Legislative Force Backing Corporate Social Responsibility in India- The way to Go?

1. Introduction to CSR

“Corporate social responsibility is a hard-edged business decision. Not because itis a nice thing to do or because people are forcing us to do it… because it is good for our business.”[1] 
Corporate social responsibility as a concept has traced its genesis from the social responsibility of business in a dynamic business environment referring to its obligation to take those decisions and perform those actions which are desirable in terms of the objectives and values of our society.[2] It is a conscious effort on part of the corporate houses to solve the dichotomypersiting between achieving commercial success and honouring ethical values while developing a sense of responsibility towards the society. Corporate social responsibility (CSR, also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business/ Responsible Business) is a form of corporate self-regulation integrated into a business model and the goal of CSR is to embrace responsibility for the company’s actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders.[3]
2. Evolution of Corporate Social Responsibility as a Business Practice
2.1. CSR as part of Companies Act 1956
To trace the idea of evolution of CSR as an emerging concept in India, it is necessary to analyse the manner in which this increasingly crucial aspect of the business sector underwent exponential rise in importance since the Companies Act 1956. The said statute failed to deliberate upon the essential business practice of Corporate Social Responsibility. The entire Act just includes one section (Section 581ZH- DONATIONS OR SUBSCRIPTION BY PRODUCER COMPANY) which remotely dealt with the enormous concept of CSR in a superficial manner.[4]
The Section specifically terms such activities of serving the society as “Acts of Donation” justified by the principle of mutual assistance emphasising on one of the basic arguments supporting the idea of CSR- Symbiotic relationship persisting between the society (consumers) and the business enterprise/company (producers).  The abovementioned section sets the maximum cap on the amount to be spent for such social welfare purposes, thereby, not obliging the corporate sector to undertake such CSR activities.
2.2.Transformation in the Business Outlook towards Social Responsibility
The concept of CSR is not new to the Indian legal and business setup. Until the 1990’s, CSR were purely categorised as activities of charitable nature involving companies like Tata’s and Birla’s indulging in activities like providing financial grants for needy.[5] However, the corporate sector seems to have picked CSR activities after 1991 economic reforms propounding the policies of liberalisation, privatisation and globalisation which provided a pathway for transformation of Indian businesses into large global enterprises and integrate India Inc. with the global economy.
The beginning of economic liberalization and the free market economy in India has provided an impetus to the realisation in the corporate sector in relation to the social responsibility of such business enterprises towards the various stakeholders of the business concerned.
Such a realisation is rooted in the need to have robust public-private partnerships to engineer social change in a growing economy like India has deduced greater significance.[6]For a greater part of the 20^th century, CSR existed philanthropically and largely centred around activities like donations, planting trees, community development, setting up schools and hospitals, and so on.[7] These activities lay the foundation of an organisation’s role in the societal upliftment and form a primary source of the goodwill of a company.
However, the absence of an obligation on the company to do so, the scale of such activities, the dynamic nature of CSR, its integration into the profit making strategies of the business and the implementation of the programmes therein still remained issues to be addressed. Hence, the need of adopting sustainable practices that in addition to bringing goodwill helps a company remain profitable is the need of the hour. The time has come to amalgamate the two complementary ideas of social responsibility and profitability and plan community development as an important catalyst for business growth benefit. It needs to be emphasised that-
a responsible business is one that is good for people, good for the environment and good for our stakeholders and businesses will succeed only when they operate in vibrant and thriving societies.[8]
The business of the 21-st century India seems to be moving on a path where it will have no choice but to implement CSR and this phenomenon has been reinforced by the recent Companies Bill 2012 and the subsequent Companies Act 2013 (hereinafter both referred to as the Act). The CSR landscape in India has undergone massive transformation in the recent past in the era of liberalisation, privatisation and globalisation and modern economic reform and the scope for improvement in performance in this field continues to exist and can still be worked upon.
3.Legislative Action to Inject CSR into India Inc.
