Corporate social responsibility is an immemorial age concept in India and can be traced from the period of Vedas where it says that a man can live alone but to survive he need to live in collective way i.e. in a societal way. It further state that peace security order and justice should be there in any rule of society. Without this the state cannot function properly. With the advancement of age this concept of corporate social responsibility was diminished and need to replenish into the society again. Slowly and steadily the concept was re-introduced into the society. When the corporate giants started to earn huge profits society started to demand some in return from these corporate giants as they were utilizing the regions resources both natural and human. The human skills need to be upgraded which in turn needs education, health, etc. in the society. The same was incorporated in companies’ act 2013 which made it mandatory for incorporation of corporate social responsibility in the annual report of the company under the Directors report. All the company whose net worth is exceeding the specified limit have to mandatorily file the corporate social responsibility before the ministry of corporate affairs, incorporate in the annual report and upload it on the company’s website. They have to form a committee of CSR consisting of 3 board members and make such recommendation as they deem fit for the benefit of social responsibility. If a company in any three financial year has reduced the net worth than the prescribed limit then they don’t have to file the CSR report to the authorities. If however they are required to file and not filed the same they are libel to penalize for the same.
Keywords: corporate social responsibility, stakeholders, employees, society, companies act.
The term corporate social responsibility is coined by different authors and writers let’s look some of the terms as defined by few authors for this term:
Michel Hopkins “Corporate Social Responsibility is concerned with treating the stakeholders of a Company or institution ethically or in a responsible manner. ‘Ethically or in a responsible manner’ refers to treating key stakeholders in a manner deemed acceptable according to international norms.
According to European union the term is defined as – A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.” According to Business for Social Responsibility (BSR) “Corporate social responsibility is operating a business in a manner which meets or excels the ethical, legal, commercial and public expectations that a society has from the business.
The World Business Council for Sustainable Development has defined the term as – 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.
As per rule 2(1) (c) of the Companies (Corporate Social Responsibility) Rules, 2014 Corporate Social Responsibility means and includes but is not limited to: (I) Projects or programs relating to activities specified in Schedule VII to the Act; or (II) Projects or programs relating to activities undertaken by the board in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.
Generally defined as a corporate initiative to assess and take responsibility for the company’s effects on the environment and impact on social welfare and to promote positive social and environmental change.
Other definition used in the paper- Listing agreement: Listing Agreement is the basic document which is executed between companies and the Stock Exchange when companies are listed on the stock exchange. The main purposes of the listing agreement are to ensure that companies are following good corporate governance
From the above definitions we can see that CSR is nothing but a social responsibility of a company towards the society and environment at large. As capital and resources are being given to the corporate sector and in return the corporate sector has to give back something in return (Quid Pro Quo). The resources like capital, raw materials, human resources etc. are being used in a company for manufacturing/ producing/ rendering service to the society and in return the society demands that something should be done to the society for its development. Companies maintain the CSR so that it gives a positive impact to the society through economic, environmental and social actions. Corporate social responsibility is not about just giving randomly but about bringing benefits to all its stakeholders, including end users, customers/consumers, employees of the unit and community at large. Corporate responsibility can be otherwise be termed as corporate conscience, corporate citizenship, social performance, or sustainable responsible businesses.
In today’s world if any corporation/ corporate wants to stand in the market then it has to give some benefit to the society and its stakeholders. Which in further develops the society and its employees and can retain their precious human resources being employed in other corporate sectors. This is their primary and fundamental duty to reign the employees, to have a positive impact in the society and to lift their standing in the society- nation. Without adequate CSR no company can sustain in the market and no company can earn a trust in the people who are residing in the vicinity of the company. The whole company is standing on the concept of CSR.
II. HOW CSR EMERGED IN INDIA?
From the below diagram (figure 1) we can see that before the independence the concept of CSR was there but purely on religious basis. Social help was provided by the company who were belonging to a particular community and not to the whole section of the society. There were discrimination in performing the social responsibility towards the society by the company. The company used to pay heavy amount to the religious institution and in that way they were serving the society. After the independence the scenario changed and the philosophy of Ghanaian began to emerge- to serve the society is to serve the nation concept where the public sector came into formation and the utilization of the resources is now being diverted to various groups of the society at the same time the social responsibility of the company is shifted from the religious institution to the society at large as they came to know that if they want to stand in the society then they should have to give something in return to the society who is ultimately helping them to grow their business.
Now the companies slowly started to realize that by serving the society who is helping them to grow they can withstand any situation and the trust of the employees can be kept for a longer period of time than by not fulfilling the obligation towards the society. Here only few companies used to fulfill their social obligation towards the society and not all the companies though they earn a huge amount of profit by using the resources of the region where they have incorporated their company/ industry. By the period of 1991 the concept of globalization was introduced in India and we have become part of globalization. With this, the entry of the new foreign companies came into India and very soon they started to earn huge trust in the Indian Market.
