Open Access Research Article
ANALYTICAL STUDY ON CORPORATE SOCIAL RESPONSIBILITY (CSR) & LEGAL IMPLICATIONS
Published Paper
Article Details
AUTHORED BY - SMITA R. NAIK
& AKSHAY KABRA
Semester-III,
Seconder year LLM, PES’ Modern Law College, Pune
ABSTRACT
Definition, characteristics, key
drives, strategies, advantages and disadvantages principles and legal framework
of CSR along with legal framework, Companies Act, Corporate social
responsibility committee, voluntary guidelines, policy rules and current scenario
have been discussed in this paper.
Keywords: Corporate Social
Responsibility, Companies Act (2013) & Amendment (2021), Legal implications, CSR mechanism
1.
INTRODUCTION
Corporate social responsibility
refers to ethical obligation of businesses to contribute positively to society
and environment beyond their profit-driven motives. This concept is most
important provisions as given in Section-135 of Companies Act (2013) read with
Corporate Social Responsibility Policy Rules (2014). In India, it mandates companies
with specific net worth or turnover to annually spend at least two per cent of
their average net profits of the last three financial years on CSR. The law reflects our country’s commitment to operate in manner that
is economically, socially and environmentally sustainable. It involves taking
into account the impact of actions of a company on its various stakeholders viz., its employees, customers,
community and the environment. Its goal is to go beyond financial success and
contribute positively to society and environment. Aforesaid section of Companies Act mandates constitution of Corporate Social Responsibility Committee (CSRC) of the Board, its
obligations and contribution that must be made by the specified entities
towards its CSR policy.[1]
ISO 26000 defines CSR as
responsibilities of organization for impacts of its decision and activities on
society and environment, through transparency and ethical behaviour that
contribute to sustainable development including health and welfare of society. This
definition correlates CSR with the social and environmental dimensions of
sustainable development.
Characteristics of CSR are kind
of positive responsibility of relations; takes concerns with non-shareholding
interests as concern party of obligations; as integration of legal and moral
obligation of corporate and amendment / compliment to conventional principle of
exploited profits for shareholders.
Key drives of CSR are core value
systems by which corporate feel responsible not only for wealth creation but also for social and environmental good; considered as top strategic
development of corporate and public pressure from customers media states
pressure groups pressing corporation to be more socially responsible.
CSR as strategy is becoming more and
more important for businesses today. Consumers and Society at large has increased
expectations from the companies whose product they buy in light of recent corporate scandals which has reduced public
trust in corporations. Affluent consumers can afford to pick and choose the
products they buy. Society in need of work and investment is less likely
to enforce strict
regulations and penalize organization that might take their business & money elsewhere.
Growing influence of the media brought immediately to the attention of the
public if it sees any mistakes by corporations and this is further ignited
by Internet which fuels communication among likeminded groups and consumers-
empowering them to spread their message, while giving those means to coordinate
collective action of product boycott. CSR constitutes the aspects like human
rights, labor welfare, consumer protection to local communities, environment
protection, respect for national sovereignty etc.
2.
CSR: ADVANTAGES AND DISADVANTAGES
i.
Advantages: Consumers become more aware about
environment and social issues; the communities becomes aware of fact that corporations are also responsible for development of community and stakeholders also exerts pressure
on corporations through socially
responsible investment; laws
and regulations framed prevent corporations in damaging or harming social good that includes people
and environment; large corporations recognizing need of corporate- social
action in the wake of consumer movements and demands of civil society by which
socially responsible companies enjoy enhanced brand image and reputation;
stakeholders bear costs of corporate
social action; organization that adopt corporate social responsibility
principles gets more transparent with less risk of bribery and corruption etc.
ii.
Disadvantages: Incurs heavy cost (e.g. purchase of environment friendly equipment /
strict quality control implementation); lack of seriousness (due to want of
skills, knowledge and attitude required for planning CSR approaches,
implementation and evaluation); mismatch of the roles and expectations between
the organization and society etc.[2]
3.