As a result of such transformation experienced in the attitude of the corporate houses towards the idea of Corporate Social Responsibility in light of the path-breaking economic structural and policy changes over the past two decades which consequently led to business operations being shaped by the interests, desires, wishes and consumption patterns of the public. Subsequently, the birth of Companies Act 2013 came into being. The new Companies Bill 2012 was finally passed on 18 December 2012 by the LokSabha.[9]The most revolutionising and bold step on the part of the government in this Bill is the introduction of an unprecedented mandatory corporate social responsibility investment of 2% provided in Section 135 of the said Act.  The only prominent CSR legislation, India has seen prior to this Bill, is the Corporate Social Responsibility Voluntary Guidelines 2009 exemplifying the deplorable state of affairs in this sector.[10]As a result of these legislative efforts and the enactment of the Companies Act 2013, Section 135 of the sad Act titled, “Corporate Social Responsibility”, requires a company to fulfil any of the below mentioned criteria to fall under this Section-

• Companies having a net worth of Rupees five hundred crore or more.
• Companies have a turnover of Rupees one thousand crore or more.
• Companies have a net profit of Rupees five crore or more.[11]

The other clauses of this section deal with the implementation and organisational aspect of the issue. It requires setting up of a Corporate Social Responsibility Committee which is required to initiate a CSR Policy, which shall stipulate how, where, and when they want to invest their funds with respect to this requirement and introduces an accountability element by entrusting the responsibility on the Board directors to provide an explanation for the same if they are unable to do so.[12]It is pertinent to take note of the fact in the present scheme of matters that the absence of any definition of CSR under Section 135 has been partially rectified under Schedule VII which provides some direction on what will constitute as valid expenditure under this Section.
Although, it seems to be a progressive legislation yet it is plagued by several challenges as identified in the subsequent sections which need to be tackled on an urgent basis for successful application of this concept propagating social responsibility of a business enterprise.
4.Impact of CSR as Part of Companies Act 2013 on Stakeholders
The Act has severely impacted the interest groups involved in functioning of a business enterprise through the CSR clause multiplying its importance. As far as the owners are concerned, CSR through the 5 crore net profit criteria deprives even small companies from using the excess profits as capital for the next financial year compelling them to allocate these funds to activities entailing social responsibility. Consequently, such disability caused by the act leads to economic instability and lowers potential to improve performance as the financing required to do the same diminish in value which is seen as detrimental to shareholders interest.[13] The companies are further frustrated by the limited scope of the Companies Act with respect to the range of business enterprises covered under it. As a result of such a restricted nature of the legislation in this sphere, highly profitable partnerships exploiting societal resources and morally obliged to contribute towards the welfare of its creator manage to escape with minimal corporate social responsibility shirking off their voluntary duties.
Mandatory  CSR, often viewed as a pro consumer business ethic[14] as it is traditionally viewed as providing reasonably priced quality goods and services and placing Consumer at the pinnacle of the marketing process. However, at the same time companies formulate pricing strategies in a conniving manner to transfer the burden of the CSR activity costs on the consumers in the form of increased taxes ultimately worsening the situation.[15]
As far as the government as a stakeholder is concerned, the mandatory CSR is its own creation and certainly a tool of assistance to build a Public-Private Partnership mechanism to further the cause of societal development. The Companies Act on the other hand also requires government to act as a monitoring agent to a certain extent pushing up the administrative costs of this body already running on a deficit.CSR also involves creation of the right working conditions and provision of adequate and equitable salaries to workers for their sustenance and often positively impacts them ensuring fair treatment. Absence of any employee related CSR activity in Schedule 7 can lead to employee interests often being ignored but as they form the core of a business operation that is practically impossible.[16]
Environment is of tremendous criticality to a business enterprise as it is a primary source of resources required for its functioning. It is a collective responsibility of the society as a whole to contribute towards the process of environmental protection and the business enterprises being the leading creators of wealth, employment, trade and technology. Simultaneously, these wealth generating extensive commercial bodies also possess huge financial, physical and human resources and the knowhow to solve environmental pollution problems with a preventive approach.[17] Consequently companies like Coco Cola are induced to engage in environmental initiatives including programmes that are focused on water stewardship, sustainable packaging, energy management and climate protection advocating the cause of sustainable development.[18] In an era of rapid industrialisation wherein business activities seem to be adversely affecting the deteriorating environment on a daily basis, the impact of CSR on this stakeholder gains unprecedented importance.
