Nallavelli Manasa

1. INTRODUCTION :

Even after six decades of Independence, India is still an under-developed country. Still problems like hunger, poverty, illiteracy, ill-health and malnutrition are prevalent in the society. There is need to look after the socio economic problems prevailing in the society not only by the individuals and Non Governmental Organization but also by the Companies therefore, the Legislature made it mandatory for the certain companies to contribute to Corporate Social Responsibility (CSR). The concept of Corporate Social Responsibility is that, “Companies have to spend a small chunk of their earnings to the society”. India is the first country to make CSR mandatory in the world[1].

2. HISTORY:

The concept of CSR is not new; it has been deep rooted culture in the Indian history. In ancient times CSR is practiced in the form of charity to poor and disadvantaged.

Religion also plays an important role in promoting CSR. Islam provides for a law called “Zakaat” that is , “a portion of one’s earnings must be shared with the poor in form of donations” even in the Hindu law traces of CSR are found, Hindus followed the concept of “Dharmada” where the seller charged a specific amount from the purchaser which was used for charity.

In Pre Independence era, industrial families like Tatas, Birla, Godrej, Bajaj and Singhanias promoted the concept by setting up charitable foundations[2].

Warren Buffet and Bill Gates contributed Rs. 5000 crore by for community development and they have influenced our Indian Corporate Leaders to set up such funds for community development.

3. WHAT IS CORPORATE SOCIAL RESPONSIBILITY?

According to the United Nations Industrial Development Organization, “Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders[3].”

TRIPLE BOTTOM LINE: The ideals and philosophy of Corporate Social Responsibility are succinctly summed up in 3 P’s: People, planet, profit, also known as the triple bottom line[4], and these ideals and practices that are to be followed in every organization.

People: relates to fair and beneficial business practices toward labour, the community and region where corporation conducts its business.

Planet: refers to sustainable environmental practices.

Profit: is the economic value created by the organization after deducting the cost of all inputs, including the cost of the capital tied up.

4. SCOPE OF CSR:

According to Section 135 of the Companies Act 2013,

 Every company having:

  • net worth of rupees five hundred crore or more, or
  • turnover of rupees one thousand crore or more or
  • a net profit of rupees five crore or more

shall constitute a CSR committee and allocate 2% of its net profits of preceding 3 financial years to undertake the activities mentioned in Schedule VII according to the directions of CSR committee.

Rule 3(2) of the Corporate Social Responsibility Rules, 2014 provides that every company which ceases to be a company covered under section 135(1) of the Act for three consecutive financial years shall not be required to:

a. constitute a CSR Committee ; and

b. comply with the provisions contained in subsection (2) to (5) of the said section till such time it meets the criteria specified in sub section (1) of Section 135.

The activities mentioned in Schedule VII are-

Activities relating to –

a. Eradicating extreme hunger and poverty

b. Promotion of education

c. Promoting gender equality and empowering women

d. Reducing child mortality and improving maternal health

e. Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases.

f. Ensuring environment sustainability

g. Employment enhancing vocational skills

h. Social business project

i. Contribution to Prime Ministers National Relief Fund or any other fund set up by central government or state government for socio economic development and relief and funds for the welfare of Schedule Castes and Schedule Tribes and other backward classes, minorities and women and

j. Such other matters as may be prescribed.

Prior to the notification Schedule VII of the Companies Rules 2014, it permitted the companies to carry out the corporate social responsibility activities under 10 heads , which included “reducing child mortality” and combating “HIV, AIDS and other diseases”

The Ministry Of Corporate Affairs filed a letter before the court, “stating it has decided to amend the scope of Schedule VII of the Companies’ Act 2013, to bring in clarity regarding the ambit of “providing preventive health care” as included in the said schedule. It has decided to amend the said item in the schedule as “promoting healthcare including preventive health care” this could encompass the entire healthcare area, including the treatment of diseases, etc[5].

Court decisions:

  • A pharmaceutical company donating drugs or medicines is within Section 135 of the Companies Act 2013, read with schedule VII of the Act and it is a Corporate Social Responsibility activity[6].
  • Karnataka High Court[7] held that, the expenditure incurred by the assesee on installation of traffic signals at baneerghata (in Bangalore) as the expenditure having incurred by the assesse in discharge of its corporate social responsibility.
  • Expenditure incurred in creation of infrastructure for supply of reliable power rural households within a radius of 5km of power station if, the generating company does not intend to meet such expenditure as a part of its corporate social responsibility[8].