The only reason behind is that they along-with profit maximization they incorporated the concept of corporate social responsibility to the people who are residing in the region where the company is located. This helped them to gain trust and confidence amongst the local people and stated using more resources of the region and in-turn they give a certain percentage of the total profit as social obligation retaining the larger portion with them. Due to this some of the Indian companies were not able to withstand in the competitive market and this resulted in shutdown/ winding up of some of the companies. This also made the national companies to keep their brand name and forced them to give a portion of their total earnings / net profit to the development of the society and helping their stakeholders in various ways so that they can withstand in the competitive market. This continued till the year of 2000- 2001. Afterwards the government of India promulgated that the each and every company should be spending a portion of their profit to the betterment of the society and to all stake-
holders who are related with the company/ industry so the development can be made in the nation and the concept of equality of justice (Economic) can be made now practicable where the intention of the government was that no one should make excessive profit by squeezing the society and not giving quid-pro-quo to its shareholders, end users customers, employees and to the society at large. Now it has made mandatory for every company to show how much they have spent on CSR each year and the same should be incorporated in their Annual Report with a separate heading Corporate Social Responsibility. It’s mandatory to show what all activities have done during the financial year with related to the social responsibility of the company. Though it was made mandatory but nothing was said in the companies’ act 1956 and was silent on this point. This was one of the point incorporated in the listing agreement in the SEBI Listing Agreement Clause 32. Later-wards in the year 2013 the companies act was amended a major provisions of the act was amended. In the amendment a new provisions for corporate social responsibility was also added in the act which now made mandatory for each company to show how much they have spent and what did they do in the reporting financial year and the how many times the committee has been held during the reporting year should be stated in the company’s annual report and should same should also be uploaded in the MCA portal with all details. This is a welcome provision for all companies as now the Indian companies can too give quid pro quo to its all stakeholders.
III. COMPANIES’ PROVISION IN THE NEW AMENDMENT ACT 2013
As per the new amendment act of companies’ act 2013 any company with a:-
- net worth of the company to be Rs 500 crore or more or
- turnover of the company to be Rs 1000 crore or more or
- net profit of the company to be Rs 5 crore or more
has to spend at least 2% of last 3 years average net profits on CSR activities as specified in Schedule VII and as amended from time to time. This rules came into effective from 1 April 2014 onwards for the qualifying companies – those companies which are coming into the above mentioned slabs- and have to adhere the same from 2014 onwards.
The above rules are not only applicable to Indian companies only but to foreign companies who have a branch office or project office in India. The companies who are qualifying and whose net worth meet the above criteria those companies will be required to constitute a CSR Committee consisting of 3 or more directors. The committee so constitute shall formulate and recommend to the Board, a policy which indicates the activities to be undertaken, allocate resources and monitor the CSR Policy of the company. if during the year the company is not able to spent any amount on CSR then the same has to be disclosed along-with the reason for not spending. Non-disclosure or absence of the details will be penalized from Rs. 50,000 to Rs. 25 lakh or even imprisonment of up to 3 years.
IV. ROLE OF THE CSR COMMITTEE
The role of the CSR committee is as follows:
- To formulate and recommend to the board the CSR policy of the company which shall include inter alia CSR activities to be undertaken by the company and the modalities of execution monitoring and implementation schedules of the same. The policy to specify that the surplus arising out of the CSR activities shall not form part of the business profit of the company.
- To identify the CSR projects/ activities/programs to be undertaken by the company in alignment with the CSR policy as defined in schedule VII of 2013 act along with the applicable rules
- To recommend the amount of expenditure to be incurred by the company on the CSR activates in each financial year
- To institute a transparent monitoring mechanism for monitoring progress/ status implementation of CSR activities.
- To receive reports and review activities from executive and specialist groups managing CSR activities.
- To monitor the CSR policy from time to time and revise the same whenever necessary
- To issue a responsibility statement confirming that the implementation and monitoring of CSR policy, is in compliance with CSR objectives and policy of the company
- To prepare an annual report on CSR activities to be included in the board of director’s report in the form provided in the annexure to the companies (corporate social responsibility policy) rules 2014. The same shall be disclosed on the website of the company
- To report the CSR activities undertaken by the company in the manner prescribed under segment c of the form AOC- 3 of the companies (accounts) rules 2014
- To carry out such other functions as may be prescribed under the 2013 act or CSR rules or as may be prescribed by the board from time to time.
The CSR Policy was expected to cover the following four core elements:
- Care for all Stakeholders: Company should respect the interests of all stakeholders, including shareholders, employees, customers, suppliers, project affected people, and society at large etc. and they should create a value for all of them so that they can survive in the competitive market.
- Ethical functioning: The company should be governed by Ethics, Transparency and Accountability
- Respect for Workers’ Rights and Welfare: The workplace environment of all the employees of the company should be safe, hygienic and humane and which upholds the dignity of employees. Along with all necessary facility they should also be provided with necessary developmental skill program so that they can be in commensurate with the current technology.
