CORPORATE SOCIAL RESPONSIBILITY UNDER NEW COMPANY ACT 2013: AN ANALYSIS

The Companies Act 2013 has introduced the new concept of Corporate Social Responsibility into Indian company law. Under the new law the company is to give preference to local areas when formulating its CSR policy. India Inc will have to put the income from on-going CSR activities into its corporate social responsibility (CSR) fund in addition to the 2% of net profits of the preceding three years. CSR activities includes- Eradicating extreme hunger and poverty; Promotion of education; Promoting gender equality and empowering women;   Reducing child mortality and improving maternal health; Combating HIV, AIDS, Malaria and other diseases; Ensuring environmental sustainability; Imparting employment enhancing vocational skills; Social business projects; and Contribution to certain funds. In order to maximise the impact of their CSR, Indian Business houses need to look beyond the traditional lens of "charity" and develop succinct CSR strategies with potential for large-scale social and economic impact. Private philanthropies set up by India's business leaders can be looked at as models for CSR.

1. Introduction

The Parliament approved the new Companies Bill, which mandates that companies of a certain size spend 2% of their three-year average annual profit towards corporate social responsibility (CSR), is a landmark one as it makes India among the first nations to have social welfare spending as part of company statute by law. CSR is a means to achieve sustainable development of an organization. Hence, it needs to be accepted as an organizational objective. The new law, 2013 will make Indian business houses to consciously work towards that objective, as it requires a prescribed class of companies to spend a portion of their profits on CSR activities. Businesses can no longer limit themselves to using resources to engage in activities that increase their profits. They have to be socially responsible corporate citizens and also contribute to the social good. CSR is about integrating economic, environmental and social objectives with a company’s operations and growth. An organization can accomplish sustainable development if CSR becomes an integral part of its business process. Corporate Social Responsibility 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. Traditionally, providing goods and services to society according to their demands and needs, maximizing corporate profits and creating more job opportunities were looked at as being social responsibilities discharged by the business. But this focus has gradually changed from economic aspects to the social aspect of the business decisions. Business organization is viewed as an institution that helps in solving a broad range of social problems like poverty, crime, pollution, raising the level of education, creating better job opportunities, upliftment of the minority and the weaker sections of society, etc. Business managers have begun to realize that they owe a responsibility towards society as they owe it to the business enterprises. The provision of Corporate Social Responsibility in the new Companies law is a step forward to empowering shareholders and increasing transparency. The new law has been a decade in coming, but that's not much of an eyebrow raiser nowadays. On balance, compared to the earlier law, the new one is a positive step forward. While much will depend on the actual working rules that are formulated under the Act, the general thrust is on more transparency and better information flow. This is bound to be beneficial for shareholders while not causing too much trouble for companies that are not actively trying to hide something from shareholders.

1.1 Concept of CSR

The concept of CSR as a “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 (World Business Council for Sustainable Development). CSR is a concept that an enterprise is accountable for its impact on all relevant stakeholders. It is continuing commitment by business to behave fairly and responsibly, contribute to economic development while improving the quality of life of the workforce and their families as well of the local community and society at large. By expressing their social responsibility, companies are affirming their role in societal and territorial cohesion, quality and environment (European Union). Social responsibility is an organization’s obligation to benefit society in ways that transcend the primary business objective of maximizing profit (John A Pearce et. al.). The purpose of corporation is to do as good as we can, everywhere for everybody concerned… and incidentally to make money (Henry Ford). Social responsibility refers to the obligation of an organization to seek actions that protect and improve the welfare of society along with its own interests (K. M. Bartol et. al.).

2. STIPULATIONS OF THE LAW

Section 135 of the Companies Act, 2013 provides Formation of CSR Committee has been made mandatory for a company having net worth of Rs. 500 crore or more, or turnover of Rs.1,000 crore or more or net profit of Rs. 5 crore or more during any financial year. Companies required to comply with CSR shall give additional Information by way of notes to the Statement of Profit and Loss about the aggregate expenditure on CSR activities.

2.1 CSR Committee

The CSR Committee of the Board consisting of three or more directors, of which at least one director shall be an independent director. The Board’s report has to disclose the composition of the CSR Committee. The main functions of the CSR Committee are to - Formulate and recommend to the board, a CSR policy indicating the activity or activities to be undertaken by the company as specified in Schedule VII of the Act; Recommend the amount to be spent on these activities; and Monitor the company's CSR policy periodically. After the CSR Committee makes it recommendations, Board of the company shall approve the CSR Policy and disclose contents of such policy in its report and also place it on the company's website. Further, details about the policy developed and implemented by the company on CSR initiatives during the year to be included in the Board's report every year. Board to ensure that the activities listed in the CSR Policy is undertaken by the company.

