Legal Implications Of Corporate Social Responsibility (CSR) In India

This article has been written by Harshita Chaudhary. She completed her bachelor’s in Science from Chhatrapati Shahu Ji Maharaj University, Kanpur, and is now in her second year, currently pursuing an LLB from Lloyd School of Law, Greater Noida.

Abstract:

This article throws the light to the Concept Of “Corporate Social Responsibility”. CSR is self regulating business model and  now a crucial component to business strategy .Enactment of Companies Act ,2013 introduced CSR as mandatory provision, Section 135 of 2013 act deals with CSR legislation. By this India became the first country to make corporate social responsibility (CSR) spending mandatory by law. This act was further amended in 2019 and the Companies (Amendment) Act,2019 introduced penalties for non compliance of the provisions.Other Countries like turkey, South Africa do not have specific legislation related to CSR. In UAE CSR law was enforced from 2018 which stipulates companies to report CSR activities and financial Contribution. Companies Like Unilever, Microsoft, Coca Cola  introduced several initiatives in light of CSR. Corporate Social Responsibility (CSR) plays a key role in India’s development trajectory by addressing critical societal challenges, Education stands as a cornerstone.

Introduction:

Corporate Social Responsibility(CSR) has become increasingly crucial for firms looking to stay competitive in the twenty-first century, as both investors and consumers want more ethical and open practices from the businesses they support. CSR is now a crucial component of corporate strategy that can boost innovation, increase growth, and improve customer loyalty.[1] Enactment of Companies Act, 2013 by the Ministry of Corporate Affairs, Government of India was one of the world’s largest experiments of introducing the CSR as a mandatory provision by imposing statutory obligation on Companies to take up CSR projects towards social welfare activities. This has made India the only country which has regulated and mandated CSR for some select categories of companies registered under the Act. This CSR Initiative will push the nation towards achievement of sustainable development goals and public-private partnership in transforming India.[2]

Corporate Social Responsibility:

It is a self regulating business model which helps company to be socially accountable for itself, its stakeholders and the public. By practicing CSR which is also called corporate citizenship, companies are aware of how they impact aspects of society, including economic, social, and environmental.[3] It’s a form of self-regulation that can be expressed in initiatives or strategies, depending on an organization’s goals. Many organizations communicate these efforts to external and internal stakeholders through corporate social responsibility reports. There are various examples of what “socially responsible” means from organization to organization. Firms are often guided by a concept known as the triple bottom line, which dictates that a business should be committed to measuring its social and environmental impact, sustainability efforts, and profits. The adage “profit, people, planet,” known as the “three P’s,” is often used to summarize the driving force behind this concept.[4]

Introduction To CSR In INDIA:

The importance of inclusive growth is widely recognised for India’s Growth and development .In line with this growth CSR(corporate social responsibility) was recognised as an instrument for integrating social , environmental, and human development concerns in the entire value chain of corporate business. Ministry of Corporate Affairs had issued ‘Voluntary Guidelines on Corporate Social Responsibility, 2009’ as a first step, further refined subsequently, as ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business,released by the Ministry of Corporate Affairs (MCA) in July 2011, is essentially a set of nine principles that offer Indian businesses an understanding and approach to inculcate responsible business conduct, the NVGs have been updated and released as ‘National Guidelines on Responsible Business Conduct’ (NGRBC) in March 2019 to reveal alignments with the United Nations Guiding Principles on Business & Human Rights (UNGPs), UN Sustainable Development Goals (SDGs), Paris Agreement on Climate change etc. The NGRBC provides a framework for the companies to grow in an inclusive and sustainable manner while addressing the concerns of stakeholders. The 21st Report of the Parliamentary Standing Committee on Finance is one of the prime movers for bringing the CSR provisions within the statute. It was observed by the Standing Committee, that annual statutory disclosures on CSR required to be made by the companies under the Act would be a sufficient check on non-compliance. Section 135(4) of the Companies Act 2013 mandates every company qualifying under Section 135(1) to make a statutory disclosure of CSR in its Annual Report of the Board. Rule 8 of the Companies (Corporate Social Responsibility Policy), Rules, 2014 prescribes the format in which such disclosure is to be made.[5]

Legislative Framework Governing CSR in India:

