community keeping in mind the community as a whole and improving status of the community free from direct benefit of the enterprise.
The chief purpose of business is to supply “continually improving goods and services for an increasing number of people at prices they can afford” which should be connected with today’s challenges, for instance, pollution, threats of rising temperatures, water shortages and crop failures which should be addressed together with governments and international bodies as risks for our business, as the competency of the environment is limited both in terms of service growth in furnishing raw materials and in assimilating by-product wastes owing to consumption.
There are a few broad categories of social responsibility that many of today’s businesses are practising:
1. Environmental efforts: One primary focus of corporate social responsibility is the environment. Businesses regardless of size have a large carbon footprint. Any steps they can take to reduce those footprints are considered both good for the company and society as a whole.
2. Philanthropy: Businesses also practice social responsibility by donating to national and local charities. Businesses have a lot of resources that can benefit charities and local community programs.
3. Ethical labour practices: By treating employees fairly and ethically, companies can also demonstrate their corporate social responsibility. This is especially true of businesses that operate in international locations with labour laws that differ from those in the United States.
4. Volunteering: Attending volunteer events says a lot about a company’s sincerity. By doing good deeds without expecting anything in return, companies are able to express their concern for specific issues and support for certain organizations.
Corporate social duty (CSR) as we comprehend it today has been in India in different disguises. Amid the pre-industrial times, CSR was rehearsed to a great extent as charity. In the early twentieth century, the Gandhian belief system of trusteeship overwhelmed the field of CSR. as of late, India has turned into the first nation to make CSR obligatory for organizations of certain sizes. The legal birth of CSR can be sourced to December 2007 when the Reserve Bank of India (RBI) instructed the scheduled business banks about their obligations, urging them to embrace CSR exercises. Different rules as to social, ecological, and economic duties of business undertakings issued by Ministry of Corporate Affairs (MCA), Department of Public Enterprises (DPE) and the Securities and Exchange Board of India (SEBI) added to the formalization of CSR law in India through Section 135 and Schedule VII of the Companies Act 2013.
Evolution of CSR
To understand CSR, we need to understand the development of it through the years and the various forms it took:
(i)The Ethical Model (1930-1950) proposed by Mahatma Gandhi suggested the companies commit to public welfare and help in the nation-building process. The companies were supposed to manage themselves as a trust and look after the larger interests of the community.
(ii) The Statist Model (1950-1970) proposed by Jawaharlal Nehru came into effect during the post-independence era; it calls for the state ownership and legal requirements of corporate social responsibility in a socialist and mixed economy.
(iii) The Liberal Model (1970-1990) proposed by Milton Freidman is concerned with corporate social responsibility limited to private owners or shareholders where it is confined to the economic bottom line
(iv) The Stakeholder Model (1990-present) proposed by R. Edward Freeman proposes the companies to respond to the requirements of the stakeholders and this model came into effect in the 1990’s as a result of the increased profits which required greater responsibility towards the society. 8
Emergence of CSR
India became the first country to make CSR a mandate for companies for a specific size and turnover under the ‘CSR RULES 2014’. Though the rules were enacted in 2014, the foundations were already built.
The first formal notification of CSR was in December 2007, when RBI issued a circular to all the scheduled commercial banks regarding their duties as responsible citizens. It required the financial institutions to take up CSR exercises. It broadly encompassed the ideas of sustainable development, non-financial reporting, and different initiatives around CSR in its enclosures. The circular pushed on the advancement and security of human rights also, the environment. The circular additionally specified the absence of mindfulness about sustainable development and proposed open detailing of banks’ CSR exercises through their yearly reports.
In the subsequent years’ various guidelines regarding the social, environmental, and economic responsibilities of business were issued by Ministry of Corporate Affairs (MCA), Department of Public Enterprises (DPE), and Securities and Exchange Board of India (SEBI). MCA recognizes its ‘Corporate Governance Voluntary Guidelines’ of December 2009 as first formal communication to corporations regarding making CSR integral to their business policy. The ministry also mentions the ‘Guidelines on CSR, for CPSEs’ issued by the DPE in April 2010 as the first indicator of the serious attempt being made to link social responsibility and business in India. The ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business’ issued in July 2011 by the MCA drew a parallel between Indian business and global pattern and practices.