PRINCIPLES OF CSR
Basic idea of corporate social
responsibility is that business and society are interlinked rather than the
distinct entities. There are three basic principles viz., Legitimacy, Public responsibility and Managerial discretion.
Legitimacy is society allowing power to energy to business for proper utilization. Public-responsibility infers business
is in charge of results
identified with its regions of association with society. Managerial
discretion refers to supervisors as good performers who are obliged to exercise such discretion as is
accessible to them to accomplish socially capable results.[3]
4.
LEGAL FRAMEWORK
CSR is primarily seen as
voluntary commitment; these can arise from sources like national laws,
international regulations and emerging soft laws. UN Human Rights Council
(2011) outlines responsibilities of businesses in respecting human rights. They
are not legally binding however have influenced national laws and corporate
policies worldwide. OECD guidelines for multinational enterprises provide
recommendations on responsible business conduct. They are also not legally
binding but are endorsed by governments and serve as reference point for
businesses to align their operations with international standards.
5.
INDIAN COMPANIES ACT (2013)
The Act mandates companies to
spend at least 2 per cent of their average net profits over three years on CSR activities. Rigid environmental and labor laws that indirectly enforce CSR by holding
companies accountable for environmental degradation, workplace safety and fair labor practices; failure
to comply can lead to legal actions,
fines and reputational damage. Soft laws and voluntary standards comprises of ISO
26000 and GRI. Former is voluntary international standard that provides
guidelines for social responsibility which is not certification but tool for
companies to integrate CSR into their operations. Global Reporting Initiative
(GRI) standards are widely used by companies to report on their environmental,
social and governance (ESG) performance. Adherence to these standards is
voluntary. They are increasingly being used by investors and regulators to
assess corporate performance.
With enactment of Company Act (2013) made compulsory for each and every company that fulfills certain specified conditions to frame CSR
policy and create social responsibility committee and also have to spend 2 per
cent of their profits on CSR. These provisions set a path for uniform pattern
of spending in field of CSR because now corporations have to form uniform and
compulsory policy regarding the CSR.
6.
CORPORATE SOCIAL
RESPONSIBILITY COMMITTEE (CSRC)
Sub-section 1 of Section-135
states that every company that has net worth equal to or more than Rs. 500
crore or turnover equal to or more than Rs. 1000 crore or net profit equal to or
more than Rs. 5 crore during any financial year is required to constitute
CSR Committee Board which shall
consist of three or more directors, amongst whom at least one director should be an independent director. Board must disclose composition of such committee under its report to be laid before company in its general
meeting as mandated by Section-134(3). Section-35(3) specifies to formulate and recommend CSRC policy for the
activities which are to be undertaken by company as
specified in Schedule VII of the Act, endorse expenditure amount to be spent on
these activities and monitor the policy from time to time. Recommendations of committee have to be approved
by Board, disclose policy contents
in its report and placed on
the company’s website. If the company
fails in spending such amount towards CSR activities as laid down in its
policy, the Board has to specify the reasons in its report as mentioned u/s
134(3)(o).
Activities of CSRC motivates
companies to fund socially, economically and environmentally by engaging in acts such as engaging local
community members; developing
cordial relationship with employees an consumers; engaging in activities for
sustainable protection of environment through chain of sustainable
manufacturing practices therein; paying fair wages to workers
engaged; supporting reforms
in social justice
policy; innovating its
products to solve environmental or social issue, if any; task to reduce carbon
footprint and contributing appreciable profits to any charitable cause.
7.
CSR VOLUNTARY
GUIDELINES (2009)
The voluntary guidelines were
issued by Ministry of Corporate Affairs as fundamental principal wherein, each
business entity should formulate CSR policy to guide its strategic planning and provide road map for its CSR initiatives which should be integral part of overall business
policy and aligned with business goals; policy should be framed with
participation of various level
executives and should be approved by the Board; and policy should cover issues
such as care for all stakeholders ethical functioning respect for worker’s
right human rights and their environment and activities to promote social and
inclusive development.
