Corporate Social Responsibility (CSR) in India

 

 

In news:                                                               

• Recently, the government has decided to expand the scope of corporate spend under Corporate Social Responsibility (CSR) norms.

 

Important facts:

• The corporate tax cut announced by the Union Finance Minister Nirmala Sitharaman , had not only left corporates and stock markets delirious with joy, but also the incubators, across the country.
• The Companies Act requires firms with a net worth of Rs 500 crore, turnover of Rs 1,000 crore or net profit of Rs 5 crore or more, to set aside two percent of their average net profits over the last three years towards ‘approved’ CSR activities. 
• These include initiatives that would have social, economic and environmental impact or a way to give back to the society, such as promoting gender equality, empowering women, promoting education, eradicating hunger, poverty, malnutrition, rural development projects, conserving natural resources, among others.
• Till now, companies were allowed to provide CSR funds to technology incubators located within Centre-approved academic institutions.
• The announcement stated that, the money can be invested on incubators, which are engaged in conducting researches in science, technology, engineering and medicine aimed at promoting sustainable Development Goals (SDGs).

 

Significance of this move:

• The government has also decided to expand the scope of corporate social responsibility (CSR) to two percent spending. Now CSR can be spent on incubators.
• CSR fund can be spent on incubators funded by the Centre or state or any state-owned companies.
• This is expected to attract more funds on research and development in the country
• The decision is expected to bring stronger connect between startups and industry.
• The news was a big boost for the incubators across the country, as they can now get their to fund from the private sector. According to reports, there are around 140 incubators and accelerators in the country.
• It will help encourage startups across the country in securing support from the industry.
•  It will help uplift and upskill several capable engineers across the country,
• In January 2016, various incubators in India, got a boost from the Government, after the launch of the Startup India programme. Today, various state governments, along with the Centre, are encouraging setting up of incubators.
• States like Karnataka, Telangana, and Rajasthan have been in the forefront of setting up of incubators, where government, industry and academic bodies come together to foster innovation and entrepreneurship.
• This will help in improving Indian industry global competitiveness and allow spends on incubators that help boost creation of tech ecosystem.
• The announcement by the government has widened the scope of CSR activities and companies can now contribute towards research across various fields such as science, technology, medicine. 
• This is expected to attract more funds on research and development in the country.

 

CSE spending:

• Spending on CSR has gone up from ₹10,066 crore in 2014-15 to ₹13,327 crore in 2017-18

• Of the over 21,300 companies obliged to report their CSR activities in 2017-18, over 10,800 have complied.

• CSR spending between 2014-15 and 2017-18 was the highest in education, health, fight against poverty and malnutrition, access to clean drinking water, livelihood and for the differently-abled.

 

What is Corporate Social Responsibility (CSR)?

• The term "Corporate Social Responsibility" in general can be referred to as corporate
  initiative to assess and take responsibility for the company's effects on the environment and impact on social welfare.
• It is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders
• In India, the concept of CSR is governed by clause 135 of the Companies Act, 2013.
• India is the first country in the world to mandate CSR spending along with a framework to identify potential CSR activities
• The CSR provisions within the Act is applicable to companies with an annual turnover of 1,000 crore and more, or a net worth of Rs. 500 crore and more, or a net profit of Rs. 5 crore and more.
• The Act requires companies to setup a CSR committee which shall recommend a Corporate Social Responsibility Policy to the Board of Directors and also monitor the same from time to time.

• The Act encourages companies to spend 2% of their average net profit in the previous three years on CSR activities.
• It is a self-regulating business model that helps a company be socially accountable — to itself, its stakeholders, and the public. By practicing corporate social responsibility, also called corporate citizenship, companies can be conscious of the kind of impact they are having on all aspects of society including economic, social, and environmental.
• To engage in CSR means that, in the normal course of business, a company is operating in ways that enhances society and the environment, instead of contributing negatively to them.

 

What activities are allowed under CSR?

• Eradicating hunger, poverty and malnutrition, promoting preventive healthcare,

• Promoting education and promoting gender equality, setting up homes for women, orphans and the senior citizens
• Measures for reducing inequalities faced by socially and economically backward groups,
• Ensuring environmental sustainability and ecological balance, animal welfare
• Protection of national heritage and art and culture
• Measures for the benefit of armed forces veterans, war widows and their dependents
• Training to promote rural, nationally recognized, Paralympic or Olympic sports
• 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 SC, ST, OBCs, minorities and women
• Contributions or funds provided to technology incubators located within academic institutions approved by the Central Government and rural development projects.
• Companies can also collaborate with each other for jointly undertaking CSR activities, provided that each of the companies are able individually report on such projects.

