Corporate Social Responsibility

September 12, 2022

Corporate Social Responsibility is often expressed as a company’s commitment to operate in an economically, socially and environmentally sustainable manner whilst recognizing the interests of the stakeholders.

There is no universally accepted definition of Corporate Social Responsibility. Therefore, there cannot be a single approach to Corporate Social Responsibility. The concept of Corporate Social Responsibility is based on the idea that a corporation cannot survive in the society by acting as an isolated entity existing only for its own benefits. Corporate Social Responsibility is a continuing commitment by businesses to act morally and contribute towards the improvement of the quality of life of the employees and their families as well as the local community and society at large.

Lately, Indian judiciary has been so stringent with regards to pollution and injury to the environment that non-confirming factories/enterprises can now be asked to close down. Good corporate governance which aims at maximizing its ethical values triggers social responsibility.

Corporate Social Responsibility is not a new phenomenon. Its roots existed in the Indian culture since ancient times. Charity and philanthropy have always been an integral part of our culture. It is only now that Corporate Social Responsibility has been imposed on certain category of companies via the Companies Act, 2013. Effective from April 1, 2014, qualifying companies must spend at least 2% of its average net profits of the preceding 3 financial years on Corporate Social Responsibility activities. Average profits are to be calculated in accordance with section 197 of the Companies Act, 2013.

Though there have been corporate who have done their bit for the society at large, majority do not take the initiatives unless mandated to do so by the law. Hence, Section 135 has been introduced in the Companies Act, 2013 making Corporate Social Responsibility mandatory for certain classes of companies. The following outlines the said section 135:

1. Section 135 is mandatory for companies fulfilling either of the following criteria:
   1. has net worth over Rs.500 crores;
   2. has a minimum turnover of Rs.1000 crores;
   3. has a minimum net profit of Rs.5 crores.  
2. Companies which falling in either of the above criteria will have to constitute a Corporate Social Responsibility Committee consisting of 3 or more directors of which at least 1 shall be an independent director.  
3. The Corporate Social Responsibility Committee shall:
   1. Formulate and recommend a Corporate Social Responsibility policy;
   2. Recommend the amount of expenditure to be incurred on Corporate Social Responsibility activities;
   3. Monitor the implementation of the Corporate Social Responsibility policy at regular intervals.  
4. The Board shall:
   1. Approve the recommendations of the Corporate Social Responsibility Committee;
   2. Disclose the contents of the policy in its report and place it on the company’s website;
   3. Ensure that the Corporate Social Responsibility activities are undertaken by the company;
   4. Ensure 2% spending on Corporate Social Responsibility activities;
   5. Report Corporate Social Responsibility activities undertaken and disclose any non-compliance, if any, in the Director’s Report and also place it on the company’s website.  
5. A minimum of 2% of the average net profits of the immediately preceding 3 years must be spent on Corporate Social Responsibility activities.  
6. The following is the list of activities that may be included in a company’s Corporate Social Responsibility policy:
   1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation including contribution to the Swach Bharat Kosh;
   2. Promoting education, including special education and employment-enhancing vocational skills, especially among children, women, elderly, and the differently-abled and livelihood-enhancing projects;
   3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old-age homes, and day-care centres;
   4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources, and maintaining quality of soil, air and water; including contribution to Clean Ganga Project;
   5. Protection off national heritage, art and culture, and setting up public libraries;
   6. Promotion of traditional arts and handicrafts;
   7. Measures for the benefit of armed forces veterans, war widows, and their dependants;
   8. Training to promote rural aports, nationally-recognised sports, paralympic sports and Olympic sports;
   9. Contribution to the Prime Minister’s National Relief Fund, or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes. Minorities and women;
   10. Contributions or funds provided to technology-incubators which are approved by the Central Government;
   11. Rural development projects; and
   12. Slum area development.

The Corporate Social Responsibility activities must be undertaken in India. The above provisions also apply equally to foreign companies registered in India.

There is no specific punishment for not spending the requisite 2% either fully or partially. What is required is that the Director’s report must disclose the fact that the company has no been able to spend the 2% amount and must also state the reasons for the same.

Since Corporate Social Responsibility provisions state that expenditure in the ordinary course of business is not Corporate Social Responsibility, it means that any expenditure in furtherance of the main objectives of the company as per the Memorandum of Association cannot be considered as Corporate Social Responsibility.

Neither the Companies Act, 2013 nor the Companies (Corporate Social Responsibility Policy) Rules, 2014 speak of any requirements of a separate audit of Corporate Social Responsibility spending. Hence, currently, Corporate Social Responsibility audit is a part of the statutory audit. A statutory audit can only ensure basic compliance rather than micro-level monitoring. In order to ascertain the effectiveness of a company’s Corporate Social Responsibility policy, a specific audit for the same gains importance. A Corporate Social Responsibility audit can assess how the policies are being implanted and their effectiveness too.

Corporate Social Responsibility is essentially the commitment of a company to contribute for sustainable economic development whilst doing business. Sustainable economic development would mean contribution towards improving the lives of the society at large by activities such as providing educational and healthcare facilities. Companies need to give back to the society for what they take in to achieve their goals. Resources like people, surroundings, raw materials, etc which are used to produce their products and services should be replenished suitably. Only then can we sustain ourselves and our resources for our future use.

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