Unlocking the potential of Corporate Social Responsibility (CSR): (Section 135 of the Companies Act, 2013)
Summary: Corporate Social Responsibility (CSR), as outlined in Section 135 of the Companies Act, 2013, mandates certain companies to engage in social and environmental initiatives beyond mere philanthropy. This section applies to companies meeting specific financial thresholds: a net worth of ₹500 crores, turnover of ₹1000 crores, or net profit of ₹5 crores, requiring them to spend at least 2% of their average net profits over three years on CSR activities. These activities must align with Schedule VII of the Act, covering areas such as education, healthcare, environmental sustainability, and social welfare. The CSR policy must be crafted by a committee comprising at least three directors, including an independent director. Compliance with CSR not only enhances a company’s social impact but also offers competitive advantages, improves customer and employee engagement, and attracts investors. Examples of effective CSR include Starbucks’ sustainability practices, Nestle’s health and education initiatives, and Unilever’s Sustainable Living Plan. However, companies face challenges like financial costs, inconsistent implementation, and potential greenwashing. Despite these hurdles, CSR under Section 135 represents a strategic opportunity for businesses to contribute meaningfully to society while achieving sustainable growth and operational benefits.
Corporate Social Responsibility (CSR) is the combination of 3 words i.e. Corporate, Social & Responsibility which literally means the responsibility of the corporates towards the society. Every organisation operates within the society and is dependent upon the various resources of the society be it natural or human or other resources for its smooth operation. Thus, it is the responsibility of the corporates to contribute to the society in return.
CSR cannot be equated with philanthropy, because in philanthropic activities there is no give and take relationship. However, the corporates carry out CSR activities in exchange for the exploitation of social resources. Thus, CSR is one of the major steps towards the promotion of sustainable development.
Compliance with CSR provisions is not optional now. Companies Act, 2013 mandates certain classes of companies to mandatorily carry out CSR activities. Moreover, in this era of social media and advancement in digital technologies, any noncompliance with CSR provisions or any violation of environmental or human laws may have catastrophic impact on the business and profitability of an entity.
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Why does CSR matter?
Here are some reasons:
- Social Impact: Through CSR activities, centred on issues like poverty, education, healthcare etc. corporates can create a favourable social impact enabling them to have a competitive edge over their competitors. It has been often seen that socially responsible companies are more preferred by the customers. Tata Group is one of the best examples. Through CSR efforts, they help communities thrive.
- Environmental Sustainability: Businesses use lots of scarce natural resources, leaving behind tons & tons of waste every year. A well-planned CSR project focused on caring for our environment can lessen the negative effects of the business activities of any company. Companies must make efforts to reduce their carbon footprints.
- Ethical Practices: By doing CSR, companies show they care about fairness and transparency in everything they do.
- Customer Retention and Profitability: Due to continuous increase in environmental awareness, companies which are ethical and environmental friendly are getting more and more attention from the new customers along with the retention of the existing customers. This ultimately leads to high profitability for any business.
The Legal Framework: Section 135 of the Companies Act, 2013
Section 135 of the Companies Act, 2013 prescribes the provisions related to CSR in India. Let’s understand these provisions in detail:
1. Scope of CSR Activities: Schedule VII of the Act prescribes the types of activities that are covered under CSR. These activities ensure that CSR work addresses important social &/or environmental issues. Company’s CSR Policy must be in line with the above provisions and should include only those activities that are mentioned under Schedule VII. While drafting, approving and implementing the CSR Policy the CSR Committee and the Board must keep this in mind.
2. Applicability: The CSR provisions apply to a company if it meets all or any of these criterion as per the audited financial statements of the preceding financial year:
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- Net Worth of ₹500 crores or more;
- Turnover of ₹1000 crores or more;
- Net Profit of ₹5 crores or more;
These companies need to spend at least 2% of their average net profits of the last three years on CSR ativities. For a company which has been in existence for a period of less than 3 years, this 2% shall be calculated based on the average of the net profit of the period of its existence.
