25 July 2019

By : Shubham Shree ( Partner , Atharva Legal LLP ) & Prakhar Bharadwaj ( Research Associate, Atharva Legal LLP )

Corporate Social Responsibility (CSR) is a concept that suggests that it is the responsibility of the corporations operating within society to contribute towards economic, social and environmental development that creates positive impact on society at large. Although there is no fixed definition, however the concept revolves around that fact the corporations needs to focus beyond earning just profits. According to the EU Commission, …"CSR is the concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” The term became popular in the 1960s and now is formidable part of business operations. CSR is termed as “Triple-Bottom-Line-Approach”, which is meant to help the company promote its commercial interests along with the responsibilities it holds towards the society at large.

The corporate social responsibility (CSR) movement began as a response to advocacy for corporations to play a role in ameliorating social problems due to their economic power and overarching presence in daily life. Now, the movement is transitioning from its reliance on purely voluntary activity to the greater use of laws. The push for legalization came because voluntary CSR presented problems such as free-riding (companies taking advantage of benefits without actually spending), green washing posing as CSR, and false disclosures. Governments are now modifying their laissez faire approach and considering legal rules. The US Securities and Exchange Commission, for instance, has moved beyond its mandate as a market regulator to issue rules on conflict minerals, resource extraction payments, and gender diversity. And, in 2014, the European Union issued a directive on disclosure of non-financial and diversity information. Similarly, Australian companies are required to disclose how they will manage their environmental and social sustainability risks.

CSR in India is a result of the 2013, Companies Act. India is one of the few countries in the world to have a dedicated CSR act. In fact, it is the first to have brought about legislation to implement CSR activities, followed by United Kingdom.
Statutory Provision for Corporate Social Responsibility
Under Companies Act, 2013 Section 135 mandates that the threshold limit for applicability of the CSR to a Company i.e.
● net worth of the company to be Rs 500 crore or more;
● turnover of the company to be Rs 1000 crore or more;
● net profit of the company to be Rs 5 crore or more.

In addition to above stated companies the CSR also applicable to foreign companies having the branch and
project offices of a foreign company in India. “Each qualifying company shall spend at least 2% of its
average net profit for the immediately preceding 3 financial years on CSR operations/activities.

Need For CSR Reforms:

The law in its current form is failing to promote CSR activity. Its poor design and lack of clear
obligations, After over four years of corporate social responsibility (CSR) becoming mandatory in India,
there remains considerable gap between what had been the objective of this policy and what has been
the outcome so far. The estimates of funds this regulation was expected to generate for the benefit
of stakeholders—people affected or displaced when an enterprise was set up or expanded
operations—have fallen from around Rs 40,000 crore to about Rs 14,000 crore, but nobody knows
why the expected money is not coming in. Even though there has been a substantial increase in the
social activities incurred by the firms, but the spending has mostly gone to the set priorities of the
company rather than the democratically determined priorities. Of the nine different schedules
prescribed by The Companies Act, 2013 two schedules: combating various diseases and promotion of
education accounted for 44% of the total CSR expenditure while reducing child mortality received no
funding and eradicating extreme hunger and poverty received only 6% of the total CSR expenditure.

A survey by accountancy firm KPMG found that 52 of the country’s largest 100 companies failed to spend
the required 2% last year. A smaller proportion has gone further, according to an Economic Times
investigation, allegedly cheating the system by giving donations to charitable foundations that then return
the monies minus a commission. The main problem with the CSR is the reported expenditure on the
projects. Most firms don’t mention the exact amount of expenditure spent by them on the CSR activities.
Due to this, it becomes very problematic for the government to comprehend the exact amount of funds
spent by the firms in this relationship. This lack of transparency creates an indelible impact on the
relationship and trust between the companies and local communities, which is the key to the success rate
of any CSR initiative.

New Amendment Bill Passed By Parliament To Make CSR Effective:

The new bill bought many changes a total of 12 additional amendments in 11 sections of the Act are
proposed to be made, in addition to amendments in 29 sections and insertion of 2 new sections. The Bill
also proposes to give more administrative power to the National Financial Reporting Authority (NFRA)
for smooth functioning, but the major change pertains to Corporate Social Responsibility (CSR) norms,
wherein companies would be allowed to keep unspent money in another account.

For companies that are not able to spend their full amount for CSR activities in ongoing projects within a
particular financial year, the money can be transferred to a CSR account. The latter amount has to be spent
within the next three financial years, any amount remaining unutilized in such CSR account would be
transferred to government fund specified in Schedule VII of the Act. Besides, Section 135 would be
amended to provide for a specific penal provision in case of non-compliance and authojustify-textrize the corporate
affairs ministry to give directions to companies for ensuring compliance with CSR provisions. “The new
amendments are expected to benefit law abiding corporate, while closing the existing escape
routes”