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Companies Act 2013: Redefining Corporate Social Responsibility

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 Companies Act 2013: Redefining Corporate Social Responsibility

Aqa Raza*

Introduction
The concept of social responsibility among businessmen, particularly in India, is not new and
can be easily seen in the form of magnificent temples, high mosques, large dharmshalas and
great educational institutions. Indian literature is full of incidents when businessmen have
gone out of the way to help extract kings and societies out of crises. Many Indian businesses
are known for staying one step ahead of the government, as far as the welfare of employees
and societies is concerned.

Till the late twentieth century, the mission of business firms was exclusively economic. With
the business environment being characterised by various developments including the shift of
power from capital to knowledge, increased levels of literacy and the shrinking of
geographical boundaries due to faster means of navel and communication, people are, by and
large, becoming conscious of their rights, which has led to a rise in the expectations of
society from business. The often narrated success stories of middle or lower income
individuals turning into billionaires have generated a lot of excitement and people at large
expect business organisations to treat them as partners in wealth creation rather than as
merely recipients of their donation. No amount of coercion can compel corporate houses to
realise their sense of responsibility, as it has to come from within.1

Over the years, the nature of the involvement of business houses with social causes has
undergone a change. It has moved away horn charity and dependence to empowerment and
partnership. In today's well-informed world, the setting up of a business on the basis of
financial strength is not a blanket licence to mint money, and businesses have to be sensitive
to the expectations both of society and of regulators. Businesses have to associate themselves
with various groups in society, including religious groups, compelling them to become
habituated to operating in a pluralistic society wherein no group is in a position to exert
inordinate power but the functioning of each group has an impact on the other. The existence

* Student of LL. M. (Commercial Law) Final year, Faculty of Law, Aligarh Muslim University, Aligarh
(Uttar Pradesh, India), email: aqaraza@rediffmail.com; Contact: +91 7417037864.
1
Sanjay K Agarwal, Corporate Social Responsibility in India (SAGE Publications, 2008).

Electronic copy available at: http://ssrn.com/abstract=2707169

of these various groups not only helps keep the desired check on the powers and wild wishes
of others, but also ensures that each group is aware of what the others are doing.

An organisation receives inputs from society in the form of skilled/unskilled labour, raw
material and natural resources, and, in turn, offers goods and services to society. Thus
businesses depend on society for their existence and it is in their interest to take care of
society. While industry provides employment opportunities and thus facilitates socio-
economic progress, it also displaces people, and the onus is, therefore, on industry to ensure
proper infrastructure facilities. Business cannot operate either in isolation or in a vacuum.
Like individuals, businesses also need to live in the real world, i.e., in society. Industrial
growth brings, in its wake, various social problems and it is the moral and social duty of the
corporate sector to address them. A developing nation like ours cannot bank on just the
government's efforts or funding from global agencies. It needs corporate intervention for
sustainable development.

The present paper helps in understanding the meaning of business beyond financial numbers
and tries to explain how even Corporate Social Responsibility (hereinafter referred to as
CSR) can be used as a marketing tool and for business benefits. It dwells comprehensively
upon the concept of CSR, from its inception as philanthropy till its journey to a form where
now it is mandatory to be sensitive about CSR in businesses with special reference to the
provisions of the Companies Act, 2013.

Conceptualization of Corporate Social Responsibility

Corporate Social Responsibility (CSR) can be defined as the 'ethical behaviour of a company
(or say business) towards society'. It means engaging directly with local communities,
identifying their basic needs, and integrating their needs with business goals and strategic
intent. The government perceives CSR as the business contribution to the nation's sustainable
development goals. Essentially, it is about how business takes into account the economic,
social and environmental impact of the way in which it operates. Simply stated, CSR is a
concept which suggests that commercial corporations must fulfil their duty of providing care
of the society.2

2
C. Gopala Krishna, Corporate Social Responsibility in India: A Study of Management Attitudes (Mittal
Publications, 1992).

Electronic copy available at: http://ssrn.com/abstract=2707169

CSR is the process by which managers of an organization think about and evolve their
relationships with stakeholders for the common good, and demonstrate their commitment in
this regard by adoption of appropriate business processes and strategies.CSR does not
emanate directly from external demands but instead from organizationally embedded
processes. These processes prompt the organization to view its relationships with
stakeholders in a different perspective, which in turn influences its engagement with them.