• Companies Act 2013: The Companies Act 2013 regulates the formation and functioning of corporations or companies in India. The first Companies Act after independence was passed in 1956, which governed business entities in the country. The 1956 Act was based on the recommendations of the Bhabha Committee. This Act was amended multiple times, and in 2013, major changes were introduced. By Section 135 of the 2013 Act, India became the first country to make corporate social responsibility (CSR) spending mandatory by law.[6]
• Section 135 of the Companies Act introduced mandatory CSR contributions for large companies, making it the only mandatory CSR law in the world. All firms above a particular net worth, turnover, or net profit threshold are required to spend at least 2% of their annual profits of the preceding year on corporate social responsibility. The law requires that all such companies establish a CSR committee to oversee the spending.[7]

  Applicability of Section 135: Sub- Section 1 of Section 135 states that this section is applicable to companies that meet certain thresholds:

• Every Company having Net worth of INR 5000 crore or more,Or
• Annual turnover of INR 1000 crore or more,Or
• Net Profit of INR 5 Crore or more.

  CSR Committee: sub-section (1) Of Section 135 mandates forming Committee within the Board. As per Sub -Section (3) of Section 135 The Committee recommend to the board, A CSR policy which indicate the activities to be undertaken by company, also recommend the amount of expenditure incurred on the activities and monitor CSR policy of the company time to time.

  CSR Expenditure:As per sub-section (5) of Section 135,  that the eligible companies shall spend at least 2% of the average Net Profits made during last preceding three financial years in pursuance of CSR policy.

  Areas Of CSR Expenditure:As per Schedule VII of The Companies Act,2013 the  activities which may be  included in CSR:

1. Eradicating extreme hunger and poverty;
2. Promotion of education;
3. Promoting gender equality and empowering women;
4. Reducing child mortality and improving mental health;
5. Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria, other disease;
6.  Ensuring environmental sustainability;
7. Employment enhancing vocational skills;
8. Social Business Projects;
9. Contribution to the Prime Minister’s Relief Fund or any other fund set up by the Central Govt. or the State Govt. for the socio- economic development and relief and funds for the welfare of the Schedule Castes, the Schedule tribes, other backward classes, minorities and women; and
10. Such other matters as may be prescribed.

CSR reporting : Companies shall include CSR report in annual board report, detailing the activities undertaken, amount spent, and reasons for any unspent amount.

Punishment For Non- Compliance: If company contravenes the provisions of Section of 134(Financial statement, Board’s Reports, Etc) Of The Companies Act,2013. The company shall be punishable with imprisonment for a term which may extend to three  years or with fine not less than Fifty Thousand Rupees which may extend to Five lakh Rupees, or with both.[8]

• The Companies (Amendment) Act,2019: It introduced penalties for non-compliance with CSR requirements. As per Section 21 of The Companies (Amendment) Act,2019 (which is the Amendment of Section 135 of The Companies Act,2013 ) , if company contravenes the provisions ,the company shall be liable with fine not less than fifty thousands Rupees but which may extend to twenty-five lakh Rupees and every officer who is default shall be punishable imprisonment for a term which may extend to three years or fine which shall be not less than fifty thousand Rupees but which may extend to five lakh Rupees, or with both.[9]

CSR in other Countries:

1. In Europe: The EU since 1990s has been aware of the importance of CSR as part of its sustainable strategy, EU identified CSR as voluntary action rather than a compulsory Framework. Many countries In EU have traditionally practised CSR. In Austria ,there is no legal framework stipulating CSR apart from CSR guiding vision of 2009.There is no CSR legislation in Croatia, Finland, Czech Republic, Germany, Russia. Ireland also views CSR as voluntary approach.
2. In East Asia: Since 2004, the Chinese Govt. taken active actions to develop CSR as an effective means to build harmonious society. In Japan, which primarily drives CSR is the Ministry Of Economy,Trade and Economy and the private Sector Company. In South Korea, more than Half  of the big companies like Samsung, Hyundai Motor Group ,etc run CSR department.
3. In the Americas: In U.S , CSR is often characterised by the voluntary societal engagement by businesses, There is no obligatory compliance. The concept of CSR is neither well known or well developed in Mexico. There is No clearly spelt out legislation in Costa Rica,Brazil.
4. In the Middle East and Africa: there is no legislative framework in Egypt,South Africa. Turkey presents promising environment for CSR but needs to have legislation.In UAE, CSR law was enforced from February 01,2018 which stipulates companies to report CSR activities and financial Contribution.
5. In Australia: There is no specific CSR legislation in Australia, However It is open to interpretations .[10]

