INTERNATIONAL JOURNAL OF RESEARCH AND ANALYSIS VOLUME 2 ISSUE 5

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1 EVALUATE THE CONCEPT OF CORPORATE SOCIAL RESPONSIBILITY AS EXPRESSED IN THE COMPANIES ACT 2013 Introduction ** Tripti Pandey & Aditya Sandal "I desire to end capitalism almost, if not quite, as much as the most advanced socialist. But our methods differ. My theory of trusteeship is no make-shift, certainly no camouflage. I am confident that it will survive all other theories." Mahatama Gandhi 1 Indian Corporate history has gone under colossal changes over a period. There has been a drift from companies being a mere producing unit to companies being a socially responsible artificial person. The fundamentals of corporate social responsibility rest on the fact that not only public policies but even corporates should be responsible to address social issues. Oliver Sheldon of the US( was the first )in 1924, proposed that a company s business operation should be combined with responsibilities of all human necessities inside and outside the industry. Adam Smith s Theory of Moral Sentiments and Lectures on Jurisprudence provide insight into how companies might practice CSR in the face of competing claims, it clearly proposes that the moralobligations of business to society begin with its obligations touphold the perfect rights afforded in its stakeholder relationships,strengthened by its obligations to correct for any pastharms. Evolution of concept of CSR in India According to Nivarthiet as (2012) four phases can been seen for CSR in India. He categorised the four phases as time prior to 1914 from independence movement in India( roughly as 1914 to 1960) 1 Theory of Trusteeship - Village Swaraj."Theory of Trusteeship - Village Swaraj.N.p., n.d. Web. 02 Jan. 366

2 Swadeshi Movement from uptil now He explains that until 1914CSR was driven by religious practices as charity and philanthropy. However it was observed that major efforts towards social as well as industrial development were not only driven by selfless and religious motives but also influenced by caste groups and political objectives. A change was witnessed during independence movement where was pressure on Indian Industrialists to demonstrate their dedication towards the progress of the society, especially when Mahatma Gandhi introduced the notion of "trusteeship" 2.The third phase of CSR started with emergence of mixed economy somewhere between socalled era of command and control".. During this time frame special importance was given to the public sectors and private sectors were forced to back seat. This sector was seen as prime mover of development because of the strict legal rules and regulations relating to industrial licensing, high taxes and restrictions on the private sector which led to corporate malpractices and their active involvement in the socio-economic development of the country became absolutely necessary. From 1980 onwards and up till now Indian companies started abandoning their traditional engagement with CSR and integrated it into a sustainable business strategy. With emergence on LPG (Liberalisation, Privatisation and Globalization) during 1990 s controls and licensing policy where also partly done away with giving boost to the economy. After briefly discussing the concept of corporate social responsibility and its presence in India, we would further discuss why CSR is important for India. Why CSR for India? Even after 67 years independence India is still try to fight the evils of extreme poverty and unemployment. The social and economic gap since 1947 between the haves and not-haves has just widened up. The new company act 2013 making Corporate Social Responsibility a mandatory activity is step towards narrowing the gap. CSR is not only give and give but it s a give take relationship, McWilliams A and D.Siegel (2001) proposed a new theory for CSR, they projected a demand and supply view to it. They 2 according to which the industry leaders had to manage their wealth so as to benefit the common man 367

3 theorized that level of CSR level investment can both maximize profits as well satisfy stakeholder demand for CSR, and manager should look at it as cost benefit analysis. As per institutional theory, organisation that functions under social framework and are more accepted. Deteriorating Role of Government Increase in inflation coupled with shrinking government resources, along with a distrust of regulations, failed policy implementation have led government to the search of charitable and non-regulatory initiatives instead. Demands for Disclosure Due to increase awareness and scams coming in light, in recent past there is an increasing demand from stakeholders, including customers, suppliers, employees, communities, investors, and activist organizations for corporate disclosure from stakeholders, including customers, suppliers, employees, communities, investors, and activist organizations. Customer Interest Results of various surveys show that the ethical conduct of companies creates an influence on the purchasing decisions of customers. Investor Pressure With change in trend of company being assessed by the investors, social performance and ethical conduct are playing vital role in their investment making decision. As survey by Environics International revealed that more than a quarter of share-owning Americans took into account ethical considerations when buying and selling stocks. 3 3 Corporate Social Responsibility(CSR). N.D.MS.International Institute for Sustainable Development. Web. 11 Dec