Thus CSR is not charity or mere donations. CSR is a way of conducting business, by which
corporate entities visibly contribute to the social good. Socially responsible companies do not
limit themselves to using resources to engage in activities that increase only their profits.
They use CSR to integrate economic, environmental and social objectives with the
company‟s operations and growth.

Significance of Corporate Social Responsibility

Corporate Social Responsibility (CSR) has been in existence for a long time and is almost as
old as civilization. It is based on the Gandhian Principle of “trusteeship concept” whereby
business houses are looked upon as trustees of the resources they draw from society and thus
are expected to return them back manifold. CSR is extremely important for sustainable
development of all stakeholders (all the people, on whom the business has an impact,
including the society at large). Proponents of CSR argue that companies make more long
term profits by operating with a perspective, while critics argue that CSR distracts from the
economic role of businesses. Nevertheless, the importance of CSR cannot be undermined.3
Corporate social responsibility is also called corporate conscience, corporate citizenship,
social performance, or sustainable business. It is a form of corporate self regulation integrated
into a business model. CSR policy functions as a built in, self-regulating mechanism whereby
a business monitors and ensures its active compliance with the spirit of the law, ethical
standards and international norms.

Genesis of Companies Act, 2013

The Companies Act, 2013 („2013 Act‟), enacted on 29 August 2013 on accord of Hon‟ble
President‟s assent, has the potential to be a historic milestone, as it aims to improve corporate

3
Pushpa Sundar, Business and Community: The Story of Corporate Social Responsibility in India (SAGE
Publications India, 2013).
governance, simplify regulations, enhance the interests of minority investors and for the first
time legislates the role of whistle-blowers. The new law will replace the nearly 60-year-old
Companies Act, 1956 („1956 Act‟).

The 2013 Act provides an opportunity to catch up and make our corporate regulations more
contemporary, as also potentially to make our corporate regulatory framework a model to
emulate for other economies with similar characteristics. The 2013 Act is more of a rule-
based legislation containing only 470 sections, which means that the substantial part of the
legislation will be in the form of rules. There are over 180 sections in the 2013 Act where
rules have been prescribed and the draft rules were released by the MCA in three batches. It
is widely expected that the 2013 Act and indeed the rules will provide for phased
implementation of the provisions and in line with this, 98 sections of the 2013 Act have been
notified and consequently the corresponding section of the 1956 Act cease to be in force.

The 2013 Act has introduced several provisions which would change the way Indian
corporate do business and one such provision is spending on Corporate Social Responsibility
(CSR) activities. CSR, which has largely been voluntary contribution, by corporate has now
been included in law. Basis the CSR provisions, as laid down under the 2013 Act and the
draft CSR rules made available for public comments, in this bulletin we bring out the key
provisions, analysis and challenges relating to the compliance of these provisions for
companies to consider.4

Corporate Social Responsibility under Companies Act, 2013

Corporate Social Responsibility (CSR), a term widely use for defining the responsibilities of
corporate world towards the society & environment. Although the term is not new in this
corporate world but its scope & meaning has undergone major changes from treating it as a
mere charity in comparison with the responsibilities/duties of the corporate towards the outer
world. As per the Companies Act, 2013, every company having a net worth of rupees five
hundred crore or more, or a turnover of rupees one thousand crore or more or a net profit of
rupees five crore or more, during any financial year, shall ensure that the company spends, in
every financial year, at least two per cent of the average net profits of the company made

4
Subhasis Ray and S. Siva Raju, Implementing Corporate Social Responsibility: Indian Perspectives (Springer
Science & Business Media, 2014).
during the three immediately preceding financial years, in pursuance of its Corporate Social
Responsibility policy.5 The application is to every company, including its holding or
subsidiary and a foreign company having its branch or project office in India6.

The Ministry of Corporate Affairs (MCA) has vide its notification dated 27 February 2014
and in exercise of powers conferred by Section 1(3)7 of the Companies Act, 2013 (the Act),
notified 1 April 2014 as the date on which the provisions of Section 1358 and Schedule VII of

