Corporate social responsibility in India
D K Vasal
DSK Legal, Advocates & Solicitors, Mumbai
Over the years, the idea of Indian companies (‘India Inc’) going beyond business ventures to do something for the development of society has undergone remarkable changes. There were days in the past when India Inc merely dispensed cash by way of charity to organisations or non-government organisations (NGOs) engaged in social work. Few of them promoted activities that were mutually beneficial to villagers living around a company plant or town or to their own workforce.
But times have changed and India Inc has started accepting more responsibility and supplementing facilities in schools or hospitals, promoting adult literacy and family welfare activities. With time, consciousness about the environment grew and in the 1960s, India Inc felt the need to reimburse society and the environment for the damage caused to it due to rampant industrial development. The concept of corporate social responsibility (CSR) evolved, ranging from philanthropy to a more comprehensive concept that subsumed the environment, employee relations, corporate governance and society at large.
Many of the great leaders of India who sacrificed their entire life for the freedom of India were also ardent followers of propagating CSR, which companies owe towards their workforce and society.
It is believed that in the past, dispensing cash by Indian Inc was done with the intention of gaining recognition and to be treated as a privileged class in society. However, over the years due to increasing literacy levels, awareness about the role of India Inc towards society and other allied reasons, the mindset of society underwent remarkable changes. The society started expecting India Inc to discharge more responsibility for its development. For example, if a corporation desires to acquire land for setting up a plant, manufacturing unit, etc, the villagers may have their land acquired provided the company provides them with basic infrastructure such as schools, hospitals, etc. Hence, the perception of Indian Inc towards development of society has changed and now corporations themselves have moved away from charitable initiatives like financial grants or sponsorships to providing products and services in a manner that would make a real difference in the target communities.
Corporate social responsibility
‘Corporate Social Responsibility or CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.’1
In other words, CSR aims to examine the role of companies/corporations in the development of the economy of a country and society at large. Thus, the twofold meaning of CSR can be derived. On one hand, it exhibits the ethical behaviour that an organisation exhibits towards its internal and external stakeholders (customers as well as employees). On the other hand, it denotes the responsibility of an organisation towards the environment and society in which it operates.
CSR and corporate law in India
Under the Indian Companies Act, 1956, section 293(1)(e) provides for contribution to charitable and other funds (which do not directly relate to the business of the company or the welfare of its employees). Such contribution can be made by a public company or a private company, being a subsidiary of a public company, for an aggregate amount upto Rs 50,000 or five per cent of its average net profit determined under sections 349/350 of said Act during the three financial years immediately preceding – whichever is greater. Thus, the board may contribute during a financial year upto Rs 50,000 even though the company may be working at a loss. For providing contribution exceeding the aforesaid ceiling, prior consent of shareholders is required and the company must have enabling powers in its articles of association. However, this provision is not applicable to a private company (not being a subsidiary of a public company) and it can contribute freely without any ceiling.
CSR initiatives by regulators/authorities in India
Though CSR is not regulated in India, it is not a new concept. A number of legislative proposals are underway which shall provide the corporate sector with an effective regulatory framework for the growth of CSR. Anticipating that the regulation(s) for CSR will be in place in the near future, the concerned regulators and authorities have laid down certain guidelines, established committees, etc, to ensure the orderly development of a CSR regime, in absence of regulations. The following are some of the initiatives in this regard.
Ministry of Corporate Affairs
The Ministry of Corporate affairs (MCA), being the regulator of India Inc, has adopted the role of facilitator and enabler for effective implementation of CSR. MCA has witnessed India Inc’s active participation towards development of society and the transition of India Inc from traditionally being socially responsible to incorporations of stakeholders’ interests in the business model. Hence, MCA has accordingly issued the CSR Voluntary Guidelines, 2009 (‘Voluntary Guidelines’) which shall enable India Inc to discharge their responsibility towards the development of society and the environment in a more efficient manner. The said guidelines, inter alia, provide for the following:
Each company should formulate a CSR policy with the participation of executives and should be approved by the board.
Upon finalisation of a CSR policy, the implementation of the policy in an orderly manner becomes imperative. Hence, MCA has provided implementation guidance for CSR policy as under:
o identification of projects and a detailed time schedule;
o motivating the employees to actively participate for social development;
o tie-ins with NGOs, municipal authorities, etc;
o allocation of a specific amount out of profits for CSR activities;
o to form networks with other organisations for promoting CSR activities; and
o dissemination of information on CSR policy to the stakeholders through their website, annual reports, etc.
Core elements of CSR policy should cover the following:
o care for all stakeholders;
o ethical functioning;
o respect for workers’ rights and welfare;
o respect for human rights;
o respect for the environment; and
o activities for social and inclusive development.
The Indian Companies Bill, 2009, which seeks to replace the half-a-century-old Indian Companies Act, 1956, will be presented in parliament in the ongoing Monsoon Budget session, as per the news report.