4 Supplier Relations Over aperiod of time it can be noticed that stakeholders are becoming increasingly attentive in business affairs, many corporation are ensuring that their partners conduct themselves in a socially responsible manner By introducing CSR as mandatory norm in India under the new bill it will make the corporate equally responsible for the society. Its tax replacement for them hence they can work for society instead of paying it to Government the fund can directly be used by them for public welfare. As companies can reach smaller effected areas by their investment more easily compared to government policy, it is thought as to have more impact and would prove to be a very effective solution. As per the new company s act 2013; India stipulates that at least two per cent of average net profits in three immediately preceding financial years must be spent annually on CSR..This is to be applicable to companies with net worth Rs. 500 crore or turnover of Rs. 1,000 crore or Net profit more than Rs. 5 crore in any financial year. Such collective expenses are estimated to be about Rs15,000-20,000 crore a year WHAT DOES THE SECTION TALK ABOUT? This bill introduced needs large companies, determined with reference to net worth, turnover or profit as mentioned above to constitute a Corporate Social Responsibility Committee consisting of at least one independent director. The role of the committee so formed will be to formulate and recommend to the board a CSR policy for the company. Further it s the board to pass the recommendation and publish it on the company website, making it public. The CSR activities may comprise a number of activities listed in Schedule VII of the Act.Though general nature of the list in that Schedule VII does not provide any assurance that the CSR spending might indeed be always directed to the achievement of the planned purposes. However, it is certain that the 369

5 more reputed and socially-oriented companies the more focused it would be in their method to satisfy their social obligations. In case companies are unable or do not spend the necessary amounts on CSR activities, they need to specify reasons in the board s report annually sent to shareholders. This incorporates the comply-or-explain approach particularly adopted for corporate governance (e.g. under the Corporate Governance Code in the UK and the Voluntary Guidelines in India).The new act essentially elaborates the legislative provision and seeks to implement the same. The CSR activities are to be carried out via projects or programs for the purposes detailed in Schedule VII to the Act it excludes activities undertaken in pursuance of the normal course of business of the company. This appears somewhat absurd but this is because the Companies Act s focus on CSR as an expenditure of funds by corporations rather than as a matter of conduct or corporate behavior.it should be stressed over that CSR goes beyond mere spending, and necessity also promote social responsible and sustainable business practices. Therefore the act also contains some details on how company can undertake the CSR, like section 8 which talks about CSR being implemented through trusts or the company makes or uses such entities for the same. Though there are certain limitation are imposed on activities like First, only CSR spending within India would be accepted under the Act. Any activities undertaken outside India will be excluded. This may have some influence on Indian companies having international operations, where CSR activities conducted in other jurisdictions would not be taken into account for the purpose of fulfillment of obligations under section 135. But it done for the sole purpose of social enhancement of India and secondly companies can escape their responsibility by laundering money showing mere fulfillment of these activities Second, activities which are solely for the benefit of employees or their family members are excluded from the scope of CSR activity. It is done so that the not haves are taken into consideration and the gap between two extremes in India can be lessened. 370

6 Critical Analysis of the provisions of the Indian Companies Act, 2013 As per the section 135 of the Indian Companies Act, 2013, every company having 1. net worth of rupees five hundred crore or more, or 2. turnover of rupees one thousand crore or more, or 3. a net profit of rupees five crore or more During any financial year has to form a Corporate Social Responsibility Committee which must consist of at least three directors, out of which one must be an independent director. The Corporate Social Responsibility committee will be responsible for the CSR activities of the company and has to perform certain functions. The Functions are as follows- 1. Formulating and recommending to the board, the CSR policy of the company which shall be undertaken by the company as specified in the schedule 7 of the Act. 2. Recommending the amount of expenditure to be incurred by the company on CSR activities. 3. Monitoring the CSR policy of the company. Further, the board has to ensure that the company spends at least two per cent of the average net profits of the company made during the three immediately preceding financial years in every financial year. Shortfalls of the provisions Ambiguity related to number of directors As per Section 135 of the Act, the CSR Committee must consist of three or more directors. But the Act itself provides for companies having one or two director(s). Therefore, if the company meets the criteria as specified in the section it would mean that it is necessary for the company to appoint more directors only for complying with the CSR policy. In this case, it would be very unreasonable and unjustified for the companies to increase the strength of the board to comply with the CSR provisions. 371

7 Recommendation The provision regarding formation of CSR committee must be relaxed to only one director, or the act must remove the ambiguity by expressly mentioning the CSR compliances to be undertaken by the companies having one or two directors. Narrow scope of the CSR activities The term Corporate Social Responsibility has nowhere been defined in the act. A term which is too wide in scope needs some explanation to know what qualifies as a CSR activity and what not. The Schedule 7 to the act only mentions 9 activities which may be undertaken by the companies as the CSR activities which are (i) Eradicating extreme hunger and poverty; (ii) Promotion of education; (iii) Promoting gender equality and empowering women; (iv) Reducing child mortality and improving maternal health; (v) Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; (vi) Ensuring environmental sustainability; (vii) Employment enhancing vocational skills; (viii) Social business projects; (ix) 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. The provisions are very narrow in scope and they do not include activities like protection of Human Rights, protection of welfare and senior citizens and disabled people, eradicating corruption and improving governance etc. which are the key problems of the Indian society. Furthermore, the activities mentioned in the schedule are already being undertaken by the 372

