Covid-19 Pandemic – Defining CSR and its Relevance

CORPORATE SOCIAL RESPONSIBILITY IN TIMES OF COVID-19 PANDEMIC DEFINING CSR AND HIGHLIGHTING ITS RELEVANCE

Corporate Social Responsibility, or CSR, a term coined by Howard Bowens’, is a self-regulatory business model that enables a firm to be socially accountable to its stakeholders and the general public. As the COVID-19 pandemic hit the world, the need for work-from-home became a norm and employees needed more support than ever from their companies. In such a time, incorporating CSR initiatives played an important role for the companies as pandemic reinforced ideas such as customers are paying attention towards the social behavior of a company and employees want to regain engagement through charitable causes. Hence, CSR contributions from corporate houses became a possible avenue for addressing the shortage of funds caused by the world-wide lockdowns.

Ensuring that the CSR activities are designed in such a manner that they match employees’ needs and expectations, are accessible and make an impact in the community is a task of the management and directors of the company. CSR not only benefits a company with productivity, profitability and retention but also creates a society-friendly image of the company through the good that it is doing. The Indian Parliament enacted the Companies Act, 2013¹, incorporating the concept of CSR, and by this introduction, India became the only country to have a mandatory statutory policy for CSR. Further amendments made in the Act with regards to CSR in letter and spirit helped in distinguishing between charity and responsibility under Section 135 and Schedule 7 of the Act. The aim behind such incorporation is to ensure a balance between the primary objective of generating profits while also “giving back” to the society for the utilization of resources.

The impact that societal movements can have on companies and corporations is visible all around the world. Unilever and Johnsons and Johnsons. though not legally bound, were socially pushed to take down their fairness products as a part of social responsibility towards the community.² To spread a message of social distancing in the coronavirus pandemic, Coca-Cola and Audi upgraded their iconic logos when the former separated each letter in the logo to convey the message “staying apart is the best way to stay united”, the latter separated the four rings.³ This shows that multinational companies across the globe are getting conscious of the socio-political issues surrounding the world and recognize its impact on their profit making objectives. Hence, adopting a well-defined structure and framework of CSR is significant for corporate companies to realize their role in society.

IS THE INDIAN LEGAL FRAMEWORK ON CSR READY FOR THE PANDEMIC?

No doubt, the companies provided bountifully to the Government funds when the pandemic hit us through monetary and non-monetary donations. Corporate houses provided preventive healthcare facilities not only to their employees but also to the general public at large, facilitated in providing resources for distribution of food and other necessities in economically weaker sections of the society and the like. The emphasis is to analyze whether the existing CSR framework including the recently announced government instructions and FAQs is suitable to permit the most effective use of CSR for COVID-19 given the urgent need for finances.

The existing CSR framework mentions that every company having net worth of INR 500 crore or more, or turnover of INR 1000 crore or more or a net profit of INR 5 crore or more during the immediately preceding financial year shall among other things develop a CSR policy in terms of Schedule VII of the Act.⁴ Each fiscal year, every qualified corporation must spend at least 2% of its average net income over the previous three fiscal years on CSR initiatives. Failure to do so must be disclosed in the annual report of the company’s board of directors. The Ministry of Corporate Affairs (MCA) through various circulars cleared the air around the treatment of expenditure made as CSR expenses by companies in view of the COVID 19 pandemic. Other adjustments, on the other hand, are required to achieve a larger CSR contribution and tackle criticism aimed at policy implications on the ground. As a result, in light of the pandemic, the MCA may look at the following recommended changes to the Companies Act.

Firstly, it is proposed that this excessive expenditure made by the companies in lieu of CSR may be carried forward and set off against the subsequent financial years to incentivize corporate companies to contribute profusely in these testing times.⁵

Secondly, although Section 135(7) does not imply criminal liability, it still requires the imposition of hefty fines for failure to comply with CSR regulations as held in Pan Asia Logistics India Private Limited.⁶ Similarly in the case of Chettinad Earth Movers Private Limited⁷, the company’s non-disclosure of CSR policy developed and implemented led to the violation of Section 135 of the Companies Act, 2013. This means that corporations must go through the onerous process of implementing CSR while incurring large costs, and they must still pay tax as an additional obligation. This condition is particularly unreasonable and arbitrary, given that prior to the enactment of Section 135 of the Act, businesses could claim a tax deduction for similar activities under the Income Tax Act of 1961⁸.