Below are extracts of the news report of the Business Standard, which deals with the CSR policy that the Corporate Affairs Minister, Veerappa Moily, proposes to introduce.
NEWS REPORT NUMBER 1 DATED 20 JULY 2011
‘Regretting that the concept of voluntary CSR has not picked up in India, Corporate Affairs Minister Veerappa Moily today said the new Companies Bill would make it mandatory for corporate to earmark part of their profit for corporate social responsibility (CSR) initiatives.
India Inc, the new Minister said, “needs to develop a culture of voluntary CSR...CSR cannot be considered only as a charity it is more of a social business...As my predecessor has said that 2% mandatory provision [for CSR spend in the Companies Bill 2009], will stay.”
The government is in the process of replacing the half-a-century old Companies Act, 1954 with a new law. The Companies Bill 2009 is expected to be taken up for consideration and passage in the monsoon session of Parliament beginning August 1.
Noting that CSR culture is yet to find favour with India Inc as in developed countries like the US and the UK, the Minister told PTI in an interview, “all the 60 years we tried the concept of voluntary CSR. Unfortunately, it did not catch up”.
The suggestion for earmarking a part of a company’s profit for CSR was floated by the Parliamentary Standing Committee on Finance, which scrutinised the Companies Bill, 2009.
Subsequently, the MCA proposed that every company having (net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more) or (a net profit of Rs. 5 crore or more during a year) shall be required to formulate a CSR Policy.
In case any such company does not have adequate profits or is not in a position to spend prescribed amount on CSR activities, the directors would be required to give suitable disclosure/reasons in their report to the members, the Bill says.
Industry has for long been opposing this provision as according to them they should be allowed to monitor implementation of CSR themselves without the government intervention.
At present, spending on CSR activities is part of the voluntary guidelines laid out by the MCA and it draws no penal provisions.
However in case of PSUs, those government companies whose net profit is less than Rs. 100 crore have to contribute 3-% of their income for CSR, PSUs with profits between Rs. 100 and Rs. 500 crore would be required to earmark 2-3%.
Futher, those companies earning a profit of Rs 500 crore and above, CSR spending should be between 0.5% and 2% of the net profit.’2
NEWS REPORT NUMBER 2, DATED 16 AUGUST 2011
‘In a bid to turn companies’ management decisions more transparent, the corporate affairs ministry may mandate more disclosures in their annual financial statements and the reports of boards of directors.
The manner in which companies carried out their Corporate Social Responsibility (CSR) activities during the year will become part of the annual mandatory disclosure. The details of the policy adopted by the company, the way it was implemented and the result achieved will all be reflected in the report.
The proposals are expected to be part of the new Companies Bill, 2011. A debate is still on over whether CSR will be made mandatory in the Bill or not. Recently, Corporate Affairs Minister Veerappa Moily had said India Inc needed to develop a culture of voluntary CSR. “CSR cannot be considered only as a charity, it is more of a social business,” he had said.
A proposal in the earlier Companies Bill, 2009 to make it mandatory had evoked a heated response from corporations. Companies may escape mandatory expenditure on CSR, but will not be able to escape disclosure. That may serve as an indirect inducement to them to go for CSR, officials said.
Similarly, companies may be asked to develop a risk-management policy reflecting its preparedness to face unforeseen business setbacks. It would list potential risks and possible solutions, an official said. In the case of public companies, the boards will be asked to explain the rationale behind conclusions made in their annual reports to shareholders.
According to a Delhi-based corporate lawyer, many such suggestions are not new to the corporate world. “There are several disclosure requirements mandated by market regulator Sebi for listed companies. By bringing some of these under the Companies Act, the ministry is trying to make the managements more responsible,” he said.’3
National foundation for CSR
The Ministry of Corporate Affairs or MCA, in partnership with various chambers, members of corporations, and the Indian Institute of Corporate Affairs has established the National Foundation for Corporate Social Responsibility (NFCSR). The key role of NFCSR is to provide an environment for the corporate sector which shall enable them to work with the government, NGOs, etc, to ensure effective contributions to sustainable growth and development. The following are some of the objectives of NFCSR:
to formulate plans for all stakeholders and society at large for their orderly development;
to support actively, directly or indirectly, any individual, group or organisation taking the initiative in promoting CSR best practices;
to write, print and publish newsletters or articles and contribute to any papers or periodicals in order to spread more awareness on CSR; and
to support either financially or by participation in any event, research or training aimed at promoting CSR.
Reserve Bank India
The Reserve Bank of India (RBI), being the regulator of banks and banking operations, issued a circular dated 20 December 2007 which addressed the scheduled commercial banks on CSR, sustainable development and the non-financing reporting role of banks. Considering the lack of adequate awareness about CSR among the financial institutions, RBI issued the said circular, inter alia, suggesting the following to banks and financial institutions in regards CSR policy:
frame a plan of action towards helping the cause of sustainable development with the approval of their boards;
banks/financial institutions should keep themselves abreast of developments in CSR and modify their strategies/plans in light of such developments; and
publish in a public domain their annual accounts and the progress they have made with CSR policies.
