Legal Aspects On Corporate Social Responsibility In India – An Appraisal

Paper Details 

Paper Code: RP-VBCL-02-2024

Category: Research Paper

Date of Publication: April 20, 2024

Citation: Mr. K.S.Jayakumar & Prof. Dr. C.Basavaraju, “Legal Aspects On Corporate Social Responsibility In India – An Appraisal", 1, AIJVBCL, 16, 16-27 (2024), <https://www.vbcllawreview.com/post/legal-aspects-on-corporate-social-responsibility-in-india-an-appraisal>

Author Details: Mr. K.S.Jayakumar, Research Scholar, DOS in Law & Research, Manasagangothri, University of Mysore, Mysuru & Assistant Professor of Law, P.E.S.Law College, Mandya, Karnataka, &

Prof. Dr. C.Basavaraju, Professor of Law, DOS in Law and Research, Manasagangothri, University of Mysore, Mysuru, Karnataka

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“Successful people have a social responsibility to make the world a better place and not just take from it” – Carrie Underwood.

ABSTRACT

While there may be no single universally accepted definition of CSR, each definition that currently exists underpins the impact that businesses have on society at large and the societal expectations of them. Although the roots of CSR lie in philanthropic activities (such as donations, charity, relief work, etc.) of corporations, globally, the concept of CSR has evolved and now encompasses all related concepts such as triple bottom line, corporate citizenship, philanthropy, strategic philanthropy, shared value, corporate sustainability and business responsibility. “CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders. The term "corporate social responsibility" became popular in the 1960s and has remained a term used indiscriminately by many to cover legal and moral responsibility more narrowly construed. The paper focuses on numerous features of the new CSR law  in the framework of modern corporate philosophy and attract government officials’ attention to practical challenges in implementing the new rules.

Keywords: Historical background of CSR, Types of CSR, CSR related to Indian Companies Act, 2013, Government’s initiatives to promote CSR.

INTRODUCTION

The notion of Corporate Social Responsibility (CSR) is on the rise all over the world, and in India as well. CSR is not new to India; in fact, historically speaking, CSR is a well-established phenomenon in the country, and India has one of the world's richest traditions of CSR. "In 1965, Lal Bahadur Shastri, then the prime minister of India, presided over a national meeting that issued the following declaration on the social responsibilities of business:" [2]

A business has a responsibility to itself, to its customers, workers, shareholders and the community. Every enterprise, no matter how large or small, must, if it is to enjoy confidence and respect, seek actively to discharge its responsibilities in all directions . . . and not to one or two groups, such as shareholders or workers, at the expense of community and consumer. Business must be just and humane, as well as efficient and dynamic.[3]

In its oldest forms, corporate responsibility in India included the concept of corporate philanthropy and the Gandhi and trusteeship model.[4] Corporate philanthropy as practiced in India in the pre-independence era involved occasional charitable donations made by business houses. [5] Additionally, "notions of generosity and trust, as advocated by Mahatma Gandhi and his followers served as an ideal for many business leaders both during pre and post-independence times." [6] Over the years, CSR practices in India have evolved from notions of pure philanthropy and charity, to CSR practiced as a part of social development, to the multi-stakeholder approach that is the current global trend.  The philanthropy first practiced by Indian businesses was initially rooted in religious belief and culture, but with the changing times, there has been a significant shift in the approach. This shift resulted in the emergence of four different models-the Trusteeship model propounded by Mahatma Gandhi, the Statist Model put forward by Nehru, the Liberal model by Friedman, and the Stakeholder model by R. Edward.[7]

HISTORICAL BACKGROUND OF CSR

CSR is not a new concept in India and has traditionally been seen as a philanthropic activity. The practice has been followed since ages albeit informally. Various religions and philosophies preach business with ethics with an emphasis on helping the disadvantaged sections of the society. Philosophy, religion and charity have traditionally been the main drivers of CSR. Religious traditions of “Seva”, “daan”, “zakat” and “dashansh” have shaped the relationship between the privileged and poor. Besides religion, culture and family values & tradition have also motivated and influenced CSR activities. Pre-industrialization period till 1850 saw rich people sharing their wealth with masses by creating health, educational and religious infrastructure, and providing food during famines, disasters and epidemics. Such philanthropic activities were also used as a tool to secure an elevated status in the society.