3. CSR Policy & Committee: The above specified companies are required to formulate a CSR Committee consisting of at least three directors; one of whom shall be an independent director. A company that is not required to appoint an independent director under section 149(4) can constitute its CSR Committee with 2 or more directors. This Committee is responsible to draft the CSR Policy of the company & oversee the implementation of the same.
The Seventh Schedule of the Companies Act, 2013 specifies the list of CSR activities that includes:
(i) Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
(ii) Improvement in education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects.
(iii) Encouraging gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
(iv) Safeguarding environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund setup by the Central Government for rejuvenation of river Ganga.
(v) Preservation of National Heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts.
(vi) Measure for the benefit of armed force veterans, war widows and their dependents, Central Armed Police Forces (CAPF) and Central Paramilitary Forces (CPMF) veterans, and their dependents including widows.
(vii) Training to promote rural sports, nationally recognized sports, Paralympic sports and Olympics sports;
(viii) Contribution to the Prime Minister’s National Relief Fund or Prime Minister’s Central Assistance and Relief in Emergency Situations Fund (PM CARES Fund) or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Schedule Tribes, other backward classes, minorities and women.
(ix) a. Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government.
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- Contributions to public funded Universities; IITs; National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Défense Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs)
(x) Rural development projects.
(xi) Slum area development.
(xii) Disaster management, including relief, rehabilitation and reconstruction activities.
Real-world examples of effective Corporate Social Responsibility
1. Starbucks:
Starbucks works at making their business more responsible by following the triple bottom line approach, it is a sustainability framework based upon three Ps: people, planet, and profit. The business strategy behind the logic of such ethical decisions helps people, saves the planet, and provides a profit by means of sustainability and practices that are fair.
2. Nestle:
Nestle does a lot for health and education through programs in nutrition and rural development and has funded many projects in India to access to water, taken sustainability measures to enhance the livelihood of street food vendors, fitness programmes amongst others. These activities have been chosen from the list of recognised CSR work enumerated in Schedule VII of the Companies Act, 2013
3. Unilever:
Unilever has aimed to target “Sustainable Development” through its “Sustainable Living Plan”. A framework that explains commitment towards sustainable development. It provides the easier facilitation of reducing environmental impact while improving quality of life.
Benefits of Corporate Social Responsibility
1. Increased popularity: People trust businesses that deeply care about them.
2. Competitive advantage: CSR makes business stand out! Those who act responsibly can attract and retain customers.
3. Employee involvement: When companies engage in social efforts, employees feel more motivated and committed to their work.
4. Attracting investors: Investors are now looking for CSR compliant companies while deciding where to invest. Overlooking CSR compliances may result in hefty penalties and can erode their investment
5. Risk reduction: By engaging in social responsibility, businesses help reduce risks associated with social and environmental issues.
Challenges of Corporate Social Responsibility:
1. Financial Costs: Sometimes it can cost a lot to implement these initiatives—this may challenge smaller companies’ budget.
2. Inconsistent Implementation: Making sure every department follows through can be tough! If not done properly, it might harm company’s reputation!
3. Greenwashing: Some businesses might exaggerate their responsible practices—this could hurt their credibility!
4. Measurement Complexity: Figuring out the effectiveness of these activities can be tricky! It’s hard to measure how much impact they have created or could create!
5. Balancing Expectations: It’s not easy to meet everyone’s expectations—customers want one thing; investors want another!
CONCLUSION
Corporate Social Responsibility under Section 135 of the Companies Act, 2013, has brought social and environmental considerations right at the heart of business. This is beyond mere compliance with any law but an opportunity for companies to sincerely contribute toward the society and environment in which they operate, while gaining business benefits too.
Companies can contribute to social change, and sustainable growth by embracing Corporate Social Responsibility. This is the strategic method whereby companies benefit at the same time as the communities they serve.
Happy Reading!
Team Businezexcellence
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