2.2 CSR Spending

The CSR Board to ensure that companies which meet certain set of criteria will have to spend at least 2 % of the average net profits of the company made during three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. The preference to be given to the local area and areas around the company operates for CSR spending. The amount has to be spent on the 9 broad areas that result in social good as specified in Schedule VII of the new act. The areas are:

• Eradicating extreme hunger and poverty; 
• Promotion of education; 
• Promoting gender equality and empowering women 
• Reducing child mortality and improving maternal health; 
• Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; 
• Ensuring environmental sustainability; 
• Employment enhancing vocational skills; 
• Social business projects; 
• Contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and;
• Other matters as may be prescribed.

2.3 Failure to Comply

If a company fails to provide or spend such amount, Board to specify reasons in its report for that failure. If they fail to do so, they would face action, including penalty. The company's board will have to explain why spending has fallen short in a particular year. A study carried out by the ET Intelligence Group shows that bulk of this - nearly Rs 5,000 crore - will be spent by the companies constituting the Nifty 50 Index. But India Inc will have to scramble to meet the target as only two companies in the Nifty - Ambuja Cement and ITC - currently spend 2% of net profit towards CSR. A close examination of annual reports indicate that while most companies discuss CSR initiatives at great length only a handful have mentioned the amount spent, either in absolute terms or as a percentage of their sales or profit. Thirty eight companies of the Nifty companies mentioned CSR initiatives in their annual reports or exclusive sustainability reports, but there was no information on the amount spent.

In their annual reports some companies have mentioned the amount spent by the group of which they are a part. For instance, the Mahindra Group spent Rs 72 crore on CSR while the group's net profit was Rs 5,410 crore, which translates to 1.3% of its net profit. The Vedanta Group spent Rs 230 crore on CSR when its net profit was Rs 13,130 , or 1.75% of its net profit.

Companies in India have not been able to link CSR with the sustainability of business and it is one of the reasons why companies are reluctant to spend on CSR (Sudhir Sinha, corporate head-CSR in Cipla). While the company has not disclosed the amount it spends on CSR in its annual report, the company claims it to be far above 2% of its profit due to its various efforts linked to making low-cost lifesaving anti-HIV drugs available.

"The performance of Indian companies in case of CSR has been pathetic as they have failed in their role of being a good corporate citizen. They are found to be doing more of lip service rather than actual initiatives in and around the areas of their operations. Companies would do well to spend more on CSR’ (Anil Singhvi, chairman, Ican Investment Advisors). Infosys contributes 1% of its PAT to the Infosys Foundation, which then spends the money on numerous CSR initiatives. Tata Steel's sustainability report mentions that the Tata group companies spend 4% of their net profit towards CSR. Ultra Tech, ICICI Bank, NTPC and SBI spent less than 1% of their earnings.

3. CSR Practices

In order to ensure organised and successful CSR initiatives, companies will have to identify and hire an appropriate team of professionals. From the fight against polio to fixing education, what's missing is often good measurement and a commitment to follow the data. We can do better. We have the tools at hand (Bill Gates). Businesses need to extend these principles to their CSR work. Bill & Melinda Gates Foundation, a benchmark for a focused socially-relevant enterprise, chose just two areas of effective and measurable action - education and healthcare. The foundation then made worldwide eradication of polio akin to a business goal and is confident of achieving it in the next six years.

In India, the Azim Premji Foundation chose to focus on improving the quality of primary education, and has maintained this effort for over 12 years. Tech Mahindra hired Loveleen Kacker, a former senior IAS officer and a domain expert in children's education, to lead its foundation. The Azim Premji Foundation recruited Dilip Ranjekar and Anurag Behar, senior executives from Wipro, to lead efforts towards large-scale impact in education. The Michael and Susan Dell Foundation have Barun Mohanty and Debashish Mitter, former senior executives with McKinsey & Co and American Express, to help children living in urban poverty. The Piramal Foundation operates its healthcare initiatives internally, but for its education-related activities, it backed two highly capable social entrepreneurs, Madhav Chavan of Pratham and Aditya Natraj of Kaivalya Education Foundation. For giving to be ingrained in a company's culture, employees must be involved with CSR.

At Tech Mahindra, associates engage with communities through partner NGOs. Their CSR goal is to get 10% of company associates to volunteer 10% of their time by 2015. At HDFC Bank, over 5,000 employees contribute around Rs 1 crore a year through payroll giving. Successful businesses are all driven by measurable goals, strong monitoring processes and data-driven decision-making.

