By- Ms. Aishwarya Deshpande
• INTRODUCTION:
Corporate Social Responsibility (CSR) is a business model that is adopted by a company in order to be socially responsible to the shareholders, stakeholders, the public at large and itself. By adopting CSR practices, a company becomes aware of how its actions and operations impact various social, economic, and environmental aspects of society. Hence, CSR has emerged as an important component in business strategy across the world, in different forms. Particularly in India, there have been multiple policy attempts and discussions to incorporate CSR into the business objectives, before making it into a mandatory legal requirement.
• ADAPTATION OF CSR:
In 2009, the Ministry of Corporate Affairs published ‘Voluntary Guidelines on Corporate Social Responsibility’ guidelines for mainstreaming the concept of business responsibility marking the first step. These guidelines have been prescriptive, advising Indian companies to adopt them to the best extent possible. However, their primary intention has always been to understand the impact of their adoption by the Indian corporate sector, along with considering relevant feedback and related issues that may arise. Consequently, the government aimed to review these guidelines for further improvement, potentially to a prescriptive model for certain companies.
Subsequently, these guidelines were refined as National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Business, in 2011. This was in response to endorsing the United Nations Guiding Principles on Business and Human Rights adopted by the UNHRC. They essentially comprised a set of nine basic principles providing Indian businesses with a comprehensive approach to conducting their operations responsibly. However, their adoption was discretionary for companies, lacking enforceability and, consequently, effective implementation by Indian businesses. During these changes, the 21st Report on Companies Bill, 2009 by the Parliamentary Standing Committee has provided suggestions for provisions that incorporated CSR within the statute to give them enforceability. The committee observed that for checking the non-compliance of these initiatives, annual statutory disclosures made by the directors would be sufficient. Their advocacy for the incorporation of these principles into the bill has led to the formulation of the Companies Bill in 2011.
• CSR COMPLIANCE UNDER COMPANIES ACT 2013:
In 2013, the Companies Act (“Act”) was enacted, explicitly promoting the consideration of various stakeholders’ interests through the clear language of the legislation. Section 166 of the Act showcases the importance given to uplifting the various stakeholders of India. In furtherance to this, the Act also has mandated establishing CSR committees for eligible companies under section 135 , marking a milestone in the evolution of CSR in India. The Act mandates that the companies that are eligible under the section are required to spend at least 2% of the amount prescribed in such activities or areas enumerated in Schedule VII of the Act.
The Act is accompanied by the Companies (Corporate Social Responsibility Policy) Rules 2014 (“Rules”). The Act requires all companies that have a minimum net worth of 500 Cr, or turnover of 100 Cr, or a net profit of 5 Cr during the last consecutive three years to setup a CSR committee responsible for overlooking the CSR policy of the respective eligible company. Further, the Rules provide that branch offices of foreign companies fulfilling the criteria shall also be required to set up a CSR committee. The CSR Committee is primarily responsible for formulating the CSR policy and recommending it to the board which is in compliance with the Act, rules, regulations and other relevant laws.
Schedule VII of the Act provides for the areas or subjects in which the CSR committee shall perform activities related to. These, including but not limited to, eradicating hunger, promotion of education, promotion of gender equality, protection of national heritage, and promotion of rural sports, among many others. In order to maximize the effect of the CSR activities on the stakeholders, the Rules provide for the eligible companies to undertake activities through a section 8 company or registered trust, registered society, etc., either in collaboration with other eligible companies or individually. The Ministry of Corporate Affairs has broadened the scope of this schedule including various activities and efforts combating the spread of the pandemic in 2019, through a circular dated 05th May 2021. Through this, the Ministry has ensured that the stakeholders of India have received additional assistance from non-state entities as well.
The entire purpose of this provision is to ensure that the stakeholders or the public of India at large would be benefited, and their interests are also upheld by the actions of these corporates. The Act and Rules, with the help of MCA circulars, enumerate certain activities, which could be used for masking the true CSR spending from consideration, out of the ambit of eligible activities. These include activities that are specifically and explicitly done to benefit the employees, activities undertaken outside of India, direct or indirect contributions to a political party, sponsorship activities for marketing purposes, etc., from the ambit of CSR activities. Further, to ensure that the amount required to be spent reaches these stakeholders, the Act requires any unspent amount to any of the various funds mentioned in Schedule VII of the Act or into a specific account in any scheduled bank named Unspent Corporate Social Responsibility Account.
