Corporate Social Responsibility- CSR Legislation in India, its Importance and Drawbacks

Exploring CSR in India, this article outlines its history, legal frameworks, benefits, notable successes, and drawbacks.

Corporate Social Responsibility (CSR) has evolved into a fundamental component of corporate governance in India, spurred by legal requirements. While notable advancements have been achieved, there remains ample opportunity for enhancing governance, transparency, and the evaluation of impact.

Corporate Social Responsibility- CSR Legislation in India, its Importance and Drawbacks

Introduction

In layman's terms, CSR refers to the companies’ responsibilities towards the society’s welfare. It is the social responsibility of any company whether it is a government, private, or non-profit organization (companies under Section 8 of the Companies Act, 2013) towards the public welfare through social, environmental or economic development. In the present scenario, mere financial stability and growth in business is not the only focus but the social and environmental development is also the matter of concern.

Historical Development of CSR in India

The timeline of CSR development starts from 2007 when the inclusive growth-11th five-year plan was created. In 2009, the first guideline on corporate social responsibility was released followed by the report on companies’ bill, 2009, by the parliamentary standing committee on finance. Then Ministry of Corporate Affairs released the National Voluntary Guidelines (NVGs) on social, environmental and economic responsibility of business in 2011, which was a set of nine principles that gave the business holder a sense of responsibility and understanding regarding the proper conduct of their business activities.

In 2012, a report was formed based on business responsibilities, and lastly, the mandatory provision of CSR under Section 135 of the Companies Act was added in 2013 and this provision came into effect on April 1st, 2014.

CSR Legislation in India

India is the first country to make the CSR provisions as the mandatory provision. The term CSR has been defined under section 135 of the Companies Act, 2013 as,

a company having a 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 hundred crores or more, shall, during a financial year, constitute the CSR committee. This committee formed by any company shall consist of three directors and one independent director.

The major function of the CSR committee is to keep a check on the company’s actions towards the CSR policy, to recommend the amount of expenditure to be made and to monitor the policy of CSR. The activities which a company should perform for the welfare of the society are mentioned under Schedule VII of the Act as eradicating hunger, malnutrition and poverty, promoting education, promoting gender equality and empowering women, ensuring environmental sustainability, protecting national art, heritage and culture, etc., Companies shall spend 2% of their average net profit made during three immediately preceding financial years or where the company have not completed three years since its incorporation then the immediately preceding financial years, in pursuance of its CSR, on these welfare activities as per the policy.

The consequence of the non-compliance with Section 135 is mentioned under sub-section (5) of Section 135, i.e., if the company fails to spend the whole amount, then it shall state the reason for the same in its report and transfer such whole amount in the fund specified in Schedule VII within six months of expiry of the financial year or under sub-section (6) if the company fails to spend the remaining amount of CSR on an ongoing project, the remaining amount shall be transferred to the special account opened by the company in any scheduled bank within thirty days from the date of completion of the third financial year.

In the non-compliance of the above provision, the sub-section (7) shall apply, which states the company shall be liable to pay the twice amount in default or rupees one crore, whichever is less, and every officer who is in default shall be liable to pay one-tenth of the default amount or two lakhs’ rupees, whichever is less.

Importance of CSR

Here are five major importance of CSR:

1. Building Public image: The brand value and reputation increase among the customers and it attracts more and more of them.

2. Building customer loyalty:  The long-term benefit, customer loyalty plays a vital role as there is a steady number of loyal customers who rely on the brand and the brand relies on them.

3. Attracts talented employees: Companies spending on the welfare of society attract employees to work for their brand.

4. Sustainability: It helps the company to practice sustainable development like factories reducing their carbon emission, reducing chemical emissions and promoting energy efficiency.

5. Stakeholder Engagement: CSR helps the company attract stakeholders too, it creates a sense of trust and loyalty.

Overall, CSR is increasingly recognized as integral to business success, not only for its positive impact on society but also for its potential to contribute to financial performance and long-term sustainability.

Glimpse of CSR in India

1. Tata group - The Tata group carries out various CSR activities by forming a self-help group promoting women empowerment, rural development and other social welfare. Tata Groups provide various scholarships and infrastructural development such as hospitals, research centres, educational institutes, sports academies, etc.

2. Mahindra & Mahindra - It is the automobile company which established the K. C. Mahindra Education Trust in 1954 and Mahindra Foundation in 1969 for education.

3. Hindustan Unilever Limited - Hindustan Unilever Limited (HUL) company was established in the year 1931, largely it covers consumer goods in nearly every house in India. In FY 2022, HUL spent nearly 157 crores on CSR activities. It focuses on health, hygiene, skill development, education, water conservation, rural development, women empowerment, environmental sustainability, etc.

4. Adani Enterprises Limited - Adani Enterprises Limited is an entity of Adani Group. The company spent nearly 12.87 crore in FY 2021-2022 on CSR. It believes in “Nation Building” by “Growth with Goodness”. The Adani Group is Focusing on climate protection activities.

Drawbacks of CSR in Indian Legislation

Some of the major drawbacks are the lack of partnership between the government, private and civil society sectors, lack of professional, standardisation of evaluation and impact assessment of CSR projects lack of investment in developing effective collaborative stages, lack of stakeholder awareness, lack of social audits, lack of training, etc.

The CSR affects the small scale business monetarily because of which they run away from the society’s responsibilities and hide behind the paperwork. When a small-scale business brings its CSR activities into the market the customers are usually unaware of the same and the CSR of this business remains unutilized. Nevertheless, there is an increase in CSR expenditure at an increasing rate and the trend is growing in the companies of social welfare and brand building by charity.

Conclusion

It is true to say,

“We, as members of society, are owed to give back to society through our work, for the education we were provided.”

CSR is the social contribution by the companies from their profit towards the welfare, benefit, growth, wealth, etc., of the common people. CSR benefits the company in the long term as this helps in brand building and attracting customer whereas CSR is more important to the common public for their growth and livelihood.

Some examples of CSR like Parks, malls, Hospitals, Stadiums, etc., benefit the lifestyle of the general public, automatically, leading to an increase in the brand reputation. The drawbacks of CSR can majorly be addressed by awareness and education which will result in the ultimate growth of the nation. Thus, drawbacks or gaps in the legislation of CSR have to be removed. The provision of CSR benefits the company in the long term and also the general public. This should be promoted among the public to boost the trend of CSR in India.

References

[1] Companies Act, 2013

[2]  History - CSR, Available Here

[3] Dezan Shira & Associates,  Corporate Social Responsibility in India, Available Here

[4] Mohammad Kaif, Corporate Social Responsibility in India: Legal Framework & Recent Developments, Available Here

[5] Corporate Social Responsibility in India, Available Here

[6] Gaurav Mishra, Importance of Corporate Social Responsibility: Creating Positive Impact through Business, Available Here

[7] Top 100 Companies in India for CSR and Sustainability in 2022, Available Here

[8] Mohammad Saddam Mujeeb, Corporate Social Responsibility- Legal Provisions and Judicial Precedents, Available Here

[9] Amit Lahiri, The Gaps in Implementing CSR in India, Available Here