Corporate view on regulating CSR
The intention of the Ministry of Corporate Affairs or MCA to make CSR policy mandatory has invited mixed reactions from India Inc. Some of the comments on the proposed mandatory CSR policy are below:
‘Adi Godrej, MD, Godrej Group said, “Philanthropic organizations should be allowed to operate reasonably freely and not with control to my mind. When governments start controlling things, things don’t work as well as when people are motivated to do these things.”
Nitin Paranjpe, MD & CEO, HUL is not in favour of the idea. He said, “I am not in favour, I don’t know what will be achieved, the history of this country and the companies out here and many other people would have shown we try and do this people will find a way out. It is not about ticking the box, it is about the belief that this will be good for us, the more education that we can have around this issue, the more conviction that we can build around this issue we will see a difference. I have said this to our teams when I talk to them that if I trace the history of social responsibility in this country it has moved considerably. Not long ago, at all times businesses realize that they must contribute to society, but there was a period when it was all about charity and philanthropy etc.”
He added that there was also the concept of trusteeship. “But in the large measure within an organization the act of running the business and the act of doing social good were mutually independent things which happened in the organization.”
Paranjpe said, “It is our belief and a point of view that these two mutually circles are coming closer and closer together and I think today that there is a small intersection which has already happened between these two. What does it mean? That in the small intersection there are such approaches which are doing well for business and doing good to society. But the intersection is still small today which means if you are not disciplined enough and if you are intellectually lazy you could find many strategies which are doing good for business without doing anything for society and doing any good for people”.’4
In short, the proposed provision on a mandatory allocation of profit for formulation of a CSR policy would mean India Inc have to discharge responsibility towards shareholders and society at large. As a result of the proposed provision, India Inc would be stepping into the shoes of the government. The alternative solution with respect to the formulation of CSR policy would be to continue with the voluntary approach with stringent disclosure requirements that induce a culture of ‘comply or explain’.
CSR practices existing in India
Many of the corporations in India have taken the lead in incorporating policies relating to business ethics, environmental protection and so on. In India, some of the noticeable examples of proactive leadership in this field include:
Birla Group established a trust for promoting educational research and they also run an academic institution.
Tata Power Co Ltd sponsored the Lifeline Express (the world’s first hospital on rails) to cater for over 500 villages. The train is even equipped with an operating theatre. It has provided free medical check-ups and medicines to villagers in the vicinity of the project.
Lupin Ltd established Lupin Human Welfare and Research Foundation in Bharatpur, has set up 125 schools and it has provided drinking water facilities in 80 villages and helped 25,000 people above the poverty line.
ITC’s e-Choupal in villages has been a source of pride for poor people across the country.
Some business organisations have formed NGOs that are not for profit and which may be either registered as societies, trusts or foundations. Such NGOs cater for the needs of society by implementing social programmes in a variety of ways.
Benefits arising from CSR practices
Businesses can expect some of the following benefits when adopting CSR practices:
enhanced corporate reputation and brand image;
increased productivity as a result of employee satisfaction;
stronger relationships with stakeholders and business partners;
strengthening the rule of law through the application of international human rights standards; and
government support, as and when required.
In conclusion, it can be said that while there is no doubt that the CSR voluntary guidelines issued by the MCA are an excellent initiative, on their own they will not achieve the desired goal. However, it is a noble idea that the MCA has issued the guidelines on CSR to be adopted by India Inc and businesses voluntarily (at least to begin with). Hence, it is imperative for the corporate sector to treat these guidelines not merely as ‘corporate social responsibility’ but also to treat the guidelines as ‘corporate basic responsibility’ and recognise the need to function as corporate citizens to justify the unwritten licence given by the society to harness the public, social and natural resources for conducting its business profitably.
Further, the recommendation by the government making it mandatory to earmark at least two per cent of the average net profit during the previous three years will help increase awareness and it is a laudable approach. By prescribing the particulars in the Director’s Report, there will be regular follow ups by the independent directors to monitor and to improve CSR activities. By this process, the corporations will ensure that the money is spent or put to use in activities relating to CSR. In the current social situation in India, it is difficult for one single entity to bring about change. Corporations and businesses have the expertise, strategic thinking, manpower and money to facilitate extensive social change. Effective partnerships between businesses, NGOs and the government will speed up social development in India.
The quote is available at: www.icsi.edu/38nc/Articles/Archana_shruti.htm.
The news report is available at: http://businessstandard.com/india/news/voluntary-csr-to-be-made-mandatory moily/141855/on.
The news report is available at: www.business-standard.com/india/news/companies-may-have-to-disclose-morecsr-in-annual-reports/445969/.
This quote is available at: www.moneycontrol.com/news/business/mandatory-csr-notgreat-idea-feels-india-inc_475926.html.