- ENFORCEMENT OF CSR:
The Act through its various attempts at successfully enforcing imposes penalties for non-compliance, requires board and director disclosures, and impacts assessments as part of the ensemble of enforcement measures. Any company that is in default of these provisions is liable to transfer the lesser of either a penalty of twice the amount required to be spent on these activities or one (01) Crore rupees into the funds mentioned in Schedule VII. Further, the officers in default are also penalized to the extent of one-tenth (1/10th) of the total amount required to be transferred, providing a deterrent effect ensuring higher levels of strict compliance
The Board of the eligible company is mandated to disclose both the constitution of the CSR committee and the CSR policy adopted by the company, both in the annual board report and on the website of the company. Further, under the SEBI LODR Regulations, the listed companies are required specifically to publish and submit a Business Responsibility and Sustainability Reporting (BRSR) report as a part of the Annual Board Report . These shall include the statement from the directors with respect to the compliance of MCA’s National Guidelines on Responsible Business Conduct of 2018. These guidelines have come in lieu of the NVGs of 2011, enumerating guidelines that are more comprehensively aligning with United Nations Guiding Principles on Business & Human Rights (UNGPs), UN Sustainable Development Goals (SDGs), Paris Agreement on Climate Change etc. Ensuring that these companies are enforcing the provisions related to CSR increases the effectiveness and implementation of these provisions.
The regulators not only regulate the companies incorporated under the Companies Act but also other entities which could significantly influence the stakeholder’s engagement and upliftment in India. The Central Public Sector Enterprises have been mandated to formulate CSR policies that are in compliance with the Guidelines on CSR and Sustainability, in addition to that of the Act and Rules. IRDAI has mandated that the Insurance companies, that are making profits above Rs. 5 Cr, set up a CSR committee and shall contribute 2% of the net profit earned by that company. Even the banks that make profits are required by RBI to contribute 1% of net profit in the form of donations to the various stakeholders and the general public of India.
- CSR RULES AND AMENDMENTS UNDER SECTION 135 OF THE COMPANIES ACT, 2013:
The Ministry of Corporate Affairs (MCA) has gradually modified the Corporate Social Responsibility (CSR) framework under the Companies Act of 2013, with major changes in 2021 and additional modifications in 2022 and 2023. The amendments are intended to improve compliance, transparency, and accountability in CSR activities.
The 2021 amendment introduced detailed definitions to provide clarity and streamline the implementation of CSR activities. The definitions include:
Administrative Overheads: Defined as firm expenses incurred for the administration and general management of CSR tasks, excluding direct expenses for CSR project implementation, design, evaluation, and monitoring. Previously, administrative overheads were not clearly defined, resulting in difficulties in expenditure categorization.
CSR Policy: Now refers to a statement outlining the company’s board’s direction and approach, taking into account the CSR Committee’s recommendations, as well as guiding principles for activity selection, implementation, and monitoring. Previously, CSR policy concentrated solely on the activities mentioned in Schedule VII, with no detailed framework.
Net Profit: The definition specifies that net profit excludes profits from overseas branches and dividends from other companies in India complying with Section 135 of the Act. This provides a clearer financial base for calculating CSR expenditure. Before this, the definition was broader, lacking specific exclusions.
Ongoing Project: A multi-year project that lasts no more than three years, excluding the fiscal year in which it began. Projects that were not initially approved as multi-year but have been extended beyond one year with acceptable justification are also included. Previously, there was no precise classification, making it difficult to categorize these projects.
