Every right has a corresponding duty and therefore with the right to earn profits comes the duty to give back to society. The basis of social accountability is where Corporate Social Responsibility ("CSR") finds its origin. It acts as an instrument for organizations to serve the interests of society.
Evolution Of CSR In India
The concept of CSR is not new in India, it can be traced back to the Vedas, wherein it is mentioned that a man can live individually but for survival he needs to live collectively.
Although the erstwhile Companies Act, 1956 did not contain any provision for CSR, in December 2009, the Ministry of Corporate Affairs ("MCA") issued 'Voluntary Guidelines on Corporate Social Responsibility, 2009' taking into consideration the expectations of society as well as the issues faced in governing our nation ("Voluntary Guidelines").
These Voluntary Guidelines were subsequently revised as the 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011' ("Guidelines"). "The Guidelines use the terms 'Responsible Business' instead of Corporate Social Responsibility (CSR) as the term 'Responsible Business' encompasses the limited scope and understanding of the term CSR." An updated version of the Guidelines was issued in 2018 which specified principles which a business needed to address as part of its governance structure.
Provisions Under The Companies Act , 2013
Prior to the implementation of the Companies Act, 2013 ("Act"), the traditional practice of CSR was followed by Indian companies as a philanthropic activity. One of the biggest attempts to make corporate social responsibility (CSR) mandatory was the Companies Act, 2013 passed by the Ministry of Corporate Affairs, Government of India which became effective from 1 April 2014. The broad framework of CSR has been expressly provided under Section 135 of the Act.
Every company having: (i) net worth of minimum INR 500 crore; or (ii) turnover of minimum INR 1000 crore; or (iii) net profit of minimum INR 5 crore, during any financial year ("Company"), is required to constitute a CSR committee of the board. However, its holding or subsidiary company is not required to comply with the CSR provisions unless the holding or subsidiary company itself fulfils the eligibility criteria.
A Company is required to form a CSR Committee which shall include:
1. Public companies – Minimum 3 directors, out of which at least 1 shall be an independent director. (If there is no requirement of having an independent director in the company, then 2 or more directors.)
2. Private companies – Minimum 2 directors.
3. Foreign company – Minimum 2 persons out of which one shall be an Indian resident and the other shall be nominated by the foreign company.
However, the constitution of the CSR Committee is not mandatory where the amount required to be spent under CSR does not exceed 50 lakh rupees. In such cases, the board of directors shall discharge the functions of the CSR Committee.
Implementation Of CSR Activities
A Company must use at least 2% of its average net income from previous three fiscal years in pursuance of CSR activities. However, if a Company has not completed three financial years since its incorporation, then the average net income is calculated taking into account the immediately preceding financial year(s).
The CSR amount needs to be spent by a Company on the activity(ies) as indicated under Schedule VII of the Act. Further, the CSR amount may also be spent by a Company for creation or acquisition of a capital asset which may be held by: (i) a Section 8 company, or registered trust, or registered society having charitable objects, and which is registered with the Central Government by filing CSR-1; (ii) beneficiaries of the CSR project; (iii) a public authority.
Outsourcing Of CSR By Companies
A company is permitted to undertake its CSR activities either by itself or through:
1. Section 8 company, or a registered trust, or a registered society:
a. established by such company singly or in collaboration with another company.
b. established by either the Central or State Government.
c. which has an established track record of at least 3 years in undertaking similar activities.
2. A statutory body constituted under an act of the parliament or state legislature to undertake activities mentioned under Schedule VII of the Act.
Activities that would not amount to CSR expenditure
1. Activities undertaken in pursuance of a company's normal course of business.
2. Projects or programs or activities that benefit only the employees of the company or their families.
3. Expenses incurred for fulfillment of any provision under any statute.
4. Contribution of any amount to any political party.
Enforcement Of The Provisions
Every Company is required to make a statutory disclosure of CSR in its annual report as prescribed under Rule 8 of the CSR Rules.
If a Company is in default in complying with the relevant provisions of CSR, then, the Company shall be liable to a penalty of twice the amount required to be transferred by the Company to the fund specified under Schedule VII of the Act, or one crore rupees, whichever is less. In addition to this every officer of the Company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such a fund, or two lakh rupees, whichever is less.
The Government keeps an eye on how well the CSR laws are being followed by looking at the disclosures that businesses make on the MCA 21 portal. The Company Act, 2013 permits the Government to take legal action against non-compliant corporations for any violations of the CSR regulations. As of January 22, 2021, noncompliance with CSR Rules has been reported as a civil wrong.
Further, the National Corporate Social Responsibility Data Portal is an initiative by Ministry of Corporate Affairs, Government of India "to recognize companies that have made a positive impact on the society through their innovative & sustainable CSR initiatives."
Difference Between CSR & ESG
Environmental, social, and governance ("ESG") is a framework that encourages businesses to behave responsibly towards the environment, their relationships with others, and transparency in their business dealings to make sure that the requirements set forth when approving a project are fulfilled.
Although a company's influence on the environment and society is a concern of both ESG and CSR, the main distinction between the two is that ESG is a set of standards which an investor may use to evaluate a company before it decides to invest.
Conclusion
CSR has evolved from a charitable gesture to an integral part of corporate strategy in India, driven by factors such as consumer expectations, regulatory frameworks, and business sustainability. This evolution reflects a growing recognition of businesses' role in societal development and is imperative to balance profit-making with social responsibility.
In conclusion, CSR in India not only fulfills legal obligations but also serves as a vital mechanism for businesses to contribute meaningfully to society, thereby fostering sustainable development and inclusive growth.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.