The approach to CSR saw a discernible change with the establishment of colonial rule (1850 onwards). Industrialists of the time, prominent among them being Tata, Birla, Godrej, Singhania, Modi and Bajaj steered the concept of CSR through charitable foundations, healthcare and educational institutions and other community development activities (Sharma, 2013). Businessmen of smaller towns, including semi-urban areas, also spent a part of their profit in community development activities, especially in setting up of schools. Their efforts towards social development though appear to be selfless and for religious motives, but were also influenced by caste considerations and political objectives.

 The period from 1910 to 1947 can be christened as the period of independence movement. This was a phase of corporate philanthropy that attracted business leaders into the political fight for independence. The concept of ‘trusteeship’ coined by Mahatma Gandhi advocated the management of industrial wealth for the benefit of the masses and his influence motivated the industrialists to contribute towards socio-economic development of the country. Business houses contributed towards CSR through trusts for educational institutions, healthcare infrastructure and training and scientific institutions and through social reforms like women empowerment and rural development.

 During the period immediately after independence, the corporate sector took a backseat and the government acquired the role of being the prime mover of development. The period was characterized by stringency of rules and policies regulating private business like industrial licensing, high taxation, and legislations regarding labour and environmental issues and corporate governance, and can be very aptly described as an era of regulations, control, and command. Many PSUs established by the state during this period suffered from poor governance and failed to achieve the desired objective of distribution of resources and wealth among the poor. It led to increased expectations from private sector in the socio economic development of the country. However, CSR activities during this phase (till 1980) largely failed to meet societal expectations.

The period from 1980 onwards saw Indian companies integrating CSR into their business strategy (Gahlot, 2013). Initiation of globalization and economic liberalization in the 1990s coupled with loosening of licensing controls gave a boost to the economy which helped rapid growth of the companies. It enabled the companies to show greater willingness to contribute to the social cause. The concern of western markets about labour and environmental standards in business partner countries also forced Indian companies to pay greater attention to their social responsibility.

CSR during last 15 years has evolved rapidly with companies strategizing CSR initiatives aligned with national priorities like public health, education, skill development, environment etc. Concerted efforts have been made by the Government to persuade companies to adopt CSR as a business practice. Department of Public Enterprise (DPE), Ministry of Heavy Industries and Public Enterprises took a lead by issuing “Guidelines on CSR and Sustainability for Central Public Sector Enterprises” regarding expenditure on CSR activities. These guidelines were revised in April, 2013 to provide for a budgetary allocation for CSR and sustainability activities with the approval of its Board of Directors. These guidelines also required mandatory reporting and disclosure of CSR activities.

The first attempt of the Government of India to formalize CSR was in the issuance of “CSR Voluntary Guidelines” by the Ministry of Corporate Affairs (MCA) in 2009. These guidelines spelt out the core elements of CSR that included ethical functioning, respect for workers’ rights and welfare, respect for human rights and activities to promote social and inclusive development. Besides spelling out the core elements of a CSR policy, these guidelines distinguished between philanthropy and CSR activities. The 2009 guidelines were succeeded by “National Voluntary Guidelines of Social, Environmental and Economic Responsibilities of Business” issued by Ministry of Corporate Affairs in 2011. Important principles laid down under these guidelines were ethical transparency and accountability; employee welfare; respect for stakeholders, human rights and environment; inclusive growth and equitable development. These guidelines created common standards for CSR and raised hope that companies will strive to meet these guidelines since these will lead to creation of peer and public pressure for non-compliant companies. Though these sets of guidelines were voluntary in nature but were successful in sensitizing the corporate about their social responsibility and empowering the community to demand it. SEBI (2012) notified mandatory inclusion of Business Responsibility Reports in the annual reports of the top 100 listed companies at Bombay Stock Exchange (BSE) and National Stock Exchange NSE) and making of these reports available on their respective websites. It was the first initiative in the country towards making the reporting of CSR activities mandatory. CSR thus evolved to be a priority for government; corporate; media; and direct, indirect, close and distant stakeholders of the corporate sector[8].

TYPES OF CSR

CSR is a business practice that involves a company’s efforts to address social and environmental issues by taking responsibility for the effect of its operations on customers, employees, shareholders, communities, and the environment. CSR requires going beyond legal compliance to make a positive impact on society and contribute to sustainable development. Learn more about the 4 types of corporate social responsibility.