CSR in Financial Year 2023: Slower CSR spending growth: In FY 2022-23, the CSR spending by companies listed on the National Stock Exchange (NSE) increased by 5 percent to INR 155.24 billion, up from INR 148.16 billion in FY 2021-22. This growth was slower compared to a 13 percent rise in average net profit over the preceding three years, Decline in CSR as a percentage of net profit: CSR spending as a percentage of net profit fell to 1.87 percent, a six-year low, indicating a lag in CSR spending relative to profit growth., Compliance with CSR mandate: Despite the slowdown, 1,271 out of 1,296 companies required to spend on CSR did so, showing an improvement from the previous year.[11]

CSR Achievements and Initiatives:

1. The Coca Cola Company: Coca Cola has launched “world without waste initiative” aiming to collect and recycle bottle for each one they sell by 2030, it is also engaged in water stewardship by supporting sustainable water management projects worldwide.
2. Microsoft: It has become Leader in CSR, Microsoft’s “AI for Good” program uses artificial intelligence to address some major issues related to environment, sustainability, healthcare , and education.
3. Unilever: The “sustainable living plan” sets target to reduce its environmental footprints. Unilever has made significant strides in reducing waste, water usage etc.
4. Patagonia: “its worn wear” program encourages customers to buy used Patagonia clothing, or repair their existing products through worn wear program.[12]

Conclusion

Corporate Social Responsibility (CSR) plays a key role in India’s development trajectory by addressing critical societal challenges. Education stands as a cornerstone, where CSR initiatives can bolster access to quality education in remote and underserved areas. By investing in infrastructure, scholarships, and digital literacy programs, corporations can empower the next generation, fostering economic inclusion and innovation. [13]The CSR mandate has been key to unlocking a cumulative giving capital of INR 2,17,000 crore over the last decade. And the learnings that have emerged over this period will shape the what, why, and how of corporate giving towards social impact for the next decade.[14]

[1] Corporate Social Responsibility: A Strategic Imperative For Modern Businesses,FORBES, https://www.forbes.com/councils/forbesbusinesscouncil/2024/10/11/corporate-social-responsibility-a-strategic-imperative-for-modern-businesses/ (last visited Oct.15,2024).

[2] See Ministry Of Corporate Affairs, https://www.csr.gov.in/content/csr/global/master/home/home.html (last visited Oct.15,2024).

[3] Jason Fernando, What Is CSR? Corporate Social Responsibility Explained ,INVESTOPEDIA ( Last updated March. 06,2024), https://www.investopedia.com/terms/c/corp-social-responsibility.asp .

[4] Tim Stobierski, What Is Corporate Social Responsibility? 4 Types,HARVARD BUSINESS SCHOOL ONLINE (April. 08,2021) https://online.hbs.edu/blog/post/types-of-corporate-social-responsibility .

[5] See,Ministry Of Corporate Affairs, https://www.csr.gov.in/content/csr/global/master/home/aboutcsr/history.html (last visited Oct.20,2024)

[6] BYJUS EXAM PREP., https://byjus.com/free-ias-prep/indian-companies-act/ (last visited Oct.20,2024).

[7] Companies Act 2013,WIKIPDEDIA, https://en.wikipedia.org/wiki/Companies_Act_2013#Corporate_Social_Responsibility (last visited Oct.20,2024).

[8] See , The Companies Act 2013, https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (last visited Oct.20,2024).

[9] See, The Companies (Amendment) Act,2019, https://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf (last visited Oct.20,2024).

[10] CSR Legislation in other Countries, E GYANKOSH, https://www.egyankosh.ac.in/bitstream/123456789/74141/1/Unit-1.pdf (last visited Oct.20,2024)

[11] Melissa Cyrill, Corporate Social Responsibility in India ,INDIA BRIEFING (Sept. 27,2024) https://www.india-briefing.com/news/corporate-social-responsibility-india-5511.html/ .

[12] Five CSR Success Stories and Key Strategies for Your Business, GOODMAN LANTERN, https://goodmanlantern.com/blog/five-csr-success-stories-and-key-strategies-for-your-business/ (last visited Oct. 21,2024)

[13] The Future of CSR in India with Dominic Dsouza,ESSAR, https://www.essar.com/inthenews/the-future-of-csr-in-india-with-dominic-dsouza/ (last visited Oct.21,2024)

[14] Sumit Tayal, What will the next 10 years of CSR look like?, IDR (June. 04,2024) https://idronline.org/article/philanthropy-csr/what-will-the-next-10-years-of-csr-look-like/