- CSR Implementation
The 2021 amendment requires firms to conduct CSR operations through registered entities with the MCA by filing Form CSR-1. This registration promotes accountability and systematic execution. Previously, firms could do CSR operations directly or through some qualifying entities without being required to register, which resulted in inadequate oversight. Further, the companies have been empowered, to engage international organizations to design, monitor, and evaluate CSR projects for reducing administrative costs. - CSR Committee Composition
CSR Committee composition requirements have also been updated through the 2017 amendment. Listed and unlisted public companies with independent directors must have a CSR Committee with at least three directors, including one independent director. Private and foreign companies not required to have an independent director must have at least two directors. Companies that no longer meet the criteria under Section 135(1) of the Companies Act are exempt from CSR Committee requirements until they meet the criteria again, offering flexibility for companies with fluctuating financial conditions. - CSR Committee Role and Responsibility
The CSR Committee’s responsibility has expanded with the 2021 amendment. It is now required to develop and recommend a yearly action plan that contains a list of authorized CSR projects, implementation strategies, and monitoring systems. This organized method guarantees that CSR activities are consistent with the company’s policy and efficiently handled. Previously, the committee’s primary responsibility was to oversee CSR policy without formal planning requirements. Since 2022, the companies exempted earlier from constituting CSR committee, are required to constitute CSR committee at the board level, in case amounts are being utilized for ongoing projects. - CSR Expenditure
The 2021 amendment caps administrative overheads to 5% of total CSR expenditure, ensuring a significant portion of funds go directly to CSR projects. Surplus from CSR operations must be reinvested in the same project or transferred to the Unspent CSR Account, which prevents corporations from considering it as business profit. Previously, there was no cap on administrative overheads, and surplus handling was not explicitly defined, leading to potential misuse of funds. - Reporting and Disclosure
Annual CSR reports now require an impact assessment for projects with an outlay of Rs. 1 crore or more, conducted by an independent agency. The Board report must include disclosures on CSR initiatives and projects on the company’s website to provide transparency. Previously, CSR reporting was less severe, with no obligatory impact assessments and fewer disclosure requirements.
The CSR-2 Form, introduced in 2022, marks a significant shift in CSR reporting by requiring full disclosures on CSR activities to improve transparency and consistency. Previously, reporting was less extensive, with Board reports serving as the primary source.
Impact assessments became mandatory for CSR projects with significant outlays from 2022. Companies that spend Rs. 10 crore or more on CSR must now examine the impact of projects that cost Rs. 1 crore or more, with assessments costing no more than 5% of total CSR expenditure, or Rs. 50 lakhs. This change ensures effective use of CSR funds and better accountability.
The 2021 amendment mandates the transfer of unspent CSR funds related to ongoing projects to a specified separate account, ensuring funds are utilized for their intended purposes.
- CONCLUSION:
As enumerated above, constant attempts have been made to incorporate stakeholders’ upliftment into business structures through various means, showcasing a progressive and positive stance towards sustainable social welfare and corporate responsibility. The implementation of CSR has yielded a significant tangible impact, including enhanced community engagement and effective social projects. However, these efforts are not enough as they have been riddled with various challenges, including effective redressal mechanisms for stakeholders, small penalties levied, lack of effective monitoring mechanisms, etc. Proactive efforts in collaborating between companies, stakeholders, general public, NGOs, and government would assist in the effective enforcement and increasing the reach of CSR policies.
[i] Corporate Social Responsibility and Voluntary Guidelines, ‘CORPORATE SOCIAL RESPONSIBILITY’.
[ii] Ministry of Corporate Affairs, ‘History’
https://www.csr.gov.in/content/csr/global/master/home/aboutcsr/history.html accessed 5 July 2024
[iii]The Companies Act 2013, s 135.
[iv] The Companies Act 2013, Schedule VII.
[v]General Circular No. 09/2021, Ministry of Corporate Affairs, dated 05/05/2021.
[vi] General Circular No. 14/2021, Ministry of Corporate Affairs, dated 25/08/2021.
[vii]The Companies Act 2013, s 135.
[viii]‘LODR – Regulation 34’ (Companies Act Integrated Ready Reckoner | Companies Act 2013|CAIRR) < https://ca2013.com/lodr-regulation-34 /> accessed 5 July 2024
[ix]Anonymous, ‘National Guidelines on Responsible Business Conduct *’ (2019) 9 IPE Journal of Management 68 < https://libproxy.library.unt.edu/login?url=https://www.proquest.com/scholarly-journals/national-guidelines-on-responsiblebusiness/docview/2398640375/se2?accountid=7113%0Ahttp://dq4wu5nl3d.search.serialssolutions.com?ctx_ver=Z39.88-2004&ctx_enc=info:ofi / >.
[x] RBI Circular, ‘Donation by banks’, Reserve Bank of India, dated 21/12/2005.
[xi] Supra, Note 3
[xii] Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.
[xiii] Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022