 

Reasons for moving towards CSR:

Some of the drivers pushing business towards CSR include:

• The shrinking role of government: In the past, governments have relied on legislation and regulation to deliver social and environmental objectives in the business sector. Shrinking government resources, coupled with a distrust of regulations, has led to the exploration of voluntary and non-regulatory initiatives instead.
• Demands for greater disclosure: There is a growing demand for corporate disclosure from stakeholders, including customers, suppliers, employees, communities, investors, and activist organizations.
• Increased customer interest: There is evidence that the ethical conduct of companies exerts a growing influence on the purchasing decisions of customers.
• Growing investor pressure: Investors are changing the way they assess companies' performance, and are making decisions based on criteria that include ethical concerns. 
• Competitive labour markets: Employees are increasingly looking beyond paychecks and benefits, and seeking out employers whose philosophies and operating practices match their own principles. In order to hire and retain skilled employees, companies are being forced to improve working conditions.
• Supplier relations: As stakeholders are becoming increasingly interested in business affairs, many companies are taking steps to ensure that their partners conduct themselves in a socially responsible manner. Some are introducing codes of conduct for their suppliers, to ensure that other companies' policies or practices do not tarnish their reputation.

 

Initiatives to promote CSR:

Injeti Srinivas Committee Report on CSR

The committee chaired by Injeti Srinivas, secretary, corporate affairs ministry, has submitted its recommendations on Corporate Social Responsibility (CSR) to the Minister of Corporate Affairs (MCA) Major recommendations are as follows.

Recommendations

• The expenses towards CSR should be eligible for deduction in the computation of taxable income.
• A clarification may be issued that for newly incorporated companies, the CSR obligation under Section 135 of the Companies Act shall lie only after they have been in existence for three years.
• A provision to carry forward unspent CSR balance for three to five years.
• CSR should not be used as a “means of resource-gap funding for government schemes”.
• The Companies (Amendment) Act, 2019,  provides that the CSR expenditure which remains unspent in three years would be transferred to any fund specified in Schedule VII of the Companies Act such as the Swachh Bharat Kosh, the Clean Ganga Fund, and the Prime Minister’s Relief Fund.
• The committee report said that the central government funds should be discontinued as CSR spend, and instead a special designated fund should be created for transfer of unspent CSR money beyond three to five years.

• Aligning Schedule VII of the Companies Act with the  United Nations Sustainable Development Goals.
• The companies having CSR-prescribed amount below ₹50 lakh may be exempted from constituting a CSR Committee.

• The violation of CSR compliance may be made a civil offence and shifted to the penalty regime.
• This is a departure from the recent policy change which had provided for a three-year jail term for violating CSR norms.
• Introducing impact assessment studies for CSR obligations of ₹5 crore or more.
• CSR spending has to be a “board-driven process to provide innovative technology-based solutions for social problems” and that the board has to assess the credibility of an implementation agency, which have to be registered with the MCA to carry out CSR activities.
• Developing a CSR exchange portal to connect contributors, beneficiaries and agencies, allowing CSR in social benefit bonds and promoting social impact companies.

 

 

Significance of CSR in India

 

• Company benefits:

• Improved financial performance;
• Lower operating costs;
• Enhanced brand image and reputation;
• Increased sales and customer loyalty;
• Greater productivity and quality;
• More ability to attract and retain employees;
• Reduced regulatory oversight;
• Access to capital;
• Workforce diversity;
• Product safety and decreased liability.

 

• Benefits to the community and the general public:

• Charitable contributions;
• Employee volunteer programmes;
• Corporate involvement in community education, employment and homelessness programmes;
• Product safety and quality.

 

• Environmental benefits:

• Greater material recyclability;
• Better product durability and functionality;
• Greater use of renewable resources;
• Integration of environmental management tools into business plans, including life-cycle assessment and costing, environmental management standards, and eco-labelling.

 

• To the government

• Reduced pressure on the country s fiscal resources.
• Aids in achieving welfare obligations of the government as investments are made towards education, healthcare etc.
• Bridging of socio-economic disparities.

 

• Engages Corporates in the Development process:

• The responsibility of a corporation to contribute to local development differs fundamentally with the nature and scope of activities of a welfare state.
• Involving corporate sector is an effective way to provide services, especially in India where massive development work is required to reach acceptable living standards.

 

• Achieving Sustainable development goals
• Can help achieve sustainable development goals: CSR aligns private enterprises to the goal of sustainable global development by providing them with a more comprehensive set of working objectives than just profit alone.
• Moral Responsibility:

Corporate sector is dependent on wider society for its business. Business managers have a moral responsibility to protect the interests of society and look after the welfare of their different stakeholders apart from providing goods and services.

• Efficient allocation of available resources:  Large organization have the human talent and financial resources to solve societal problems, hence they should be socially responsive. They are also more efficient and ensure a business and result oriented approach towards social projects.