Finally, the community is largely deemed to benefit from the actions of the corporate sector compelled by the Companies Act 2013 directed towards human resource development and creating of basic facilities forming the platform for social upliftment. E.g.- The K C Mahindra Education Trust set up in 1953 undertakes a number of education plans, which make a difference to the lives of worthy students through their various projects like the Nanhi Kali Project.[19]
5. Challenges faced by the Path-Breaking Legislation
The Companies Act 2013 fails to demarcate the scope or define the nature of activities to be covered within the ambit of Corporate Social Responsibility in a comprehensive and definite manner. Schedule 7 of the said Act lays down a range of activities to provide an idea of CSR as envisaged by the Act. However, this list is neither exhaustive nor adequate in nature as the last clause still uses the words, “as may be prescribed” leaving scope for ambiguity and subjectivity. The definition crisis persists as with regard to this practice there are different expectations from different stakeholder groups, different standards, and different practices leading to a fragmented understanding of CSR.[20]
Tracing from the problem of inability to define CSR, there are many activities that companies undertake which serve the dual purpose of being profitable and serving the society on paper.[21]Therefore, under the new law since there is no effort to define activities as CSR, taking advantage of such loophole, companies will be able to classify such profit making activities as CSR with no real change in social welfare. E.g.- A corporate training program to get the required personnel for the organisation deemed as a CSR activity promoting education[Used as a disguise by companies like Aptech, Infosys engaged in education based CSR projects]. This is consequently referred to as ‘Greenwashing” in case of environment and henceforth, the proposed law will increase deception on behalf of such companies carrying out profitable activities serving their selfish interests in the name of CSR.”[22]
Taking the discourse to an alternative paradigm dealing with the issue of impact, Section 135 of the said Act directs the companies to give preference to the local areas with respect to focussing the implementation of their CSR policies. As a result of this, the extent of social benefit derived from such strategies prepared by the companies is much localised and restricted in nature due to the presence of a greater number of companies and manufacturing setups in limited areas (urban centres and rural areas providing cheap raw materials and labour) and hence, the companies get away with flimsy, low scale strategies serving the limited purposes of the population surrounding their establishment which holds minimal value.
The Companies Act 2013 suffers from serious criticism as a result of the insertion of the mandatory clause with respect to CSR as such compulsion is often viewed as unjust and arbitrary for a field guided by economic incentives and profit maximisation. The compulsion element that has been added to an activity which is traditionally viewed as voluntary in nature has been received as a form of tax imposed on business enterprises in an indirect manner causing a certain degree of discomfort.[23] The element of voluntarism and initiative associated with CSR is the primary reason why such activities win goodwill as they are not mandated. Corporations engage in such activities because they care, and not because they are required to. Government imposed compulsions remove the essence of such social responsibility exercised by the business organisations.[24]
In addition to this, an alternate school of thought advances the argument that indulgence in such exercises of charitable nature is unnecessary as companies are profit making mechanisms established with the single most important aim for achieving economic objectives and CSR is in contravention with this philosophy. Business enterprises are often deemed to be unable to understand the nuances associated with the social problems they sought to eradicate through activities proposed to be carried out via their CSR policies due to lack of specialisation in the concerned field.[25] Subsequently, the faulty CSR policies and the government imposed financial burden on such organisations increases the cost of business operation ultimately transferred to the prices of the goods sold increasing the burden on the consumers and the ones benefiting from the idea of CSR are taxed by it as well.[26]
Arguing on the lines of inadequacy and lack of legislative amplitude Companies Act 2013 fails to deal with the primary feature of modern economy- Globalisation under Section 135 as the percentage of profits to be spent on CSR activities fails to specify whether the profits concerned relate to the earnings of a business enterprise just in India or the corporation’s overall profit from global operations. The guidelines for calculating average net profits mentioned in Section 198 of the Companies Act 2013 fail to specify whether income generated from abroad will be considered for the purposes of CSR calculation or not causing ambiguity over this matter.
Moving along the finance-centric angle, the Tax deduction aspect consequently comes into picture as the legislation ignores the issue of CSR being a tax deductible expense for the business enterprise or not further demotivating the companies to carry out such a “voluntary” action. This view was mirrored in Sachin Pilot’s statement after a meeting concerning this issue wherein many corporates raised the issue of tax benefits for the amount they spent on CSR.[27]Based on judicial precedents, the Courts have decided in favour of tax payer when mandated CSR expenses are incurred for local community and for the benefit of employees at large [Atlas Cycle Industries Ltd v CIT ][28].Such a mechanism would definitely encourage the corporates to undertake CSR activities rather than finding loopholes in the law to avoid such spends.
