In most recent writings about the Companies Bill 2012 and related issues there is always a reference, even if in passing, about corporate social responsibility (CSR) to the extent that it is now almost fashionable to discuss CSR. With this column and its series of articles, we intend to analyse various aspects of CSR from different significant perspectives. In order to understand CSR and make appropriate use of it, there is a need to grasp its history, its etymology, the detailed guidelines and its ramifications for different stakeholders. The Companies Bill, no doubt, acts as the Bible for CSR of Indian companies. However, various leading agencies have provided guidelines for CSR in country specific and/or global contexts. The articles will try to examine these as well. Then there are the actual practices on ground and initiatives taken by various companies which would also be discussed. We strongly believe that a careful study of the various dimensions of CSR would contribute to the process of strengthening and fine-tuning the CSR initiatives that are still in a fledgling state in our country.
The rationale for such a column emerges from the strong belief that CSR is the need of the hour in the crossroads to development that India now finds itself in. Why crossroads? Firstly, initiatives towards socio-economic development in India are going on for many decades now. While we have achieved some significant milestones and are constantly striving harder, a number of goals remain elusive. If anything, these seem more difficult to attain now than they were a few decades back. Surely, it is time for self-reflection. Secondly, across the globe realities on the ground and failed interventions point to one and only one startling fact, that is, the need for more participation from all quarters. Organisations and individuals who have extensive experience in development planning and implementation reaffirm the need for greater participation of all stakeholders. The business community and companies - as the institutions with capital, as employers, as manufacturers or as service providers - are no doubt one of the key stake holders and need to participate.
It was in a similar moment in history that development ceased to be the responsibility of the government and the citizens alone and a third player, now popularly known as the non-governmental sector took on a key role. A similar moment of reckoning has come again. While it may be argued that business and industry has always contributed to development and welfare, it is time to make these contributions more systematic and committed.
The Present Overarching Framework for CSR in India
The Companies Act
Section 135, Chapter 9 of The Companies Bill, 2012
“(1) Every company having 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 during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
(2) The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,--
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.
(4) The Board of every company referred to in sub-section (1) shall,--
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:
Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.”
Section 134 states
“The financial reports must include:
(o) the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;”
In General Instructions for Calculating Profit and Loss:
“5. Additional Information
A Company shall disclose by way of notes additional information regarding aggregate expenditure and income on the following items:--
(k) In case of Companies covered under section 135, amount of expenditure incurred on corporate social responsibility activities;”
“Activities which may be included by companies in their Corporate Social Responsibility Policies
Activities relating to:--
(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; and
(x) such other matters as may be prescribed.”
As the initial statement clearly spells out, this Act and the guidelines for CSR do not cover all companies. They are specific to fairly large companies. This aspect will be more closely examined in a forthcoming article.
It is also interesting to note that these guidelines are not binding in nature. If the amount earmarked for the said purpose is not spent, the company can give the reasons for the same in its annual report. This may prove to be problematic. There is no further clarification about whether the unspent amount should be moved to the CSR spending for the next year. It reminds one of the huge amounts allocated by the government for development spending each year such as in the areas of health and education. Large quantums out of these remain unspent for unknown reasons, surely not due to the lack of need for funds, and nor do we know the fate of this unspent amount in the next year.
The Bill does provide a useful indicative list in Schedule VII that suggests development issues and priorities that need attention in the specific context of India. These are important because the government, based on its experiences over a long period of time and consultations with international agencies, has developed these development priorities.
Budget 2013-14 Speech of the Honourable Finance Minister
“76. Incubators play an important role in mentoring new businesses which start as a small or medium business. The new Companies Bill obliges companies to spend 2 percent of average net profits under Corporate Social Responsibility (CSR). I am glad to announce that the Ministry of Corporate Affairs will notify that funds provided to technology incubators located within academic institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure.”
The Budget spells out some other new priorities for CSR spending by companies. As will be discussed in a later article, constantly shifting priorities and identifying new goals may have some advantages but often they sound the death-knell for important development needs and their target populations.
While the Companies Bill has been passed by the Lok Sabha on the 18th of December 2012, it is yet to see the light of the day pending its approval in the Rajya Sabha. As is often the case, other matters of greater political import take precedence over it. Till the bill is passed by the Upper House, it shall not be binding on the companies. While the Bill was being formulated and debates between different stakeholders was a common feature during the formulation stage, there were a number of misgivings expressed by the business community. It was argued that social responsibility cannot be introduced in a regulatory form and is best done under voluntary circumstances. While the Bill may be passed successfully in the Rajya Sabha, many of these misgivings continue to prevail.
The Companies Bill provides an excellent framework and a point of departure for corporate social responsibility. In fact, they are useful even for those companies that do not directly fall in the bracket that the CSR guidelines are meant for. But details and nuances have to be worked out. Every company has a huge task on hand. It is as if a sprawling minefield of possibilities has been laid open. The coming times will tell what the companies can make out of it.
The series of articles will flag, highlight and discuss various issues pertinent to this phase when guidelines have to be transformed into projects and ideas into action. The field of CSR in India is still at a very nascent stage and we encourage our readers to raise issues, share experiences and initiate discussions in the coming months in order to make this endeavour successful.
More than 20 years’ experience in the development sector with urban and rural poor communities