This Article is written by Arushi Chopra (pursuing BBA LLB from Symbiosis Law School, Noid)
Table of Contents
The past decades has seen a change in the perception of the objective of the society from being an economic being to that of a social being. Today, the objective of each company is not limited to maximizing the wealth of shareholders but also includes the moral obligation to give back something to the society which is also a major stakeholder in a business. This moral obligation gave rise to the concept of corporate social responsibility. It is not that the businesses did not indulge in societal well-being earlier. The companies used to patron art and education through its initiatives but this was not done by everyone and was understood to be more as a charity than a responsibility. India is the first country to have statutorily recognized and mandated corporate social responsibility for some companies who satisfy the basic threshold limit provided in Section 135 of the Companies Act, 2013. Despite mandating CSR initiatives, there are certain gaps in implementation and reporting of CSR which leads to a subversion of the advantages of this principle. This, however does not undermine the importance of CSR regime and its success in India. According to the report of High Level Committee on Corporate Social Responsibility, CSR initiatives in India has risen by more than half in the year 2018.
From the above paragraph, it can be ascertained that CSR initiatives holds utmost importance in India and the status of CSR has now been recognized as a responsibility rather than a mere charity. Keeping this in consideration, this research article focusses on the concept of corporate social responsibility and its development in India.
Emergence of CSR in India
CSR was mandated in India in only 2013 but it was not that it was not practiced in any form earlier. The concept of businesses giving back to the society has been a part of the corporate regime of major industrialists in the form of corporate philanthropy in the 20th century. The independence period was considered a golden age in corporate philanthropy. Firms like Tata are among the pioneers of corporate philanthropy initiatives in India. The different periods in the history bought about different perceptions of social responsibility of businesses which can be majorly divided into four major phases.
The first phase ranges from 1850 – 1914 where the social activities done by the company was determined through family values and cultures. Industrialists used to use the wealth they earned for welfare of the society or religious purposes. This activity escalated in the pre-independence period where companies like Tata and Godrej started setting up charitable foundations, schools and hospitals. The second phase was the stage where the trusteeship theory of Mahatma Gandhi became the foundation for all CSR activities. The trusteeship principle states that the companies and people are holding property in a trust for the society and thus they should give back amount through initiatives. The third phase was characterized with the idea of Public Sector Undertakings. However, these PSUs were ineffective and the focus shifted towards private sectors to undertake socio-economic development initiatives. The years starting from 1990 saw the starting of the fourth phase. The liberalization, privatization and globalization objectives of the government led to a reduction in the public sector undertakings. Also, globalization opened up gates for financial growth of the firm which ultimately led to increased finances for investing in CSR initiatives.
Change from Philanthropy to Mandatory Corporate Social Responsibility
It can be established that in all the four phases, CSR was recognized as a voluntary charity which could be performed by the companies if they earn profits. The Ministry of Corporate Affairs in 2009 formulated the Corporate Social Responsibility Voluntary Guidelines to recognize CSR as a part of the corporate structure. The main objective was to encourage companies to form a CSR policy in its strategy to ensure that a proper process for CSR initiatives is determined. It provided the core elements for CSR policy that has to be imbibed in the strategy of the company. These include considering the interests of all stakeholders, respecting the employees, society and environment and ensuring transparency and accountability in business functions. Another set of guidelines called the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business which provided certain guidelines which companies can adopt if they wish. Some of these guidelines included focus on manufacturing of safe goods, and ensure equitable development. As these guidelines were not followed by most companies, in 2013, SEBI issued a notification mandating the top 100 listed companies to submit a Business Responsibility Report highlighting the initiatives taken by them under ESG guidelines.
This bought about a gradual shift in perception for CSR initiatives and now philanthropy of corporates came to be recognized as being more of a responsibility. Like the rule by SEBI mandating Business Responsibility Report to be submitted, guidelines were framed for Central public service companies to create a CSR budget. Through all these rules, the shift in perception of the government with regards to CSR initiatives could be easily ascertained. The government tried to implement stringent CSR as it was now beginning to be considered as a responsibility rather than a charity. This change was for the first time manifested in the Indian Companies Act, 2013 which mandated CSR for companies meeting a specific criteria.
CSR under Indian Companies Act, 2013
Section 135 of the Act has now mandated CSR for certain categories of firms. According to this Section, every company having net worth of more than five hundred crore or turnover of one thousand crore or more or net profit of five crore or more would have to mandatorily constitute a CSR committee consisting of some board of directors. This committee needs to ensure that the company spends atleast 2% of the average net profits of the three previous years on any of the CSR initiatives mentioned in the Schedule VII as per the company policy.
There has been a shift in the view of CSR from “comply and explain” approach to that of “comply or pay fine”. This was done to meet the compliance gaps in the earlier approach and thus the 2019 amendment provided for the penalty for non-compliance including imprisonment. Imprisonment as a penalty was removed in 2020 and monetary penalties were introduced. Also, the Act provides for a disclosure of the company’s CSR policy on the company’s website. The new CSR regime also provided utilization of unspent money and setting off of excess amount for CSR spending.
In order to make clear what spending would be included in mandatory CSR, Schedule VII of the Act provides for the broad areas under which CSR initiatives can be taken. The topics given are broad in nature and any activities that would improve these subjects can be a part of the CSR initiatives. Some of the subjects mentioned under Schedule VII are eradicating poverty, promoting education and gender equality, undertaking rural development projects and the like. Also this Schedule has been amended time and again according to the prevailing circumstances and priority of the nation. This was seen during the pandemic period when in 2020, contribution to PM CARES fund was allowed to be under mandatory CSR spending. In the same year, research and development projects for COVID-19 vaccines and medicinal equipment would also be included in CSR spending.
The perception of corporate social responsibility has significantly changed in India. CSR initiatives were being undertaken even in the ancient times by corporations as it was deeply ingrained in their cultural values. Pioneers of CSR initiatives include Tata and Godrej who contributed substantially towards CSR initiatives. However, these initiatives were not taken by all companies as it was recognised in the nature of a charity. This outlook changed for the better and now CSR is considered as a responsibility of each company which they have to perform mandatorily. This mandate has been given under Section 135 of the Act for companies meeting a specific criteria. Today CSR is considered as a blend of philanthropy and long term growth of the company. Thus CSR activities include those altruistic activities which are done without any benefit in return. However, the fact is that CSR leads to more profitability of the company as significant CSR initiatives and proper advertising of these initiatives can lead to more trust of the existing shareholders and the prospective investors which can ultimately result in the growth of the company.
CSR today has been mandated by the Companies Act, 2013 is a means for ensuring sustainable development. It can also be used by the government to ensure that proper investments are made in the priority sectors. The best example is that of the amendment in Schedule VII of the Companies Act, 2013 for inclusion of donation to PM CARES fund and spending on research and development for vaccines as a part of mandatory CSR spending.
 Hereinafter referred to as “the Act”
 Press Information Bureau, “Corporate Social Responsibility” (2011), Ministry of Corporate Affairs, Government of India
Indian Companies Act, 2013, s. 135(2)
Companies (Social Corporate Responsibility) Rules, 2014
Indian Companies (Amendment) Act, 2020, s. 3