8 companies. Therefore, the provision might not be able to achieve what was sought while implementing the CSR guidelines. Recommendation The list of activities mentioned in the schedule must be expanded to include more activities. No penalty in case of default As per the Act, there companies just need to give a reasonable excuse if they fail to comply with the CSR provisions. There is no penalty in case of default. Therefore, the chances of default by the companies are very high and the purpose of making the CSR initiative mandatory might be defeated in case if the companies default regularly and comes up justifications. Recommendation Strict penalties must be imposed in case if any company defaults in complying with the CSR provisions. Preference to local areas It has been argued (National Foundation of India, 2013) that as per the act, the companies should give preference to local areas around which it operates to spend funds for corporate social responsibility. The allocation of funds will be restricted in only few areas as most of the big companies are located in states which are relatively richer than the others. The states like Bihar and Jharkhand or other north-eastern states might not get the benefit of the CSR clause due to absence of big companies over there. Recommendation Local area preference clause must be relaxed and funds must be allocated in areas where problems like poverty, illiteracy are more severe. 373

9 Impact of the mandatory CSR provisions As mandatory CSR is now part of the Companies Act, 2013, the question arises that what impact it will have? Finance Minister P. Chidambram (Chidambaram says firms spending, 2013) argued that the impact of the many-fold. The authors have categorised it into two parts, namely the companies and the society. Impact on the companies As it is mandatory for certain companies to form a CSR committee and to spend 2% of their net profits on CSR activities, a huge amount of money will be spent on CSR activities in the forthcoming years. If viewed from the prospective of the companies, the mandatory CSR provision is nothing but another stumbling block to invest and carry on businesses in India. Companies argue that philanthropy and corporate social responsibility cannot be made mandatory and must be a voluntary exercise. Venu Srinivasan, Chairman of TVS group even compared mandatory CSR to imposing another tax on the profits of the company (Srivastava, 2012). It seems very burdensome for the companies to spend 2% of the net profits on the CSR activities, keeping in mind the cash liquidity available to them and other statutory compliances such as taxes. Therefore, it mind sound very optimistic and welcoming for the society but it will definitely impact the functioning of the companies in India. Companies now need to look beyond the traditional method of philanthropy and need to build up a full-fledged CSR strategy as a mandatory compliance. Impact on the society With the 2% spending of the net profits by the companies, the total money spent on social initiatives will definitely witness an increase. The mandatory CSR provisions are considered to be the solution to many social problems like illiteracy, poverty and health care. In western countries, CSR spending has always been the strategy of the big corporate houses. But in India there has always been a lack of initiatives by the companies to work for the welfare of the society. Most of the big business houses do not spend 2% of their net profits towards CSR 374

10 initiatives. Even big corporate giants like Reliance Industries refrain from spending on social initiatives (Jayashankar, Paul, Bhat, 2013). Though it might not be an easy task for the companies to spend a reasonable amount on the CSR initiatives, but the contention of the society mainly rests upon the basic economics argument that the companies obtain all the resources and also earn huge amounts of profit from the society, therefore they are under the obligation to give back to the society as a socially responsible citizen. The new CSR policy is considered necessary under the lights of present business practices in India and has also been welcomed by the society. It is viewed as a landmark initiative by the Indian government in the field of CSR. 375

11 Constitutionality of Section 135 of the Indian Companies Act, 2013 Article 14 of the Indian Constitution prohibits discrimination and guarantees equality before law to all persons. But further interpretation of the right to equality as embedded in our constitution lays down the principal that the equal should be treated alike and not the unequals, unequals are ought to be treated unequally. 4 But the classification made cannot be unreasonable and arbitrary. The Supreme Court in Re: Special Courts Bill 5 laid down the test to make any kind of classification. In order to past the test two conditions must be fulfilled, namely, (1) That the classification must be founded on an intelligible differentia which distinguishes those that are grouped together from others and (2) That differentia must have a rational relation to the object sought to be achieved by the Act. The section 135 of the Indian Companies Act, 2013 creates two classes, namely 1. Net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more, or a net profit of rupees five crore or more. 2. All other companies As section 135 is only applicable to the companies belonging to the first category, it must satisfy the test as mentioned above. According to the second criteria, there must be a rational relation between the object and the class of subjects. But there seems no rational nexus between in this case, why are the companies have net worth of 480 crore or net profit of 4 crore outside the domain of this section? These companies are fairly huge and use the natural resources equally. Therefore, unconstitutionality of this section might be an impediment to implement CSR initiatives in India. (Gupta, 2013) 4 Gauri Shankar v Union of India, AIR 1995 SC 55 5 AIR 1979 SC