Corporate Social Responsibility (CSR) in India: An Overview
Corporate Social Responsibility (CSR) has become a significant aspect of corporate governance in India, reflecting the increasing importance of ethical business practices and community involvement. This article delves into the requirements of CSR in India, the rationale behind its introduction, specific provisions and rulings under the Companies Act, 2013, subsequent amendments, benefits, and drawbacks of mandatory CSR.
CSR Requirements in India
Introduction to CSR Provisions
The concept of CSR was officially introduced in India with the enactment of the Companies Act, 2013, making it one of the first countries to mandate CSR for corporations. This move was driven by the understanding that businesses have a broader social responsibility beyond profit maximization.
Rationale Behind CSR Provisions
The primary rationale for introducing CSR provisions was to encourage companies to actively contribute to societal development, address environmental concerns, and improve the overall quality of life in communities. By integrating CSR into the corporate framework, the government aimed to harness the resources and expertise of the private sector to drive social change and economic development.
Exact Provisions and Rulings in the Companies Act, 2013
Section 135: CSR Provisions
1. Applicability: CSR provisions apply to companies with:
– A net worth of INR 500 crore or more.
– A turnover of INR 1,000 crore or more.
– A net profit of INR 5 crore or more during the immediately preceding financial year.
2. CSR Committee: Eligible companies must constitute a CSR Committee of the Board, consisting of three or more directors, with at least one independent director.
3. CSR Policy: The CSR Committee is responsible for formulating and recommending a CSR policy, indicating the activities to be undertaken by the company in areas specified under Schedule VII of the Act.
4. Expenditure: Companies are required to spend at least 2% of their average net profits of the three immediately preceding financial years on CSR activities.
5. Average Net Profits: The average net profit for the purpose of determining the spending on CSR activities is to be computed in accordance with the provisions of section 198 of the Act and will also be exclusive of the items given under rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. Section 198 of the Act specifies certain additions/deletions (adjustments) to be made while calculating the net profit of a company (mainly it excludes capital payments/receipts, income tax, set-off of past losses). Profit Before Tax (PBT) is used for computation of net profit under section 135 of the Act.
6. Reporting: The Board’s Report must include an annual report on CSR activities, specifying reasons for not spending the prescribed amount if applicable.
Schedule VII: CSR Activities
CSR activities that are recognized under Schedule VII of the Companies Act, 2013:
– Eradicating hunger, poverty, and malnutrition, promoting health care including preventinve health care, and sanitation, including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of 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 centres 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 including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
– 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 art and handicrafts.
– measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows.
– training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports.
– contribution to the prime minister’s national relief fund or Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women.
– (a) Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and
(b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).
– rural development projects.
– slum area development.
Explanation: – For the purposes of this item, the term `slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.
– disaster management, including relief, rehabilitation and reconstruction activities.
Amendments to CSR Provisions Under the Companies Act, 2013
Since its inception, CSR provisions under the Companies Act, 2013, have undergone several amendments to enhance clarity and effectiveness:
1. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021:
– Entities carrying out CSR activities are required to file with the Central Government, an e-form namely CSR -1 to generate Unique registration number.
– Mandatorily disclose the composition of the CSR Committee, and CSR Policy and Projects approved by the Board on their website for public access.
– Every company having average CSR obligation of Rs.10 Crore or more in the three immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of one crore rupees.
– Ensure that administrative overheads shall not exceed 5% of total CSR expenditure of the company for the financial year.
– The CSR amount may be spent by a company for creation or acquisition of a capital asset, which can be held by following 3 entities only.
– Mandatory transfer of unspent CSR amount is required.
2. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022:
– Mandatory constitution of CSR Committee in case of unspent CSR amount
Amendment is a step to strengthen governance around implementation of CSR by utilizing services of a dedicated sub-committee to take ownership and responsibility of the ongoing project which may go on up to 3 (three) years.