5
Section 135 of Companies Act, 2013
6
http://www.mondaq.com/india/x/302204/Corporate+Commercial+Law/Corporate+Social+Responsibility+No
w+A+Mandated+Responsibility (Retrieved on January, 2014)
7
Section 1(3) of the Companies Act, 2013 reads as: “This section shall come into force at once and the
remaining provisions of this Act shall come into force on such date as the Central Government may, by
notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this
Act and any reference in any provision to the commencement of this Act shall be construed as a reference to the
coming into force of that provision.”
8
Section 135 of the Companies Act, 2013 reads as:
“Corporate Social Responsibility.- (1) 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 during any financial year shall 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.
(2) The Board's report under sub-section (3) of section 134 shall disclose the composition of the
Corporate Social Responsibility Committee.
(3) 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.
(4) The Board of every company referred to in sub-section (1) 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
(5) The Board of every company referred to in sub-section (1), shall ensure that the company
spends, in every financial year, at least two per cent. of the average net profits of the company
made during the three immediately preceding financial years, in pursuance of its Corporate Social
Responsibility Policy:
Provided that the company shall give preference to the local area and areas around it where it
operates, for spending the amount earmarked for Corporate Social Responsibility activities:
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.
Explanation.—For the purposes of this section “average net profit” shall be calculated in
accordance with the provisions of section 198.”
the Act shall come into force. The MCA has also notified the Companies (Corporate Social
Responsibility Policy) Rules, 2014 (the Rules) to be effective from 1st April 2014.

Companies are required to constitute a CSR committee consisting of three members,

including one Independent Director with the following roles:
(i) Formulate CSR strategy and activities through a CSR policy
(ii) Recommend expenditure amount
(iii) Regularly monitor CSR policy and activities.

The Board of Directors shall be responsible for approving the CSR policy; disclosing its
contents in the Board Report; making it public on the company‟s website and deploying the
funds. Companies otherwise not required to have Independent Director under the Act need
not have an Independent Director on the CSR committee. Similarly private and unlisted
companies with a requirement of only two directors can constitute a two member CSR
committee. Companies are under obligation to continue unless fails to meet the eligibility
criteria for three consecutive years. If a company fails to meet its CSR obligation, the Board
will have to specify reasons for non-compliance in its report. Failure to report on CSR
obligation may have penal consequences for the company up to a maximum of INR2.5
million (USD42, 000).

Provisions of Companies Act, 2013 on CSR

Companies Act of 2013, which has already been notified partially, gives the concept of CSR
the importance it deserves. Section 135 of the Companies Act, 2013 contains provisions
exclusively dealing with Corporate Social Responsibility. Schedule VII contains a list of the
activities which a company can undertake as part of its CSR in initiatives.9

1. Applicability and Constitution of a CSR Committee

Section 135 of the 2013 Act states that every company having:
(i) Net worth of Rs 500 crore or more, or
(ii) Turnover of Rs 1000 crore or more ,or
(iii) Net profit of Rs 5 crore or more during any financial year shall constitute a Corporate
Social Responsibility Committee of the Board.

9
Shri G Sekar, The Companies Act 2013 (Shree Guru Kripa's Institute of Management).
The committee would comprise of three or more directors, out of which at least one director
shall be an independent director.

2. Composition of CSR Committee

The Company should constitute a Corporate Social Responsibility Committee as follows:
(i) The Committee shall consist of minimum 3 (three) including 1 (one) Independent
Director, however in case of Private Company or the Company, which is not required to
appoint Independent Director on board, or Foreign Company the committee can be
formulated with (2) two directors.
(ii) The CSR Policy shall be formulated in accordance with Schedule VII and the CSR
Committee will be responsible for framing the policy, finalizing the amount to be spent
on CSR, monitoring & implementation of the Scheme.
(iii) If Company ceases to fulfill the eligibility criteria for three consecutive years, then the
company is not required to comply until the company will meet the eligibility criteria
once again.

The mandate of the said CSR committee shall be:

(i) to 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;
(ii) to recommend the amount of expenditure to be incurred on the activities referred to
above;
(iii) to monitor the Corporate Social Responsibility Policy of the company from time to time.

The CSR Rules provides the manner in which CSR committee shall formulate, monitor the
policy and manner of understanding for CSR activities. Under the rules, the Government has
also fixed a threshold limit of 2% of the "Average' Net Profits of the block of previous three
years on CSR activities and if Company fails to spend such amount, disclosures are to be
made for the same. But an exemption has been given to the Companies that do not satisfy the
above threshold for three consecutive years.10

3. Responsibility of the Board

10
http://gtw3.grantthornton.in/assets/Companies_Act-CSR.pdf(Retrieved on January, 2014).
The Board of every company referred to above shall after taking into account the
recommendations made by CSR Committee:
(i) approve the CSR Policy for the company and disclose contents of such Policy in its
report and also place it on the company‟s website;
(ii) ensure that the activities as are included in CSR Policy of the company are undertaken by
the company, and
(iii) ensure that the company spends, in every financial year, at least two per cent of the
average net profits.11
If the Company fails to spend such amount, the Board shall, in its report specify the reasons
for not spending the amount.