These guidelines were vital in formally introducing CSR in Indian law through Section 135 and Schedule VII of the Companies Act 2013 which came into effect from April 1, 2014. The Bill was earlier passed by the Lok Sabha on 18th December 2012 and the Rajya Sabha on 8th August 2013. The Act was notified in the Gazette of India on 30th August 2013.
Legal framework of CSR
The Ministry of Corporate Affairs (MCA) notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules) on 27th February 2014 which has come into effect from 1 April 2014.
Applicability
Net Worth Of Rs.500 Crore Or More
TURNOVER OF RS. 1000 CRORE OR MORE
NET PROFIT OF RS. 5 CRORE OR MORE
- Every company having the net worth of 500 crores or more, or turnover of 1,000 crores or more or a net profit of 5 crores or more during any financial year shall constitute a CSR committee of the board consisting of three or more directors, out of which at least one director shall be an independent director.
- The board’s report shall disclose the composition of the CSR committee.
- The CSR committee constituted under Section 135 (1) shall:
– Formulate and recommend to the board, a CSR policy which shall indicate the
activities to be undertaken by the company as specified in Schedule VII;
– Recommend the amount of expenditure to be incurred on the activities as mentioned in the CSR policy of the company; and
– Monitor the CSR policy of the company from time to time.
Sub-sections (1), (2) and (3) of Section 135 prescribe that all the eligible companies shall constitute a CSR committee of the board of directors consisting of three or more 10 directors. The CSR committee shall formulate and recommend to the board a CSR policy, amount of expenditure to be incurred on any of the CSR activities prescribed under Schedule VII and monitor the CSR policy of the company.
- The board of such a company shall:
➢ after considering the recommendations made by the CSR committee, approve the CSR policy of the company and disclose contents of such policy in its report and also place it on the company’s website, if any; and
➢ ensure that the activities as are included in CSR policy of the company are undertaken by the company.
This provision specifies that the board shall consider the recommendations made by the CSR committee and approve the CSR policy of the company. Further, it specifies the disclosure norms of CSR. It states that the approved CSR policy of the company shall be part of the board’s report and shall be placed on the company’s website. The board of director shall ensure that the company undertakes those CSR activities which are stated in their CSR policy. The board of every qualifying company shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR policy. If the company fails to spend the aforementioned amount, the board shall specify the reasons for not spending the amount in its report.
Further, it also, prescribes that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities. This proviso encourages companies to initiate CSR activity in the communities around local areas of their operation. CSR activities undertaken in the local area of operations make companies accountable for accepting the local community and its surrounding environment as their extended stakeholders and spend on projects for their betterment. CSR initiatives in local communities by environmentally-polluting manufacturing entities also help in avoiding protest movements and future government regulations. From the operational point of view also, most of the companies would like to spend in their local area of operation rather than spending in far-flung geographical areas as that will increase the cost of implementation and will also consume time and energy of various resources of the company. This provision which encourages companies to give preference to the local area and areas around it where they operate for spending on CSR activity has a completely different implication too.
Important Cases
“CSR is not a part of corporate governance rather corporate governance is a CSR.”
In the famous case of Union Carbide Corporation vs. Union of India AIR 1992 SC 248, The Supreme court ruled that human rights are of utmost importance in regards to social, economic and environmental aspects of corporate activity. All nations have a duty to protect human rights.
Shri Rafique Ansari vs. Damodar Valley Corp [5478/IC (A)/2010]
It was held that for the purpose of CSR, every company must envision such plans and programmes of socio-economic nature that provide empowerment to people in the vicinity.
Benefit of CSR for companies
”88% of consumers said they were more likely to buy from a company that supports and engages in activities to improve society”
As market conditions develop to complex forms and the expectations from the stakeholders of companies increases, CSR provides great tremendous benefits to companies.
1) ‘License to operate’ by communities: Companies have now realised that it is not only the government whose approval is necessary but good CSR practices give them a ‘license to operate’ by the new important stakeholder called the community. Community bring faith to the company and declines trust deficiency.
2) Attracting and maintaining employees: Human resource studies have shown that due to initiatives in CSR leading to better retainment, growth and motivation among employees.
3) Community= supplier: Some company have taken CSR initiatives that increase the status of living of the community by including them in the supply chain. This is a boon for the community as it raises their income level while benefiting the company with a new and secured chain of supply.
4) Increasing company goodwill: The direct and primary benefit of CSR for a company is an increase in its goodwill. A positive reputation, high brand value and greater credibility follow increased goodwill.
