Corporate Social Responsibility (CSR) – Mandatory Provision in Companies Bill, 2012
WHAT IS CSR ?
“The price of greatness is responsibility.”
— Winston Churchill
We know that every company is accountable to its investors, rather shareholders. But in fact, every company is not only accountable to shareholder but also to stakeholders as a whole. Any type of corporate entity is surrounded by stakeholders who are affected by the entities business and its objectives. Well, stake holders are Shareholders, Employees, Trade Unions, Customers, Suppliers, Competitors, Government, Industry as a whole and Society at large who are affected by or affects the organization in pursuit of its goal.
CSR emphases on the idea, that a business has social obligations above and beyond making profit and follows from decision by management to expand traditional governance arrangements to include accountability to the full range of stakeholders. CSR is an integrated combination of policies, programs, education and practices and practices which extent throughout a corporation’s operations and into the communities in which they operate.
CSR Advantages:
There are many advantages of CSR implementation like –
1. Socially responsible business practices are linked to positive financial performance by enhancing competitive advantage.
2. Operating Cost will reduce by say Recycling initiatives cut-waste disposal costs and generate income by selling the recycled materials.
3. A company considering socially responsible can benefit both from its enhanced reputation with the public as well as reputation within the business community, increasing the company’s ability attract capital and trading partners.
4. Increased Sales and Customer Loyalty is the major advantage of CSR. Though customers’ key buying criteria are price, quality, safety, convenience etc., CSR comes also in those criteria. [This was confirmed in June when Reputation Institute, a private global consulting firm based in New York, invited about 47,000 consumers across 15 markets to participate in a study that ranked the world’s 100 most reputable companies–all multinational businesses with a global presence. In addition to finding the companies with the best reputations, the study discovered that people’s willingness to buy, recommend, work for, and invest in a company is driven 60% by their perceptions of the company, and only 40% by their perceptions of the products, says Kasper Ulf Nielsen, Reputation Institute’s executive partner. Three of the seven dimensions that drive reputation (citizenship, governance, and workplace) fall into the CSR category—and analysis shows that 42% of how people feel about a company is based on their perceptions of the firm’s corporate social responsibility practices.]
5. Employees’ involvement in decision making lead to increase productivity and quality.
“Corporations must remember that businesses cannot succeed in societies that fail. The need therefore, is to create companies which want to make a difference to the context through society-oriented and charitable activities.”
– Talked on importance of Corporate Social Responsibility by Mr. N. R. Narayana Murthy, Chairman Emeritus, Infosys on the occasion of award by Chirmule Pratishthan at Pune on 29th March 2013
WHAT IS THE MANDATORY PROVISION IN NEW COMPANIES BILL PASSED IN LOKSABHA ?
Companies Bill 2012, as passed by the Lok Sabha, passed on 18th December, 2012 which includes the provision of mandatory in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. However, currently, the Companies Bill awaits approval by the Rajya Sabha (India’s upper house of parliament) and will thereafter likely receive assent by the President of India.
Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.
Provision also includes that company which satisfy the following conditions should constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
(1) A net worth of rupees 500 crore or more;
(2) A turnover of rupees 1000 crore or more; or
(3) A net profit of rupees 5 crore or more in any fiscal year.
The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.
The Board of every company shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
Where, SCHEDULE VII includes following activities which may be included by companies in their Corporate Social Responsibility Policies:
Activities relating to:—
- 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 (AIDS), 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 socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
- Such other matters as may be prescribed.
What is on contravention to Section 134 ?
A company qualifying for it will have to explain if it fails to do so under Section 134 of the Bill which says that any company that contravenes the CSR spend provision, and also fails to explain the reason for the same in its reporting, shall be punishable with a fine not less than Rs. 25,000 but which may extend to Rs. 25 lakh.
Ernst & Young, the audit and advisory company, estimates that the law would cover about 3,000 companies in India and about $2 billion of expenditures on CSR activities. This will likely be the first time in history that a government has implemented mandatory CSR spending for a large number of companies.