1. Environmental Responsibility:

Environmental responsibility, one of the pillars of environmental, social, and corporate governance (ESG), focuses on minimizing the negative impact of a company’s operations on the environment. This includes measures such as reducing carbon emissions, conserving natural resources, reducing waste, and using renewable energy sources. Environmental responsibility is becoming increasingly important as customers and stakeholders demand sustainable business practices. Some examples of environmental responsibility include: Reducing energy use by putting lights and HVAC systems on timers, swapping traditional light bulbs for LEDs, or even installing solar panels.

2. Economic Responsibility:

Economic responsibility refers to a company’s obligation to operate in a financially sustainable manner while also contributing to the economic well-being of the communities in which it operates. Some examples of economic responsibility include: Investing in local communities by contributing to economic development initiatives.

3. Philanthropic Responsibility:

Philanthropic responsibility refers to a company’s obligation to give back to communities through charitable donations, volunteer work, and community involvement. Philanthropic initiatives can support a variety of causes, including education, health, and social welfare.

Some examples of philanthropic responsibility include: Supporting employee volunteer programs.

4. Ethical Responsibility:

Ethical responsibility means operating with integrity, transparency, and values. This includes following laws and regulations and ensuring that business practices align with ethical standards. Some examples of ethical responsibility include: Treating employees fairly and providing a safe working environment[9].

CSR RELATED TO INDIAN COMPANIES ACT, 2013

The practice of CSR is not a new one in the Indian industry. It was an activity that was not deliberated, rather performed. Observers believe that in India, this activity has evolved from institutional development to community development by way of several projects and tends to focus on the utilization of profits made by a company.[10]

Also, undertaking such initiatives were a voluntary step for all companies until it was mandated by the new Companies Act which came to force in the year 2013. Section 135. of this Act provides that every company in India, either private or public having a net worth of Rs 500 core, or a turnover of Rs 1,000 core or net profit of Rs 5 core, needs to spend a minimum of 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities.[11]A company refers to an entity incorporated under the Companies Act or under the other previous company law.

A clarification has been made with regard to computation of net profits that if the profits have been computed under the Companies Act 1956 then they need not be recomputed under the 2013 Act. Also, the CSR activities must be undertaken with respect to certain areas which are listed under Schedule VII of the 2013 Act, some of which include:

·         Activities to eradicate hunger, poverty and malnutrition.

·         Promotion of preventive healthcare, education and gender equality.

·         Setting up homes for women, orphans and the senior citizens.

·         Undertaking measures for reducing social and economic inequalities.

·         Ensure environmental sustainability, balance in the ecology and welfare of animals.

·         Protection of national heritage, art and culture.

·         Taking measures for the benefit of armed forces veterans, war widows and their dependents.[12]

·         Provide training to promote rural, nationally recognized, Paralympic or Olympic sports.

·         Contribute to Prime Minister’s National Relief Fund or any other fund which has been set up by the Central Government for socio-economic development, relief and welfare of SC, ST, OBCs, minorities and women.

The provision also states that a company shall give preference to the local areas and those areas around which the company operates for undertaking the said CSR activities. Another statutory requirement under section 135 is the formation of a CSR Committee of the Board for monitoring the CSR policies of any company consisting of at least 3 directors (inclusive of an independent director). The Committee is required to recommend and suggest the amount of expenditure that the company must incur on the activities so specified. After considering the recommendations put forth by the Committee, the Board shall approve the CSR policy for the company.

It has been notified by the Ministry of Corporate Affairs that Section 135 and Schedule VII under Companies Act 2013, along with the provisions of the Rules[13]. Shall come into effect from 1st April 2014. The Statue provides CSR activities to be undertaken through a registered trust or society, or a company established by its holding, subsidiary or associate company. For this purpose, the company needs to specify the activities that will be taken up and the modalities for utilizing the funds. It is said that such an entity will have to establish a track record of three years where similar activities were performed by it.[14]The report which shall be submitted by the Directors along with the financial statements of a company shall include an annual report on the CSR Activities of a company in the prescribed format under the Rules, setting out inter alia a brief outline of the CSR policy, the composition of the CSR Committee, the average net profit for the last three financial years and the prescribed CSR expenditure. If the company does not have adequate profits or has been unable to spend the minimum required on its CSR initiatives, the specific reasons for not doing so are to be disclosed in the Board Report.

