The Companies Bill, 2012 under Clause 135, has made it mandatory for Indian companies (who meet the criteria provided below) to work towards social objectives. These companies will have to spend a portion of their income on policies framed by their Boards towards the fulfillment of their social responsibilities.
Corporate Social Responsibility (CSR) aims to integrate economic, environmental and social objectives with a company’s operations and growth. Is CSR philanthropy or is it a tool for sustainable development or is it yet another way for the government to assert its dominance over corporates?
Who does this apply to?
Every company having net worth of
- INR 500 crore or more, or
- turnover of INR 1,000 crore or more, or
- a net profit of INR 5 crore or more.
What are the obligations of such a company under Clause 135?
The company is required to contribute a minimum of 2% of its average net profits earned over the last three financial years towards CSR activities based on the recommendations of the CSR committee.
Such company shall during any financial year constitute a CSR committee of the Board consisting of three or more directors, of which at least one director shall be an independent director. The CSR committee shall be responsible for (a) formulating and recommending to the Board, a policy indicating the social activity or activities to be undertaken by the company, (b) recommending the amount to be spent on these social activities; and (c) monitor the company’s CSR policy periodically.
What are or what constitutes these social activities?
Schedule VII of the Companies Bill, lists the nature of what constitutes social activities. According to Schedule VII, companies in their corporate social responsibility policies may include the following activities:
- Eradicating extreme hunger and poverty;
- Promotion of education;
- Promoting gender equality and empowering women
- Reducing child mortality and improving maternal health;
- Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
- Ensuring environmental sustainability;
- Employment enhancing vocational skills;
- Social business projects;
- Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and;
- Other matters as may be prescribed.
There are some disclosure norms that companies have to adhere to in relation the CSR activities undertaken by them and the CSR policies that are framed by their Boards.
CSR initiatives can be conducted either through their actual business practices, or through “extracurricular” activities such as charitable donations, or staff volunteering projects. The CSR policies / activities have to be of mutual benefit to both the corporate and the charity of their choice.
Eammon Bulter of Adam Smith Institute says: “Businesses in general are highly responsible and they have to sell goods, hire people in their local community, they have to maintain workers. Therefore most companies do recognise the responsibilities they have to the wider public. However, what’s happened is politicians have intervened and try to make them spend money in particular ways – ways that suit politicians…”
A case in point would be inclusion of contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.
CSR should ideally impact every area of operations of an organization. For instance, governance and ethics; employee hiring, providing opportunity; stakeholders benefit sharing and energy usage and environment protection. With CSR spending becoming mandatory for prescribed class of companies, there is bound to be increased engagement of companies with social and development projects. So far, there were only voluntary guidelines issued by the MCA for companies to follow. Would these guidelines continue to apply once the Act comes into force?
Charity begins at home
In addition to donating to charities outside or undertaking CSR initiatives, corporates could work on improving employment policies. For instance, CSR could involve
- ensuring health benefits for all employees
- having in place flexible maternity policies to enable a woman employee to rejoin work post maternity leave; investing in child care facilities at the work place and
- ensuring wage parity for women and men.
Assuming a company has been a good employer and is pro-environment in its operations, and fulfills most other criteria for being a good corporate citizen – does it still require to comply with the CSR regime under the Companies Bill? The question is whether organizations can invest in their own workplace – to ensure better standards of work life for their employees? After all, doesn’t charity begin at home?
Interestingly, there appears to be no specific penalty for defaulting on CSR norms. Only an explanation is to be given by the board in its report for such non-compliance. A default under Clause 135 would be covered under the residual default provision that stipulates that for any contravention of the Act, for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first day during which the contravention continues.
What really would such a tooth less provision achieve? Why is this receiving most media attention amongst all the big changes the 2012 bill seeks to bring? Is CSR merely meant to be an ornamental provision – in which case, the undue media attention signals success?