Arriving at an issue intrinsic to the implementation of any progressive cum ambitious legislative strategy, the Accountability aspect led to the introduction of Corporate Social Responsibility Committee into the picture. The constitution of the committee including an independent director gives a hint that this is a full proof provision ensuring that the committee is not just a quasi-committee furthering the board’s interests but is in fact taking up an initiative[29]. This provision has suffered from serious criticism for being very taxing and increasing organisational complications. Adding another committee to an already complex set of requirements is not going to make life any easier for companies. However, the positive side to the accountability aspect is that the scope has increased from just CSR expenditure to its implementation partially taking care of the issue of application of CSR funds raised above. The Actrequires that the financial statements should contain inter alia “the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year.[30]
Finally, the proposed law fails to define and setup an enforcement mechanism and determine appropriate penalties for non-compliance making implementation of this Section a bureaucratic nightmare undermining value for a law already facing several other issues.[31] The Proposal suffers from a critical loophole as Section 135 entrusts accountability on the CSR committee by making them answerable in case the 2 per cent allocation has not been channelized towards CSR activities. However, in case of such inability, the responsibility of the CSR committee is restricted to providing an explanation as to why such an inability exists and the Act provides no explanation as to what are the reasonable grounds in this respect opening up room for corruption, ambiguity and arbitrariness.
6. Plausible Solutions to the Persisting Issue
The definition crisis assumes importance with respect to assisting the companies to formulate effective and impactful CSR policies and keeping a tab on the corrupt practices to escape such responsibility. The Act needs to be amended in order to bring about greater detailing to Schedule 7 deliberating on activities covered under the scope of CSR. Classification, organisation and listing of different categories and types of CSR activities on the basis of reasonable criteria is the only way forward. An example of such tabulation is as follows-

[32]
The reason for having such a table and generating an exhaustive, wide ranging list of activities therein is not to restrict the scope of CSR but to define it and such a should be dynamic in nature capable of being changed over a period of time. It is essential to view CSR as an instrument to satisfy the concerns of the various existing stakeholders thriving in the society and helping the business survive in order to structure a range and options of activities to be undertaken by the business enterprises to promote the cause of CSR. Subsequently, such definability will provide a basic guideline concerning the nature of CSR expected from the corporate sector and considerably reduce the corrupt practices enabling companies to escape with substandard CSR strategies
Furthermore, as far as the localised impact problem is concerned, Section 135 should be amended to the extent of specifying the percentage of amount spent on CSR to be directed towards local areas and allocate the remaining funds towards regions of the country actually requiring financial support in order to maintain a balance growth of the society in an equitable manner.
Taking note of the inadvertent errors giving fire to the omnipresent criticism surrounding the innovative legislative strategy circumscribed by the ideology of compulsion associated with CSR and consequent loss of its essence and the resultant diminishing profits deviating the organisations from their primary goals. Integration of work with goals and the need for regulation for societal benefit is the answer to these 2 interlinked problems.[33] A situation of social action based on initiative often creates a situation of- “When it’s everybody’s job, it’s nobody’s job.”  Companies are unlikely to voluntarily act in the public interest at the expense of shareholder interests. This causes the need for government regulations to arise and for the government to act as an effective protector of public good.
“The main strength of mandatory regulation is that it can create a regulatory system that applies to every company within a given jurisdiction, while voluntary CSR initiatives normally only apply to companies that voluntarily choose to be part of a specific initiative.”[34] In such a situation it’s necessary to ensure that such a system of monitoring and regulation does not reinforce the bureaucratic nightmare of “Inspector Raj”. The reluctance experienced by business organisations to engage in significant CSR activities requiring the need for a mandate traces its roots from the inability of such enterprises to manage the two seemingly conflicting yet complementary goals of profit maximisation and contribution towards social development.
While CSR in India has become an increasingly prominent business practice, companies need to adequately handle the problems faced in its implementation as these organisations suffer from a lack of understanding, untrained personnel, non-availability of reliable data and specific information on the kinds of CSR activities, coverage, and policies that companies should be investing in.[35]It is encouraging to observe that gradually, CSR is coming out of the purview of ‘doing social good’ and is fast becoming a ‘business necessity’. Many corporations are tying CSR as a means to attain business objectives. “Mahindra & Mahindra’s (M&M) watershed project covering 32 villages in Damoh district, Madhya Pradesh is one such example.”[36]Therefore, such organised and planned integration of CSR goals with profit maximisation goals are necessary to ensure that social work and economic work go hand in hand in helping the company progress. Subsequently, while Indian companies are generating methods of incorporating CSR into their business strategy, the Government has played its part in propelling the process and getting India Inc. on board regarding CSR through this significant piece of legislation.