5. WHAT ARE THE CONSEQUENCES OF NON COMPLIANCE?

In case of any non compliance, the Companies Act, 2013 imposes an obligation on the board to the company at Annual General Meeting (AGM).

Though there is no specific provision is provided for non compliance for spending on CSR under the Companies Act 2013 Section 450 is an overarching provision for punishing a company or its officers in case of where there is no specific punishment provided for an offence in the act. It says,

“If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made there under, for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default 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 during which the contravention continues.”

However one of the official from Corporate Ministry said, “The new law, which came into effect on April 1, 2014, says if a company isn’t able to give a satisfactory explanation about not spending on CSR activities, the corporate affairs ministry, at most, can question the roles and responsibility of its directors, but can’t act beyond that. “The quantum of penalty in case of non-compliance hasn’t been worked out,”

According to the Economic Times survey, round 14,000 companies are expected to spend about Rs 15,000 crore on various social projects under the mandatory CSR spending[9].

6. DUAL BENEFITS

CSR has dual benefits both to community and to the companies

1. Benefits to the company as well as to the general public- like, Corporate involve in community education, employment, sustainable environmental programs, homelessness programs etc.

2. Company benefits: Importance of CSR initiatives is a powerful branding tool that can build up publicity of the company and it helps in increased sales and customer loyalty and more ability to attract and retain employees.

7. ANALYSIS OF SECTION 135:

There is a need to look after the socio, economic needs of the weaker sections. For instance, IT companies have supported computer training for underprivileged groups to increase the pool of computer literacy people in India.

After the long standing debate, Parliament has passed the Companies Act 2013. One of the important provisions was making CSR mandatory to all the companies whose net worth of rupees five hundred crore or more or turnover of thousand crore or more or net profit of rupees five crore or more during any financial year. The legislators felt that it is necessary that the companies should also look after the socio economic problems and therefore made it mandatory for the companies in the form of CSR.

Corporate social responsibility strategy has to be put in practice with the millennium development goals as lodged by the United Nations and adopted by the Government of India in the 11th five year plan 2007-12, which could cover the areas of education, drinking water/sanitation, health, environment and solar lightening system, infrastructure of backward areas , community development and social empowerment, promotion of sports and traditional forms of art and culture, generation of employment opportunities and livelihood[10].

For example: Pharmaceutical companies have given subsidized medicines to rural areas and penetrated into the rural market. This not only builds the brand image of the pharmaceutical companies in the rural areas but also it is contributing to the society. If companies are provided with penalty clauses, then it would make the companies feel more responsible.

8. CONCLUSION:

There should be a monitoring body to look into the CSR initiatives taken by the companies and it should be provided with sufficient penalties for non-compliance.

The concept of Corporate Social Responsibility is summed up in 3 P’s: People, planet, profit, also known as the triple bottom line and these practices are followed by every organization.

CSR is not about serving the society but to improve the quality of life of local community and society at large.CSR is about giving back to the society what they have earned, in the form of providing assistance or through monetary to the community. Finally CSR is a “curates’ egg.”

——————-

[1] http://www.the4thwheel.com/Blog/india-would-become-the-first-country-in-the-world-to-mandate-corporate-social-responsibility-csr-spending-through-a-statutory-provision-under-clause-135-of-the-companies-bill-2011.html

[2] http://www.csrplanet.in/blog/evolution-of-csr-in-india-bid-3

[3] http://www.unido.org/en/what-we-do/trade/csr/what-is-csr.html

[4] http://highered.mheducation.com/sites/dl/free/0073524697/910345/Appendices.pdf

[5] Mh. Ahmed vs Union Of India 2014 SCC Online DEL 1508

[6] Mh. Ahmed vs Union Of India 2014 SCC Online DEL 1508

[7] Infosys technologies

[8] N.H.P.C Limited vs Punjab state power corporation limited and ors

[9] http://articles.economictimes.indiatimes.com/2014-09-18/news/54068278_1_mandatory-csr-spending-csr-activities-act-2013

[10] G Sundarajan vs Union of India

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Category : Company Law (3466)
Type : Articles (14831)
Tags : Companies Act (1934) Companies Act 2013 (1706) CSR (73)

0 responses to “CSR- History, Consequence for non compliance, Benefit and Judicial Views”

  1. CA Jai Kishan says:

    Dear Sir/Madam

    Please clarify, as to how the profits for the sais purpose are to arrived at?

    It there any deduction permissible while arriving at the said profits?

    Thanks and Regards,

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