KEY PERSPECTIVES OF NEW PROPOSED BILL ON ‘CSR’:
1. Mandatory CSR is inherently contradictory. CSR is fundamentally an inspirational exercise, and it is very difficult to legislate aspirations. Laws only set minimum standards; they do not create any impetus for positive action. For example, it would be difficult to mandate that companies “build excellent schools” or be “generous to the community.”
2. The proposed law can be attacked on the basis of pragmatism as ineffective. It does not even discuss, let alone define, an enforcement mechanism or penalties for non-compliance. The proposal would be an enforcement nightmare, exacerbating an already bad situation where many laws are poorly enforced in India and further undermining respect for law. Curiously, the proposal even includes a loophole. If the 2 % allocation is not made in a financial year, the Board of a company has to submit an explanation to avoid being penalized. Option of explain the sufficient cause of not following 2% of Profit is not fair because is open up much room for corruption and extortion.
3. Mandate of 2% of profit to CSR activity is like imposing additional corporate tax of 2% on profit. Already India is having much higher corporate tax rate compare to other nations of the world. (See Comparative Tax Rates of different countries as per KPMG http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx)
4. In the last decade, India considered as a fastest growing nation by world economy and thus India becomes the favourable global market for investment opportunities. These investment opportunities may be in danger by imposing mandatory law on CSR instead of voluntary.
5. Increase the price of the products will cause an inflation too. Sale to many consumers across the nation who will pay more price because the company would cover the cost of mandatory CSR of 2% from consumers by way of profit. Also most of the customers may not getting benefit company’s CSR activities because company’s CSR activity may in some limited area where few consumers will advantageous while consumers are in out of areas will not be benefited.
6. Even following statements also confusing where the government has not issued any guidelines regarding reporting of spending by companies towards social welfare activities and suitable norms would being place after the new companies bill comes into force. “The government has not issued any guidelines for reporting of CSR spending by companies,” Corporate Affairs Minister Sachin Pilot informed Rajya Sabha in written reply.
7. Mandatory CSR over and above taxation forces companies to do the government’s job. And trying to outsource the state’s primary job is a bad idea.
“However, after the Companies Bill, pass by Lok Sabha and under consideration of Rajya Sbaha, comes into force, suitable rules/guidelines will be issued to give effect to the provision of CSR contained in Clase-135 of the Bill” – Corporate Affairs Minister Sachin Pilot added too
CONCLUSION
CSR if taken as voluntarily i.e. irrespective of mandate of law will directly or indirectly benefit to the company as a whole. If it is to be mandate in law it should have many other areas to consider which again developing the oldest problem of India corruption and inflation.
Many corporate persons in the world believe CSR is great for the company’s future. Few months ago, on Talk on Corporate Social Responsibility by Mr. N. R. Narayana Murthy, Chairman Emeritus, Infosys on the occasion of award by Chirmule Pratishthan at Pune on 29th March 2013 said so nicely that “To effectively contribute through philanthropic activities, corporations need to partner with NGOs and development groups. This is because though organizations may have the financial resources, they may hardly have the time or focus to sustain programmes that cater to society’s demands. Infosys, for example, supported Akshaya Patra for a lunch program in schools. This initiative is the largest NGO-led lunch program in the world and feeds 1.3 million school children every day in India. Through the Infosys Foundation, we have also helped create libraries for underprivileged children in 15,000 villages across India, have provided scholarships to thousands of children, built hospitals, rehabilitated children, sex workers, and destitute, and supported cultural activities.”
So, overall there are mixed views regarding mandatory provision inserted in new Companies Bill. On the basis of overall impact on the corporate world accompanied by the Indian economy many aspects still requires considering. On seeing, India on the efforts way from developing country to developed country, mandatory CSR provision created many issues and thus it should prefer to be voluntary for many companies.
Dwarkesh K. Diwan 