- Respect for Environment: Utmost care and measures should be taken to check and prevent pollution; recycle, manage and reduce waste generated by the company both solid and liquid, should ensure optimal use of natural resources like land and water, should proactively respond to the challenges of climate change by adopting cleaner production methods, promoting efficient use of energy and environment friendly technologies.
- Activities for Social and Inclusive Development: Depending upon their nature of the company, they should undertake activities for economic and social development of communities such as education, skill building for livelihood people, health, cultural and social welfare etc., particularly targeting at disadvantaged sections of society.
V. NON-APPLICABILITY OF THE PROVISION OF COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) RULES 2014
If any company during the period of three financial year ceases to be a company as defined in section 135(1) of the companies act 2013 shall not be required to constitute a CSR Committee and to comply with the provision of 135(2)-(5) of the act till such time as it meets the criteria as specified in the act again. Thus it loses the right to give 2% of the total turnover to the social benefit of the society until and unless they meet the specified criteria to impose the CSR again. They are exempted to give a report on CSR in their annual report and is not forming part of Directors report. But still they have to give the corporate governance report under which the CSR was falling. The act only excludes to mention about the CSR in the financial year and not about the corporate governance of the company.
VI. PUNISHMENT FOR NON-COMPLIANCE
If any company is falling under the criteria and is not complying with the provisions of the corporate social responsibility then they can be criminally prosecuted. If the authorized officers does not provide the necessary details of CSR then they are liable to pay by way of fine. This is mentioned in section 134 of the 2013 act. as per the act section 134 says that:
(1) The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.
(2) The auditors’ report shall be attached to every financial statement.
(3) There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include–
- the extract of the annual return as provided under sub-section (3) of section 92;
- number of meetings of the Board;
- Directors’ Responsibility Statement;
- a statement on declaration given by independent directors under sub-section (6) of section 149;
- in case of a company covered under sub-section (1) of section 178, company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;
- explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made-
- by the auditor in his report; and
- by the company secretary in practice in his secretarial audit report;
- particulars of loans, guarantees or investments under section 186;
- particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form;
- the state of the company’s affairs;
- the amounts, if any, which it proposes to carry to any reserves;
- the amount, if any, which it recommends should be paid by way of dividend;
- material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;
- the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed;
- a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;
- the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;
- in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors;
- such other matters as may be prescribed.
(4) The report of the Board of Directors to be attached to the financial statement under this section shall, in case of a One Person Company, mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.
(5) The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that–
- in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
- the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;
- the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
- the directors had prepared the annual accounts on a going concern basis; and
- the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
Explanation.–For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;
- the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.
(6) The Board’s report and any annexures thereto under sub-section (3) shall be signed by its chairperson of the company if he is authorised by the Board and where he is not so authorised, shall be signed by at least two directors, one of whom shall be a managing director, or by the director where there is one director.
(7) A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of–
- any notes annexed to or forming part of such financial statement;
- the auditor’s report; and
- the Board’s report referred to in sub-section (3).
(8) If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
Section 134(3) (o) says about the corporate social responsibility wherein the company has to mention about the policy adopted for the corporate social responsibility and if any contravention is made in complying with the provision of the said section the company has to pay fine amounting to Rs. 5,0000/- which may extend up to 25,00,000/- with imprisonment for a term of 3 years along-with fine of Rs. 50,000 which may extend up to 5,00,000/-.
VII. IMPORTANCE OF CSR
If the society is giving something to the corporate sector then in return the corporate sector should give something to the society. By providing some social features to the society the society will able to develop to an extent with the help of corporate sector. If we look to other countries then many of the big corporate sector are providing various schemes to their employees and giving something in return to the society. Nearly 25% to 30% of the income is spent on the social upliftment of the society by the big companies in USA and other countries of the world. In comparison to this our country is spending hardly 10% of the income for the upliftment of the society. If we too spent up to 25%-30% of the income of the big companies to fulfil the social responsibility then the scenario of the Indian companies would be changing and more people of the particular region will stay with company. the minimum percentage of the spending is mentioned in the companies act 2013 which is 2% but even though it is laid in the act not many companies are following it. When society is proving for the expansion of the business enterprise then it’s the duty of the business enterprise to give something in return to the society for their effort that they have given to the company.
Form the above discussion we can see that there is lot more weightage is given to the concept of corporate social responsibility as it the mode through which the business enterprise/ company can give back to their employees/ society for what they have given to them. This will create a bond between the company/ enterprise and the employees. Though the companies act 2013 as amended in 2015 lay down the provision for the CSR it should be followed rigorously instead of taking in a lenient way. Every company should state how much percentage of their income is spent on the CSR and the same should be published in the local and national newspaper in local vernacular and in English so that employees/ people can come across the contribution made by the particular business enterprise to the society.
Cite as: Prakash George M, Corporate Social Responsibility- A New Responsibility For Every Company, 1 Int’l J. of Legal Sci. and Inno. 2 (2019)