The concept of corporate social responsibility (CSR) much talked about these days is not new. Mahatma Gandhi’s concept of trusteeship whereby he wanted capitalists to act as trustees (not owners) of their property and conduct themselves in a socially responsible way had an element of the modern day CSR. His doctrine of Trusteeship was designed to work in all spheres of life. Like parents acting as trustees for their children, the government should act as trustees of those who have chosen them to be their representative. The trustee, by its implications, meant that he is not the owner. The owner is one whose interest he is called upon to protect.
The philosophy of Trusteeship believes in inherent goodness of human beings. It involves the capitalists and landlords in the service of society without any element of coercion. It doesn’t want the destruction of capitalists. Gandhi himself believed that their destruction would result in the end of the workers. Gandhi’s principle of Trusteeship underlines that everything around us has the supreme residing in them and hence he is the rightful owner. We, who actually possess it, can enjoy a“delegated ownership” as trustees.
Corporate Social Responsibility links corporate sector to social sector. It is becoming more relevant in our society plagued by increasing inequalities between rich and poor. CSR means that the corporate sector, which earns profit through the sale of its goods and services in the society also, has some responsibility towards it.
This is essential to promote growth with equity and to achieve an overall developed society. After Independence, JRD Tata advised that apart from the obvious one of donating funds to good causes which has been the normal practice for years; industrial and business enterprises could use their own financial, managerial and human resources to provide task forces for undertaking direct relief and reconstruction measures; thusconducting themselves as honest citizens.
According to Infosys founder, Narayan Murthy, “social responsibility is to create maximum shareholders value working under the circumstances, where it is fair toall its stakeholders, workers, consumers, the community, government and the environment.” Commission of the European Communities 2001stated that being socially responsible means not only fulfilling legal expectations, but also going beyond compliance and investing ‘more’ into human capital, the environment and the relation with stakeholders.
With the enactment of the Companies Act, 2013, the concept of CSR is finally formalised and now finds mention in Section 135 and Schedule VII of the Companies Act 2013 as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 which has come into effect from April 1, 2014.
With effect from April 1, 2014, every company, private limited or public limited, which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities. The CSR activities should not be undertaken in the normal course of business and must be with respect to any of the activities mentioned in Schedule VII of the 2013 Act.
The company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR activities. Such a provision would definitely lead to socioeconomic development of the local areas including local inhabitants, local environment local employment and thus would lead to overall assimilation between the local workforce and the organisation. The impact, in the context of many manufacturing set ups, would be less unproductive trade union activities resulting into uninterrupted production of goods and overall increased revenue.
“With effect from April 1, 2014, every company, private limited or public limited, which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities. The CSR activities should not be undertaken in the normal course of business and must be with respect to any of the activities mentioned in Schedule VII of the 2013 Act”
The activities that can be undertaken by a company to fulfil its CSR obligations are contained in Schedule VII of the Companies Act, 2013 and include activities relating to eradicating extreme hunger and poverty; promotion of education; promotion gender equality and empowering women; reducing child mortality and improving maternal health; combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; ensuring environmental sustainability; employment enhancing vocational skills; social business projects; contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.
As per the provisions of the Companies(Corporate Social Responsibility Policy) Rules, 2014 a company can undertake its CSR activities through a registered trust or society, a company established by its holding, subsidiary or associate company or otherwise, provided that the company has specified the activities to be undertaken, the modalities for utilization of funds as well as the reporting and monitoring mechanism. If the entity through which the CSR activities are being undertaken is not established by the company or its holding, subsidiary or associate company, such entity would need to have an established track record of three years undertaking similar activities. Further, a company may also collaborate with other companies for undertaking projects or programs or CSR activities provided the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with the rules. However, the CSR projects or programs or activities that benefit only the employees of the company and their families as well as contribution of any amount directly or indirectly to any political party are not considered as CSR activity. Only the activities in India would be considered for computing CSR expenditure.
“CSR expenditure shall include all expenditure including contribution to corpus, for projects or programs relating to CSR activities approved by the Board on the recommendation of its CSRC, but does not include any expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Companies Act, 2013”
The constitution of the Corporate Social Responsibility Committee (CSRC) is the most important constituent under the CSR provisions. Every company including its holding or subsidiary, and a foreigncompany defined under Section 2 (42) of the Companies Act, 2013 having its branch office or project office in India shall constitute a CSRC which shall institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.
One of the major responsibilities of the CSRC is the formulation and recommendation to the Board of a Corporate Social Responsibility Policy (CSRP) which shall indicate the activities to be undertaken by the company as specified in Schedule VII. The Board has a duty to approve the CSRP and then notify it on the company’s website in addition to ensuring that the activities under the CSRP are duly undertaken by the company.
The CSRP shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.The CSR committee will also be required to ensure that all the income accrued to the company by way of CSR activities is credited back to the CSR corpus.
CSR expenditure shall include all expenditure including contribution to corpus, for projects or programs relating to CSR activities approved by the Board on the recommendation of its CSRC, but does not include any expenditure on an item not in conformity or not in line with activitieswhich fall within the purview of Schedule VII of the Companies Act, 2013.
The report of the Board of Directors attached to the financial statements of the Company would also need to include an annual report on the CSR activities of the company in the format prescribed in the CSR Rules setting out inter alia a brief outline of the CSR policy, the composition of the CSR Committee, the average net profit for the last three financial years and the prescribed CSR expenditure. If the company has been unable to spend the minimum required on its CSR initiatives, the reasons for not doing so are to be specified in the Board Report.
Thus, the new Companies Act, 2013, by making CSR activities a statutory mandate has now streamlined what was so far a selfinitiated approach by some industries / companies. This is definitely going to give a boost to the development of many core sectors like health, environment, and education and will tackle many social issues like women empowerment and reduction of child mortality. It will be in the fitness of the things that Indian corporates start nominating a designated CSR department and start drafting a wellstructured CSR policy for an effective implementation. We all are going to witness a new corporate era, in years to come, much beyond corporate advertisement in big events like IPL, film awards, music awards etc. Soon, a responsible corporate will be known by the way it conducts its CSR activities and the manner in which it spends its CSR funds.
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