Additionally, imposing strict rules on CSR would detract the companies from fulfilling the original purpose of CSR and would only comply with the requirements in order to avoid penalties rather than implementing their social responsibility of pursuing the pillars of sustainability on which CSR was formulated.

The MCA can, through parliamentary approval, provide a favorable treatment to the company that spends more than the minimum threshold limit. As per the current framework, contributions made in excess of 2% in any financial year are unaccounted for in the calculation of CSR of the company and as a consequence of this, significant contributions in excess to the minimum limit set out by the Act are abstained by the company and the CSR project suffers. However, if the excessive contributions are not accounted for in the CSR calculations, then this support will go down the drain and the urgent need for funds won’t be catered to. Consequently, even though the current framework is relatively strong, certain legal reinforcements, as outlined above are required to ensure an immediate influx of excessive CSR contributions during the pandemic and more coherent and consistent utilization of these funds.

CSR and Sustainable Development

Organizations are supposed to develop their CSR policies while keeping in mind a scope for sustainable development ensuring health and wealth of the community. In 2015, the Sustainable Development Goals were adopted by 193 countries of the United Nations, including India, which set the goals to be achieved by the year 2030⁹. Achieving these targets requires a collective effort of the governments, businesses, and civil society to foster solutions to these problems and achieve these goals for a common theme of sustainable development. Since the Indian legal framework on CSR and SDGs were formulated around the same time, they have a potential to bring out an enormous and consistent model for sustainable growth. In the post pandemic world, corporates can be opportunistic enough to change the narrative of CSR from merely achieving the statutory requirements to voluntarily contributing for a worldly cause of achieving the SDGs and reviving livelihood in communities with their corporate aid and expertise.

CONCLUSION

The pandemic has created an air of ambiguity among the companies to differentiate their activities between CSR and non-CSR activities. The guidelines and FAQs provided by MCA helped to solve the confusion and also facilitated in providing clarity with regards to treatment of CSR activities implemented by the companies as a fight against the virus. Interlinked policy decisions of SDGs and CSR will lead as a boon to the corporate houses. Building a sustainable company is not every man’s cup of tea but by taking cues from the aims and goals set by the United Nations for universal sustainable development, one can plan a long-term route through consistent compliance for the enjoyment of the business, the stakeholders, the society and the world. The author wants to conclude by stating that the key to achieve all of this and more lies with CSR initiatives.

Notes

¹ The Companies Act, 2013, §135, No. 18, Acts of Parliament, 2013 (India) [hereinafter the Act].

² Smriti Mishra, #BlackLivesMatter: From Unilever to PepsiCo and Johnson & Johnson, brands take a stand against racial discrimination, Financial Express (Jan. 15, 2022, 10:45 PM) https://www.financialexpress.com/brandwagon/blacklivesmatter-from-unilever-to-pepsico-and-johnson-johnson-brands-take-a-stand-against-racial-discrimination/2004663/.

³ Brett Molina, Companies are changing their logos to promote social distancing and thwart the coronavirus, USA Today (Jan. 15, 2022, 11:05 PM) https://www.usatoday.com/story/money/2020/03/27/social-distancing-coco-cola-audi-others-change-logos-promote/2924274001/.

⁴ The Act, Sch VII, §135.

⁵ Ayush Vijayvargiya, Is the Indian CSR Legal Framework COVID Ready? IndiaCorpLaw (Jan 16, 2022, 9:29 PM) https://indiacorplaw.in/2020/05/is-the-indian-csr-legal-framework-covid-ready.html.

⁶ Pan Asia Logistics India Private Limited, 2018 SCC OnLine NCLT 11589

7 Chettinad Earth Movers Private Limited, 2018 SCC OnLine NCLT 28247

⁸ Ministry of Corporate Affairs,https://www.mca.gov.in/MinistryV2/faq+on+csr+cell.html (Jan. 16, 2022)

⁹ United Nations, https://sdgs.un.org/goals (Jan. 17, 2022).