Existing CSR Activities

Company	Major CSR Initiatives
ITC Limited	e-Choupal, social & farm forestry, watershed development, women's empowerment, livestock development, primary education
Infosys	Employees take up social causes like education, rural rehabilitation and inclusive growth. energy conservation, water sustainability, afforestation, waste management, awareness on carbon footprint.
Jubiliant Work Sciences	Basic healthcare facilities, supporting government rural primary education system, developing resource pool through vocational training programmes.
Reliance Industries Limited	Health, education, infrastructure development (drinking water, improving village infrastructure, construction of schools etc.), environment (effluent treatment, tree plantation, treatment of hazardous waste), relief and assistance in the event of a natural disaster, and miscellaneous activities such as contribution to other social development organizations.

3.1 Expected contribution for CSR

After implementation of new law about 8,000 companies would fall under the law’s ambit and this mandate would translate into an estimated CSR spending of Rs 12,000-15,000 crore annually. The following table depicts the eexpected contribution for CSR after the enforcement of CSR provision:

Expected contribution for CSR after the CSR provisions are enforced

(Amount in Rs. millions)

No.	Companies	3 Years Average Profits (2009-10, 2010-11, 2011-12)	Proposed contribution  (2% of Average Profits)
1.	GAIL (INDIA) LIMITED	34,516.03	690.32
2.	HINDUSTAN UNILEVER LTD	23,998.00	479.96
3.	Infosys	69,053.33	1,381.07
4.	Larsen & Tourbo Ltd	42,633.03	852.66
5.	NTPC Ltd	90,181.73	1,803.63

 

 

 

 

 

 

 

 

4. Impact of CSR

The new CSR provisions will impacts almost every area of operations - governance and ethics; employee hiring, providing opportunity; stakeholders benefit sharing and energy usage and environment protection. The Companies law 2013 intends to inculcate the philosophy of CSR among Indian companies. With CSR spending becoming mandatory for prescribed class of companies, there is bound to be increased engagement of companies with social and development projects. There were voluntary guidelines for companies to follow.

• The rationale for CSR activity is that corporates earn their profit by exploiting different resources of the society, and so a portion of the benefit derived by them should be channeled for the betterment of society. 
• Though compulsory CSR spending may seem burdensome for some class of companies, it will create of a sense of responsibility among Corporates, especially when they see benefits in the long term. 
• Children, women, uneducated, and unemployed would be among the beneficiaries as CSR activities may be focused on them. 
• The intention of policy makers is quite clear - to report business community's contribution for fulfillment of social, environmental and economic responsibilities. While contribution to the local community is a good objective, businesses should choose social, environmental and economic activities that contribute to society at large. 
• CSR activities will also help improve the image of a company within the society as one that cares for the community. 
• Significantly, there is no penalty for defaulting on CSR norms. Only an explanation is to be given by the board in its report for such non-compliance. So, it seems there is no real coercive factor.

5. Conclusion

Corporate Social Responsibility is the commitment of business to contribute to sustainable economic development, working with employees and their families, the local community and society at large to improve their quality of life in ways that are good for business and good for development. It can be defined as operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business. Even at full scale, India's CSR spend will be a drop in the ocean when compared with government expenditure on social schemes. However, even these funds have the potential for large-scale impact as there has been limited scope for innovation within the government system but with passing of the new Companies Ac, a new chapter would be opened as far as social obligations of the corporate sector are concerned. The provision made in the companies’ bill for earmarking 2% for Corporate Social Responsibility is a welcome move. The general perception about some big houses spending a lot for this type of activities has been proved wrong. Let there be some defined areas where the major portion of CSR money should be utilized. Many times it is observed that many companies spent less on CSR-activity and more on its publicity to enhance visibility only. Publicity expenditure covering CSR activity should not be included in the 2% allotment. Provisions about contributions to be made by companies for Corporate Social Responsibility (CSR) activities have become mandatory. However, success of the CSR initiatives would depend on faithful implementation of the CSR provisions. In the past, many had argued that CSR activities should not be made mandatory. Any way now that they have been made mandatory, it would be better to ensure that CSR funds to be spent by the corporate sector are properly utilized and the underprivileged sections of our society become the major beneficiaries of CSR activities. It is indeed good idea. But instead of spending just to satisfying the government, each company should be given some problem to solve with mutual discussion and consent. For example some companies are interested in education the other may be interested in sanitation. The entire thing can be beautifully organized, provided the government has the will to do. Let not the government impose and at the same time it should not be left to corporate.