– Additional institutions now eligible to be appointed as implementation agency
Section 8 company, public charitable trust or a society registered, and which are exempted are also eligible to become an implementation agency for CSR, subject to obtaining registration with the MCA by filing Form CSR-1.
– Threshold for permitted expenditure towards mandatory impact assessment changed
Threshold has been reduced to INR 50 lakhs or 2% of the total CSR expenditure, whichever is lower.
– Amendment to the mandatory disclosures
New formats will apply in case of all companies which have sought extension of time to hold their annual general meetings beyond 30 September 2022.
Filing Addendum to AOC-4 for CSR Spent
Companies are required to file an addendum to AOC-4 to report their CSR spending. This filing ensures transparency and accountability in CSR activities and helps regulatory authorities monitor compliance. The addendum should include details of the CSR amount spent, the nature of CSR activities, and the reasons for any unspent amount.
Benefits of CSR to Industries and Country
For Industries:
1. Enhanced Reputation: Companies engaged in CSR activities often enjoy an improved public image and stronger brand recognition.
2. Employee Engagement: CSR initiatives can boost employee morale, attract talent, and enhance employee retention.
3. Customer Loyalty: Consumers are increasingly favoring companies that demonstrate social responsibility, leading to higher customer loyalty.
4. Operational Efficiency: CSR activities can lead to cost savings through energy efficiency and waste reduction initiatives.
For the Country:
1. Social Development: CSR funds support critical areas like education, healthcare, and rural development, contributing to societal progress.
2. Environmental Sustainability: Corporate efforts in sustainability can lead to significant environmental benefits, including reduced pollution and conservation of resources.
3. Economic Growth: CSR activities can drive economic growth by creating jobs, supporting local businesses, and fostering innovation.
Case Studies of Successful CSR Initiatives
1. Tata Group: Tata Swach
Tata Group has been a pioneer in CSR activities. One of their notable initiatives is Tata Swach, an affordable and innovative water purifier designed to address the issue of clean drinking water in rural and urban India. This initiative has not only provided safe drinking water to millions but also enhanced Tata’s reputation as a socially responsible corporation.
2. Infosys: Infosys Foundation
Infosys Foundation, the philanthropic arm of Infosys, focuses on education, healthcare, rural development, and art and culture. Their CSR projects include building schools, providing scholarships, and supporting healthcare facilities in underprivileged areas. These initiatives have significantly impacted communities and demonstrated Infosys’s commitment to social responsibility.
3. ITC Limited: e-Choupal
ITC Limited’s e-Choupal initiative leverages technology to empower rural farmers by providing them with information and services related to agriculture. This program helps farmers enhance productivity, secure better prices for their produce, and reduce transaction costs. e-Choupal has transformed rural agricultural practices and contributed to the socio-economic development of rural India.
Drawbacks of Mandatory CSR for Industries
1. Financial Burden: Mandatory CSR spending can strain the finances of smaller companies, especially those with fluctuating profits.
2. Compliance Costs: The administrative burden of compliance, including reporting and monitoring, can be high.
3. Lack of Flexibility: Mandating specific expenditure levels may limit a company’s ability to invest in other critical areas.
4. Risk of Tokenism: Companies may engage in CSR activities merely to fulfill legal obligations, leading to superficial or ineffective initiatives.
5. Impact on Competitiveness: In highly competitive markets, mandatory CSR spending might impact a company’s ability to reinvest profits for growth and innovation.
Conclusion
CSR in India, governed by the Companies Act, 2013, represents a landmark move towards integrating social responsibility into corporate governance. While it offers substantial benefits for both industries and society, including enhanced reputation, social development, and environmental sustainability, mandatory CSR also poses challenges such as financial burdens and compliance costs. Balancing these aspects is crucial for maximizing the positive impact of CSR initiatives. As businesses and regulatory frameworks evolve, ongoing dialogue and adaptation will be key to ensuring that CSR continues to drive meaningful change in India.