8.
CSR POLICY
RULES (2014)
Rule-2(c) states that corporate
social responsibility not limited to projects related to activities, areas or
subjects specified in Schedule-VII of the Act OR programmes related to
activities undertaken by company’s board of directors pursuant to
recommendations of committee of Board as per the company’s declared CSR Policy subject to condition that such policy will
include activities, areas or subjects specified in Schedule VII of the Act.
Rule-3 states that every company
inclusive of its holding or subsidiary and foreign company defined
u/s 2(42) of Companies Act (2013) having its branch office or project office in
India that fulfills
criteria specified in Section 135(1)
of the Act has also to comply these rules. Provision under this rule
states that net worth, turnover or net profit of foreign company as stated shall be in accordance with balance sheet and
profit and loss account of such company prepared according to Section-381(1)(a)
and Section-198 of the Act.
9.
CSR POLICY AMENDMENT RULES (2021)
In order to determine effectiveness
and results of CSR initiatives,
Ministry of Corporate Affairs (MCA) has notified Companies (CSR Policy)
Amendment Rules of 2021. It requires specified companies to undertake impact
assessment through independent agency. Rule-5 of this Amendment says that CSR
Committee has to schedule annual action plan to Board that should include
approved list of CSR programmes to be undertaken in areas specified in Schedule
VII of the Act; manner of execution of the programmes; mandates funding for the
implementation of the programmes; monitoring-reporting mechanism for programmes
and furnishing details of need and
impact assessment for the programmes. Annual
action plan can be altered at any time during the financial year however,
reasonable justification must be provided while altering annual action plan.
10.
CURRENT SCENARIO
OF CSR
After opening up of Indian
economy in 1990, corporate houses were exposed to threat of external competitors. Global competitors had deep pockets and
were able to pay high. Thus concern
of employee’s satisfaction and happiness increased among Indian corporate
houses. Their CSR activities were more concentrated towards creation employable population in society and retaining them from switching to other
competing companies. After that the phase came in which CSR activities in
Indian scenario were directed towards creation of market for goods and services
that were delivered to the society as a whole. Indian industry then started
competing in developed markets of Europe
and America which posed implication for them to comply with entry
level norms like certification for responsible corporate practices like ISO
14000, SA8000, AA100 as well as compliance codes formulated by OECD
and UN global compact. They had to adapt new corporate social responsibility
standards. CSR activities today also are used to build and maintain brand image
of the corporate and invariably used across by Indian corporate today.
Corporate giants are deep
pocketed groups and own huge market share in industry they exist, e.g. TATA
seems to be highest contributor to CSR activities. Tata consultancy services
(TCS) has set up fully equipped computer training laboratory for welfare of
physically handicapped children in Pune for imparting basic computer knowledge. Tata chemicals set up
Tata chemicals society for rural development in 1980 to promote social uplift
projects for communities in Mithapur
(Gujarat), Babrala (MP) and Haldia (WB). ITC have made farmer development vital part of its
business strategy and made major efforts to improve the livelihood standards of
rural communities. In 2008, Coca- cola, India was awarded golden peacock award
for corporate social responsibility for several community initiatives, it had
taken and its efforts towards for conservation of water. Infosys support
activities to institutes and non- government organizations dedicated to
healthcare and education and campaigns for skill development and community
welfare.
Globalization of Indian economy
has led to paradigm shift in the way corporate social responsibilities were
performed in India. It has drifted away from the domain of state owned public
sector giants to players of private sector. The way companies used to look at
CSR activities has also changed from charitable activity to more professional
activity and activity has become more of responsibility and compulsion to
corporate from all perspective of their existence. Indian CSR activities will
keep moving towards more holistic upliftment of Indian society and business of
21st century will have no choice but to implement CSR. Appropriate authorities
and organization needs to take necessary steps to make CSR activities
contribute to all round development
of Indian society.