Further criticising the Act on the taxability factor, it can be further amended to introduce a clause in Section 135, highlighting the fact that CSR expenses would be tax deductible in nature and would be thus, subtracted from the profits made for the purpose of tax calculations. This will consequently assuage the grievances of the business enterprises or else mandatory CSR will be perceived by this sector as an additional tax burden imposed upon by the government reaping them negligible profit-oriented benefits. However, the Accounts aspect of the problem is not completely solved by such a change as the income from abroad aspect still needs to be addressed. Section 198 of the Act still continues to ignore the foreign aspect of business operations[37] and change in this respect is needed in the legislation to ensure that foreign income is calculated as part of net profit to determine the amount to be allocated towards CSR. Companies in India in the modern economic model seem to be enriching greatly from their transnational transactions and the Act’s inability to take this factor into account can lead to serious miscalculations which can lead to a great loss of potential CSR funds.[38]
Focussing on the accountability aspect and complications associated with setting up of CSR committee. The root cause for the consequent organisational complexities as a result of Section 135 is the constant communication and system of checks required to oversee the formulation, application and implementation of CSR policies by the Committee and the Board.[39] CSR committee working like an independent organ can ensure greater success for the organisation on this front and subsequently it will avoid the communicational problems and reduce the workload of the Board which has been obligated to act as the Watchdog of CSR work along with the CSR committee under Section 135.
Finally, there is an urgent need to put in place a penalising clause in the legislation to deter companies from avoiding their CSR liability under the Act. The amount to be prescribed as penalty to be paid should be of an amount calculated as a certain percentage of the minimum 2% CSR the company was liable to pay under the Act. As far as the degree of accountability is concerned, the subjectivity surrounding the explanation for inability to execute CSR strategies will persist as it is impractical to limit the explanations to be given to a certain set of reasonable grounds. Henceforth, the companies failing to fulfil their CSR responsibility will have to be dealt with on a case to case basis in order to determine the validity of the reason provided.
7. Conclusion: A Comprehensive Analysis of the Issue in Hand
Corporate Social Responsibility (CSR), as the name suggests, deals with the firms’ recognition of the social obligation towards its immediate environment and the integration of societal development goals with the business profit motivated objectives.The Companies Act 2012 if passed by RajyaSabha and assented by the President will make India would become world’s first country to make investment in corporate social responsibility (CSR) a legal requirement, despite not establishing penalties for noncompliance.[40]Indian businesses by and large have followed a philanthropic, social-initiative based CSR approach for a prolonged period of time. While there is nothing wrong with this approach, the status quo will not propel India into the next era of business competitiveness. Companies like HPCL during 1980s stepped in this path with a humble budget of Rs 18 lakh for carrying out welfare mechanisms for the underprivileged sections of the society.[41]
In the last decade, the concept of responsibility of these profit making agencies towards the public sustaining its activities has brought about a consequent change in the legal regulatory environment surrounding the modern corporate sector. The first time any significant legislative change dealing with CSR was introduced was in 2009[42] when the Ministry of Corporate Affairs released a set of CSR-Voluntary Guidelines for Corporate Social Responsibility, 2009 “The Guidelines set out six core elements for companies to address: respect for all stakeholders; ethical functioning; respect for workers’ rights and welfare; respect for human rights; respect for the environment and activities for social and inclusive development. The Guidelines failed to provide guidance as to what “CSR” is.[43]
Lastly, a stable society is a precondition for stable economic activity, and therefore a company being a member of the society is required to contribute to this. It is essential to not adopt a cynical approach towards mandatory CSR as part of Companies Act 2013. It’s a baby step towards something much bigger which still needs improvements and thus, mandatory CSR is the need of the hour. Interestingly, one report points out that Indian listed companies had a combined net profit of Rs 4,37,167 crore last year.  At 2 per cent, this will yield slightly less than $2 billion a year as the CSR kitty of India Inc., and such a large sum generated every year could solve many of the country’s social and environmental issues.[44] Therefore, corporate social responsibility is the way forward for the corporate sector to realise-“With great economic power, comes great responsibility.”
 
[1]Archie B. Carroll, Corporate Social Responsibility: Evolution of a Definitional Construct, Sage Journals, Business and Society, 233-236, (September 1999)
[2] NCERT, Business Studies for Class XI, 143-144, (8^th Edition Revised)