4. CSR Activities as per Schedule VII

CSR activities as per Schedule VII of the Companies Act 2013 to include:
(i) eradicating extreme hunger and poverty;
(ii) promotion of education;
(iii) promoting gender equality and empowering women;
(iv) reducing child mortality and improving maternal health;
(v) combating human immunodeficiency virus, acquired immune deficiency syndrome,
malaria and other diseases;
(vi) ensuring environmental sustainability;
(vii) employment enhancing vocational skills;
(viii) social business projects;
(ix) 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
(x) such other matters as may be prescribed

The 2013 Act provides that the company shall give preference to the local area and areas
around it where it operates.

The below activities doesn‟t include under the CSR activities of the Company:

11
Average Net Profit shall be calculated in accordance with the provisions of Section 198 of the 2013 Act.
(i) Business run in the normal course.
(ii) Outside the territory of the India or abroad.
(iii) For the welfare of the employees and their families.
(iv) Political party contribution of any amount directly and indirectly as defined u/s 182 of
the Act.
The above CSR activities shall be undertaken by the Company, as per its stated CSR policy,
in consonance with the new or ongoing projects excluding activities undertaken in pursuance
of its normal course of business. The Board of Directors may decide to undertake its CSR
activities approved by the CSR Committee, through a registered trust or a registered society.

5. Compliances of Provisions on CSR

Companies are under obligation in order to compliances on CSR:
(i) The Annual Report of the Company shall include a comprehensive Report on CSR in the
format as prescribed in the Companies (Corporate Social Responsibility Policy) Rules,
2014, containing particulars on Overview of CSR Policy, Composition of the Committee,
Avg. Net Profit, prescribed expenditure and details of its spending, reason in case of
failure etc.
(ii) The disclosure on CSR in Board Report should also be available on the Company‟s
Website.
(iii) The activities included in the CSR Policy and the prescribed expenditure being
undertaken/ spent shall be ensured by the Board, in the respective manner.

This means all the Companies falling in the aforesaid criteria needs to ensure CSR
compliance but it is debatable to say that the same is for welfare of the society or the
companies are doing it just to avoid penalties. CSR stands to support the Company‟s Vision
as well as directions to what Organization stands for and will sustain its clients. An ISO
26000 is the accepted worldwide standard for Corporate Social Responsibility (CSR).

CSR term has been revaluated with an aim to embrace responsibility for the Company's
actions and encourage a positive impact through its activities on the environment, consumers,
conscience, corporate citizenship, social performance, employees, communities and all
stakeholders. In short, CSR can also be termed as Corporate Organizations to behave
responsibly.
 Conclusion
CSR clearly impacts our corporations, society, and educational organizations. Despite its
complexities, the numerous sustainability initiatives point toward continued, positive impact.
CSR policy should function as a built-in, self-regulating mechanism whereby businesses
would monitor and ensure their adherence to law, ethical standards and international norms.
In the recent years corporate business houses have substantially involved towards societal
responsibilities. Companies have started to realise the importance of CSR and initiating the
steps towards it.12 It is found that there is a need for creation of awareness about CSR
amongst the general public to make CSR initiatives more effective. This effort will also
motivate other corporate houses to join the league and play an effective role in addressing
issues such as access to education, health care and livelihood opportunities for a large number
of people in India through their innovative CSR practices. It is difficult for one single entity
to bring about change, as the scale is enormous. Effective partnerships between corporate,
NGOs and the government will place India's social development on a faster track.

Companies Act, 2013 has introduced the concept of CSR in the Act itself and even though
the Act advocates it strongly but it has still prescribed a “comply or explain” approach only.
This means as per the new norms, the two per cent spending on CSR is not mandatory but
reporting about it is mandatory. In case, a company is unable to spend the required amount,
then it has to give an explanation for the same. The CSR regime in India is in a nascent stage
and there will be hitches, and a lot of fine-tuning will be required before we hit the perfect
balance. What is commendable is the spirit with which India has made her corporate socially
responsible and in that, led the world‟s most developed nations.13

12
Bidyut Chakrabarty, Corporate Social Responsibility in India ( Routledge, 2012).
13
John Okpara and Samuel O. Idowu, Corporate Social Responsibility: Challenges, Opportunities and
Strategies for 21st Century Leaders (Springer Science & Business Media,2013).

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