11.
CSR SPENDING
IN INDIA IN RECENT
YEARS
Data from MCA (2023)[4] indicates top three developmental sectors
receiving CSR funds are education,
healthcare and rural development. These sectors have attracted major funds
owing to their necessity, possible results on society as well as their
alignment with country’s SDGs. Analyzing the numbers from 2014-15 till 2020-21, it can
be deduced that these sectors together comprised nearly 76.6 per
cent of the total CSR expenditure.
|
Sector
|
Areas
|
Funds received
(in crores)
|
Share of Expenditure
(%)
|
|
Education
|
Education, livelihood
enhancement projects, special
education and vocational skills
|
47,188
|
37
|
|
Health
|
Health care, poverty, sanitation
and Swachh Bharat Kosh
|
38,012
|
30
|
|
Rural developm.
|
Rural roads, sanitation, etc.
|
12,300
|
9.6
|
|
The data is based on the filings made by corporates in the MCA-21
registry
|
|||
12.
JUDICIAL DECISION
Case law pertaining to Indian
Companies Act: Keshub Mahindra & Ors v. State of MP & Anr (2014), case
involved discussion around CSR obligations under Companies Act. The law mandates
that companies meeting certain criteria
must spend at least 2 per cent of their average
net profits on CSR activities; failure to comply can lead to penalties,
although the law focuses more on
ensuring compliance than on penal measures. Case highlighted the enforceability
of CSR obligations under Indian law and need for companies to adhere strictly
to their statutory CSR responsibilities.
CONCLUSION
In globalization, corporate
social responsibility can’t be ignored since the social responsibility is an
important feature of every business in modern times. Economic criteria alone
can’t justify the existence of business organizations. CSR is concept that has
become dominant in the business reporting. Every corporate has policy
concerning social responsibility and produces report annually detailing its
activity. It is an integral part of sustainable development. It can be conceived broadly
as practice of incorporating stakeholder and shareholder interest in firm decision making
with an eye to increasing societal and shareholder value. It is the firms’
consideration and response to issues beyond the narrow economic, technical and
legal requirements of the firm. In reality, it is alignment of business
operations with social values and takes into account the interests of
stakeholders in the company's business policies and actions. CSR can be
competitive advantage of corporate if it is practiced in efficient manner.
Practical implementation of CSR is faced with lot of issues and challenges. CSR
is a culture and unwritten contract with the community. This invisible culture
can shape brighter future for the nation. It must be made legally compulsory
that every company has to discharge
certain share of CSR.
Companies should collaborate
with the people on the grassroots level- those who are supposed to receive
their CSR aid. This will help them realize what people actually need and what
their actual problems are and
accordingly plan their CSR aid to
help a number of people with greater
efficiency. In fact, the companies must also compulsorily collaborate with non-
government institutions that have acted in a particular field for at least
three years. This will help them utilize their fiscal resources better as
dedicated NGOs will guide them in effectively implementing their aid
programmes.
[1] Available at: https://blog.ipleaders.in/csr-laws-india/
[2] Kundu, B. (2018). Empirical study of
corporate social responsibility practices in India. PhD thesis submitted to
Dayalbagh educational institute, Agra.
[3] Wood D. J. (1991). Social issues in management: theory
and research in corporate social performance. J. of Management 17(2), Pp. 383-406.
[4] Available at: https://blog.ipleaders.in/csr-laws-india/
Last seen on 3-8-2024.
Article Information
ANALYTICAL STUDY ON CORPORATE SOCIAL RESPONSIBILITY (CSR) & LEGAL IMPLICATIONS
Authors: SMITA R. NAIK, AKSHAY KABRA
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/09/11
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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