However, failure to report CSR spending or the specific reasons for non-expenditure shall amount to contravention of the provision under section 134 of the Companies Act 2013 and the said company shall attract penalty in the form of fine, which shall not be less than fifty thousand rupees and may extend to INR 2.5 Million. Also, every officer who will be liable for such a default will be punished with imprisonment for a term extending to 3 years, along with fine of minimum fifty thousand rupees but which may extend to INR five lakh rupees or both.[15]

GOVERNMENT’S INITIATIVES TO PROMOTE CSR

Government actions are essential for creating an enabling environment for private sector development that diminishes risks, lowers costs and barriers of operation, and raises rewards and opportunities for competitive and responsible private enterprises. The challenge for governmental agencies in promoting a CSR agenda is to identify priorities, raise awareness, create incentives and support, and mobilize resources from cross-sectorial cooperation that are meaningful in the national context, as well as building on existing initiatives and capacities.

Initiative by Government: The next section introduces some initiatives which combine some of the different roles that government may undertake to raise the CSR profile of a country.

(i) creating an enabling environment- There is substantial evidence that governments around the world have begun to take on a CSR agenda.93 Some studies emphasize the influence of public policy as a critical factor in establishing a context within which CSR practice can flourish.94 Public policymakers can thus initiate policies and measures enabling CSR to flourish using several means. Some key means used to introduce an enabling environment for CSR in a country include the following initiatives.

(ii) Creating awareness and raising public support- CSR cannot be imposed against the will of enterprises, but can only be promoted together with them under involvement of their stakeholders. The first step to promote CSR in a country is necessarily to fill the knowledge gaps about the significance and contribution of CSR to business success and sustainability, as well to increase awareness and acceptance (Bertelsmann & GTZ, 2007).

(iii) Establishing a specialized CSR agency- Governments in many countries has decided to set up specific agencies with a specific mission to promote CSR practice in their respective countries. In Thailand, the CSR Institute (CSRI) was established in 2007 under the SET to promote CSR practices among its listed public company members.

(iv) Reforming regulatory frameworks to meet CSR-related standards- Government plays an important role in setting standards that reflect a minimum standard of good CSR practice or performance requirements. The government is thus in a position to determine if any legal requirement is needed to ensure compliance with these minimum social and environmental standards. It also can make necessary changes to regulatory frameworks in cases where laws, tax and administrative compliance may hinder the development of responsible business practice.

(v) Fostering interaction with businesses, NGOs and other key stakeholders-Government is in a unique position to convene necessary stakeholders in order to address social problems through a CSR agenda.

In India, two dialogue forums directly relevant to CSR policy development were initiated. First, the Coordination Committee to Promote Affirmative Action in the Indian Industry comprises the relevant government ministry offices (mainly the Ministry of Commerce and Industry), Associated Chambers of Commerce and Industry of India, Federation of Indian Chambers of Commerce and Industry, as well as senior representatives of industry. The aim of the partnership is to finalize a Code of Conduct on Affirmative Action and to set up an ombudsman with regional benches to monitor the compliance of the voluntary code of conduct by its members. Another forum is the India Partnership Forum (IPF) which is also involved in this multi-stakeholder dialogue forum. IPF has a more CSR-focused brief and addresses issues other than affirmative action, its areas of interest being the adoption and operationalization of a social code for business, the formulation of CSR, providing support to public policy measures on CSR, ensuring the mainstreaming of CSR education in business schools, capacity building for community development, capacity building for sustainable reporting processes and indices, building a CSR knowledge base, and providing communication and advocacy on CSR. In some cases, governments require companies to enter into stakeholder engagement through mandatory legislation. Providing support to increase capacity and effectiveness for business in CSR initiatives- Other interventions by governmental agencies in some developing countries have included capacity building activities designed to help domestic producers meet CSR standards. Outlines of a broadly complementary initiative in India serve as a good example.

The Indian Textiles Committee, part of the Ministry of Textiles, has taken up a national campaign to sensitize the textile and clothing industry, particularly in the SME sector, to address emerging challenges resulting from the forthcoming liberalization of the Indian textile and clothing industry. The Committee is working with the Ministry of Commerce, state governments, and local industry and trade associations on the campaign. Approximately 7,500 company representatives will have taken part in 25 workshops[16].

V. Judgement related to CSR:

The intersection of CSR and legal provisions underscores the evolving role of corporations in society. Legal frameworks and judicial precedents have increasingly recognized that businesses have a responsibility beyond profit generation.

• This landmark case established the principle of "absolute liability" for industrial activities that harm the environment and people. The Supreme Court of India ruled that industries engaged in hazardous activities are liable to compensate affected parties, emphasizing the importance of environmental protection and community welfare[17].