Challenges of CSR for Companies
1) Distrust on government regulations: Government has always relied on regulations and mandates to achieve social, environmental and economic agendas in the corporate world. But, decreasing government regulations joined by distrust in the regulations have led to the exploration of voluntary and non-mandatory initiatives instead.
2) Lack of consensus: Local agencies have a general lack of consensus for CSR projects. This leads to duplication of work by the companies.
3) Lack of interest of community: Local communities show a lack of interest in participating and contributing to CSR activities. This is mainly due to lack of knowledge regarding CSR among the local communities. Companies show less interest in spreading awareness about and generating support for their CSR initiatives. There is a lack of communication between companies and communities at the grassroots.
Sustainable Development & CSR
India is a developing nation. Economic development is of primary importance for the prosperity and sustenance of the nation. Yet the economic development should not come at the cost of hurting nature and environment. There should be cohesion between development and protection of nature. “Economic development must be environmentally sound and sustainable.”
Sustainable development as per the Report of the World Commission on Environment and Development is “development that meets the needs of the present generation without compromising future generation to meet their own needs”.
Sustainable development has three fundamental principles:
1) Precautionary Principle, whereby the state must envision, avert and assault the reason for environmental degradation. The Rio Declaration, 1992 supports the principle by expressing that wherever “there are dangers of genuine or irreversible harm, lack of scientific certainty will not be utilized as an explanation behind putting off cost-effective measures to counteract natural degradation.”
This principle was applied in M C Mehta vs. UOI (Taj Trapezium Case). It was held that the Taj, aside from being a cultural heritage, is an industry on its own. The coke/coal factories were producing the discharges which were having to harm impact both on the Taj and the general population living in the Taj Trapezium Zone (TTZ). Consequently, the coal/ coke factories working in TTZ will need to utilize natural gas as a substitute for coal/ coke. On the off chance that the natural gas isn’t accessible by/acceptable to the businesses, they will have to be moved.
As of late, environmental management and action-plan for keeping up the environment in TTZ—a 10,400 sq. km trapezium-shaped territory consisting of five districts of Uttar Pradesh and one area of Rajasthan—was filed by the Uttar Pradesh Government. The TTZ comprises more than 40 secured landmarks including three world heritage sites—Taj Mahal, Agra Fort and Fatehpur Sikri.
2) Polluter Pays Principle: CSR was consolidated in Principle 16, Rio Declaration, 1992 which accommodates ‘polluter pays principle’, i.e., “National authorities should endeavour to advance the internationalization of ecological expenses and the utilization of financial instruments, considering the methodology that the polluter ought to in principle bear the expense of pollution, respecting public interest and without contorting global exchange and investments.” This principle is translated that an absolute obligation is forced on the polluter to make good the losses caused to the victims of the pollution and to bear the expense of restoring the environment to its original state.
3) Public Trust Doctrine: This principle states that specific resources like air, water and forests have such a high significance to the public at large that it would be unjustified to make them a subject of private possession. This principle is to secure and safeguard the public land. It fills two needs: it mandates affirmative state action for the effective administration of resources and engages the public to address the ineffective administration of natural resources. The administration holds these resources in trust as trustees and can’t allow their transformation to private proprietorship notwithstanding for a fair monetary equivalent. Our Supreme court brought this Roman Doctrine into Indian Law in M C Mehta vs. Kamal Nath. It was held that the Himachal Pradesh Government committed a breach of public trust doctrine by renting out the biologically delicate land to the motel administration. Consequently, the rent deed was dropped and put aside. The Himachal Pradesh Government will re-establish the land to its original natural conditions and the Motel will undoubtedly pay remuneration according to the polluter pays rule.
Liability for Violation of CSR
In M. C. Mehta vs. Union of India, the Chairman and Managing Director were made personally obligated in view of the report of the expert committee that there was negligence with respect to the administration of the company, despite their plea that they were not directly overseeing in the everyday working of the administration.
Bhopal Gas Tragedy
The approach and the reaction of the government in Bhopal Gas Tragedy case give off an impression of being impassive in managing the legal fight in court and repercussions of the Bhopal Gas Tragedy just like the Nigerian government did in Ogoni Struggle. The victims of the gas tragedy are still suffering, to say the least, while they patiently wait for justice. Timely medical assistance from the government could, in fact, have saved many lives that have been dearly lost. Had Union Carbide Corporation initiated some steps towards CSR, it would have maintained secure storage of the unimaginable amount of the deadly gas MIC after the death of 2 workers in 1982 prior the tragedy and the same was mention in the corporation’s Safety Audit Report. A reading to its own report would have awoken the corporation from its slumber and put safety measures on the toxic gas.