 

Criticisms of CSR in India

• Tax corporate: CSR is criticized as a tool to tax corporates which already face high taxation in the country. This can make India unattractive for business.
• Regional disparity: Regional disparity CSR spending is concentrated in states of Maharashtra, Gujarat, Andhra Pradesh etc., while North Eastern states escaped the attention of corporates.
• Long Gestation period for projects- many projects require investments over a longer duration before yielding results, this is a major reason for lower than mandated spending on CSR by companies.
• Independent CSR Board: The requirement to establish independent board to monitor CSR not only creates an extra burden but also creates a new conflict between CEO and board.
• Nature of the law: More than a dozen amendments in the law since its enactment has hampered its effective implementation. Some anomalies in tax treatment still remain in the law.

 

Way ahead:

• The thrust towards research-based innovation is a much needed step in the right direction.

• Integration with established private enterprise in key sectors will provide the required impetus for a future ready economy.
• Additional focus to drive social enterprise to drive localised enterprise and employment opportunities, especially around key social services should be encouraged.
• Measures should be taken to promote voluntary undertaking of CSR initiatives by companies. This can be done by inculcating social and ethical values in youth that join the workforce.
• Facilitating collaboration between NGOs, Agencies involved in environmental and social work and corporates this will enable better utilization of CSR funds.
• Encouraging corporates to spend in hitherto neglected areas such as sports, conservation of heritage etc.
• Enabling exchange and sharing of best practices between corporates through CSR summits.
• Rationalizing Corporate tax This must be expedited as higher corporate taxes when seen along with CSR compulsions adversely reflect on the business environment in the country.
• The should be thrust on local area development, as industries are located in India on the basis of the research of raw market availability, transportation costs and, crucially, the co-operative attitude of the local government.

 

Conclusion:

• Corporate Social Responsibility is a significant tool for encouraging ethical business practices and for bridging the socio-economic divides in the country. Therefore,  Non-compliance by corporates should be decriminalized and made a civil offence.

 

Companies Act, 2013: The Companies Act, 2013 consolidates and amends the law relating to companies.  It replaced the Companies Act,1956 by revising the law as per the requirements of the international best practices as well in keeping with the needs of the current economic environment in the country..   Key features are: The concept of “dormant companies” introduced (companies not engaged in business for two consecutive years can be declared as dormant). National Company Law Tribunal introduced. Provision of self regulation with disclosures/transparency instead of government approval based regime. Companies are required to go for maintenance of documents in electronic form. Faster merger and acquisitions including short mergers and cross border mergers. For companies which have net assets of 1 cr. or less, then official liquidators are empowered with adjudicatory powers. Concept of “One Person Company” introduced. Concept of independent directors included as a statutory requirement. Women director for prescribed class of companies. Compulsory provision for constitution of Corporate Social Responsibility (CSR) committee and formulation of CSR policy, with mandatory disclosure for specified class of companies. The term “Key Managerial Personnel” and “Promoter” has been defined to affix the responsibility on main functionaries of the company. Duties of director to shareholders, employees, the community and the environment defined. Listed companies are required to have one director representing small shareholders. Companies Act, 2013 has put a cap on the number of directorships up to 20 companies of which 10 can be public companies. Search and seizure of documents, during investigation, without an order from a magistrate. Freezing assets or disgorgement of illegal gains of company under investigation. Stringent norms made for accepting deposits from the public. Internal audit for bigger companies and auditor is not authorized to perform specified non audit services. Substantial civil and criminal liability for an auditor in case of non compliance. National Financial Reporting Authority (NFRA) to be constituted.   Companies act amendment bill, 2019: The Companies (Amendment) Bill, 2019 passed by the parliament seeks to amend the Companies Act, 2013.  Its key features are: Under the Act, certain classes of public companies are required to issue shares in dematerialised form only. The Bill states this may be prescribed for other classes of unlisted companies as well.  The Bill re-categorizes 16 of the 81 compoundable offences under the Act as civil defaults, where adjudicating officers (appointed by the central government) may now levy penalties instead of fine/imprisonment Allows companies to transfer their unspent CSR funds to a separate account and the same has to be spent within three financial years. In case, the money remains unspent, then it should be transferred to any fund specified in Schedule VII of the Act The Bill changes the deadline for companies to register charges on their property (from 30 days) to 60 days (extendable by 60 days (from present 300 days)). Proposes to transfer some functions from NCLT to the Central government such as dealing with applications for change of financial year and conversion from public to private companies. Under the Act, a regional director can compound (settle) offences with a penalty of up to five lakh rupees. The Bill increases this ceiling to Rs 25 lakh. In order to curb the menace of shell companies, the Bill proposes making non-maintenance of registered office and non-reporting of commencement of business grounds for striking off the name of the company from the register of companies. The Bill requires every company to take steps to identify an individual who is a significant beneficial owner ( if a person holds beneficial interest of at least 25% shares in a company or exercises significant influence or control over the company) and require their compliance under the Act.

 

Source)

thehindu.com/business/firms-can-use-csr-funds-for-rd/article29471805.ece

https://www.livemint.com/news/india/govt-expands-scope-of-csr-spending-1568969432135.html