• The Bhopal gas tragedy case highlighted the moral and legal responsibilities of corporations toward victims of industrial disasters. The Indian Supreme Court upheld the importance of compensation, rehabilitation, and environmental restoration as integral aspects of corporate accountability[18].

• In this case, the United States Supreme Court recognized the Alien Tort Statute as a means to hold corporations accountable for human rights abuses committed abroad. The ruling emphasized that corporations can be held liable for their complicity in human rights violations[19].

• The Spanish Constitutional Court held that Rio Tinto, a mining company, had a duty to consult local communities before undertaking mining activities. The judgment underscored the importance of respecting the rights of indigenous communities and involving them in decision-making processes[20].

• The United Kingdom Supreme Court ruled that a parent company could be liable for the actions of its subsidiary in another country, if it failed to prevent human rights and environmental harms. The case reinforced the concept of "duty of care" and demonstrated the extraterritorial reach of CSR obligations[21].

CONCLUSION AND SUGGESTIONS

• CSR is a worldwide concept. In the past, CSR was presented in a compressed format. But over time, it is emerging as a business strategy on a global level, making fundamental changes in its form. In the current perspective, CSR is influenced by global ideas, values, policies and principles. The utility of CSR in the current business environment has increased unexpectedly. Currently, companies have started taking interest in CSR activities to remain in the business environment. It is like a collective charity. It is a legal award based on the methodology of public welfare as a result of a series of government efforts.

• For the prosperity and strength of any business, it is very important that in addition to its profitability, it should also strive for social prosperity. Since CSR has been mandated in the Indian Company Law, as a result, it has been made a mandatory social responsibility for Indian companies. But it can be said to be appropriate only when the corporates automatically feel their duty and feel inclined towards it.

• It would be fair to say that at present CSR not only has the potential to give impetus to the economy but it also plays an active role in the day to day activities of corporates. Therefore, it is not possible to separate them from the existence of corporates.

[2]“ Kate Brown, Confer For Social Markets, Corporate Social Responsibility: Perceptions of Indian Business  (Malini Mehra ed., Centre for Social Markets, 2001) “

[3] Id. at 1

[4] “ Ritu Kumar, State Of Corporate Responsibility In India  (2001)”

[5] Id. at 2

[6]“Linna Palmqvist, Corporate Social Responsibility And Development-A Case Study Of The CSR Strategies Of International Companies In India, (  Lund University,2007)”

[7] Id. at 1-2

[8]“Basu, K. and G. Palazzo, Corporate Social Responsibility: A Process Model Of Sense Making(Academy of Management Review 33(1):122-136,(2008)”

10”Josh Palmer,<https://www.onboardmeetings.com/blog/corporate-social-responsibility/>accessed 09 Jan 2024.”

[10]“Handbook on corporate social responsibility in India, confederation of Indian industry, http://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/handbook-on-corporate-social-responsibility-in-india.pdf/ accessed 14 Jan 2024.”

[11]“Grant Thorton, ‘Implications of Companies Act, 2013, Corporate Social Responsibility’,http://gtw3.grantthornton.in/assets/Companies_Act-CSR.pdfaccessed 14 Jan 2024.”

[12]“Press Trust of India, Promoting healthcare likely to be considered CSR activity,  http://www.business-standard.com/article/pti-stories/promoting-healthcare-likely-to-be-considered-csr-activity-accessed 14 Jan 2024”

[13]“Companies (Corporate Social Responsibility Policy) Rules, 2014”

[14]“Lalit Jain, Challenges in the CSR & Rules Implementation, http://www.icsi.edu/portals/70/NIRRULE.PDFaccessed 14 Jan 2024”

[15]“India Briefing,http://www.india-briefing.com/news/indias-corporate-social-responsibility-mandate-companies-act-2013-8057.html/accessed 14 Jan 2024.”

[16]“Neha Singhal,Corporate social responsibility - Role of government,(2014) 2249-054X”

[17]“Indian Petrochemicals Corporation Ltd. v. MC Mehta(1987)”

[18]“Union Carbide Corporation v. Union of India (1992)”

[19]“Kiobel v. Royal Dutch Petroleum Co (2013)”

[20]“Rio Tinto plc. v. Commission Nacional de Energía (CNE) (2015)”

[21]“Vedanta Resources plc. v. Lungowe (2019)”