Coca-Cola: CSR Conflicts
A local chemist in 1886 Atlanta, Georgia invented Coca-Cola. The brand went international by the 1920s and by the end of the 20th Century, Coca-Cola was available in almost every country on the face of the earth. In 2005, Coca-Cola became the largest producer, distributor and marketer of non-alcoholic beverages. Since 2007, the company has an extensive CSR policy called Live Positively.
Plachimada Problem for Company
[COCA-COLA GROUND WATER EXPLOITATION CASE]
Plachimada is a little hamlet in Palakkad District, which is known as the ‘rice bowl of Kerala.’ The majority of the population consists of adivasis (indigenous people). The primary occupation is agriculture. About 80% of the villagers are engaged in agricultural labour, with 20% engaged in other labour activities.
The village panchayat gave a license to Hindustan Coca-Cola Beverages Private Ltd. (HCCBPL) to let it produce its beverages. The chemical trash disposed of by the company caused water pollution contaminating the groundwater of the village. The village decided not to renew the company’s license. They also protested and produced a show cause notice against the drought caused and other environmental problems produced by the company. The contamination was of such hazardous nature that public health authorities had to label some wells and hand pumps as unsafe for the community.
Several campaigns and demonstrations followed the publication of a report issued by the Indian NGO Centre for Science and Environment (CSE) in 2003. The report concluded the contamination of water source and the products. To look into this, the government set up a Joint Committee. The Report grabbed eyeballs from both the news houses and the public.
Coca-Cola had to fight a long drawn legal battle against the panchayat’s decision on non-renewal of license in the famous case of Perumatty Grama Panchayat vs the State Of Kerala on 16 December, 2003{2004 (1) KLT 731}. The company did succeed in getting the license renewed but in 2006, the Kerala government banned the sale of its beverages in the state due to the presence of high levels of pesticides in its beverages. This was later overturned the High Court of Kerala in the same year.
Repercussions of Perumatty Grama Panchayat vs. State of Kerela
Not only did the legal battle cost the company a lot of time and years of perseverance, but it also cost the company a few other major things.
➢ The company indeed suffered a massive loss of goodwill in the nation and across the globe. It lost the trust of its customers and downsized its own reputation.
➢ In the nation, sales of Coca-Cola dropped a whopping 40% within two weeks after the release of the 2003 CSE report. Overall sales of the company saw a decline of 15% in direct contrast of an annual growth rate of 25-30%.
➢ The company received flak worldwide with massive protests in the USA too. 10 universities chose to ban their beverages inside their campuses.
Since then Coca-Cola has made drastic changes and upgraded its CSR policies for the better.
Frequently Asked Questions:
1. What kind of Tax benefits be availed under CSR?
No specific tax exemptions have been extended to CSR expenditure per se. Finance Act, 2014 also clarifies that expenditure on CSR does not form part of business expenditure. While no specific tax exemption has been extended to expenditure incurred on CSR, spending on several activities like contributions to Prime Minister’s Relief Fund, scientific research, rural development projects, skill development projects, agricultural extension projects, etc., which find place in Schedule VII, already enjoy exemptions under different sections of the Income Tax Act, 1961
2. What activities are no considered as CSR Expenditure?
The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act. • One-off events such as marathons/ awards/ charitable contribution/ advertisement/sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure. • Expenses incurred by companies for the fulfilment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act. • The contribution of any amount directly or indirectly to any political party shall not be considered as a CSR activity. • Activities are undertaken by the company in pursuance of its normal course of business.
3. Whether contribution to a political party is CSR?
The contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity. (May refer to Rule 4(7) of CSR Policy, Rules 2014).
4. Can contribution in kind be made in CSR?
Section 135 prescribes “….shall ensure that the company spends….”.The company has to spend the amount
5. Whether CSR expenditure is claimed as a business expenditure?
The amount spent by a company towards CSR cannot be claimed as business expenditure. The Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 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.
Edited by – Sakshi Agarwal
Approved & Published – Sakshi Raje
