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Corporate Social Responsibility in India: A mandatory philanthropy not so mandated

"To build and sustain brands that people trust, one must focus not only on today but also on tommorow. Its not easy but balancing the short and long term is the key to delivering sustainable growth; growth that is good for our shareholders but also for our consumers, employees, our business partners, communities where we live and work and the planet we inhabit."

The above lines said by Irene B Rosenfeld, former CEO of Kraft Foods defines the horizons and effects of corporate social responsibility (CSR). Corporate social responsibility in its broader sense means addressing the legal, ethical, commercial and other concerns of society regarding the businesses and making decisions which balance these concerns of all key stakeholders. A widely quoted definition by World Business Council for Business Development states that CSR is the continuing commitment by businesses to behave ethically and contribute towards economic development while improving the quality of life of the workforce and their families as well of the local community and society at large.

In today's times, businesses has emerged as one of the most powerful institutions on Earth. Some of the biggest business enterprises in the world are in fact even bigger in size than some of the developing countries. With the gobalization and liberalization of the Indian economy, many Indian companies have made their way into business boom and are recognized as major players in the global corporate arena. Therefore the role of the businesses in the social and economic upliftment of the society has also increased manifold. Businesses do not operate in isolation and therefore it has been realized that not only companies can affect society at large but they are also in unique position to influence society and make positive impact. Considering this the Indian government made it mandatory for companies above a certain size and profitability to contribute a percentage of their profits to social development, through some changes brought by the Companies Act 2013. With amendments brought in Companies Amendment Act 2017, the CSR provisions have become more comprehensive. But these mandatory provisions are not entirely compulsory in nature and the corporate houses can evade their responsibility in one way or another.
It is yet to be seen whether these mandatory provisions is followed by the businesses or not.

The prescribed CSR provisions in the company law of the country has been added because the government feels that corporate enterprises can contribute more to the growth of the country and its weaker sections. Keeping this in mind the amendments were drafted and Companies Act 2013 came into force. In this a new Section 135 was inserted, which talks about corporate social responsibility of companies. In section 135 of Companies Act 2013, it is stated that a company having net worth of rupees five hundred crores or more, or turnover of rupees one thousand crores or more or a net profit of rupees five crores or more during any financial year, is to constitute a CSR committee consisting of three or more directors, out of which one is to be an independent director. This CSR committee has the responsibility to formulate the CSR policy of the company which indicates the activities to be undertaken, the areas on which company has to focus for its spendings. The company is to focus on local areas closer to workplace.The company has to spend at least two percent of the average net profits of the company in every financial year made during the preceding three financial years.
Through the 2017 amendments to Companies Act 2013, following changes and additions have been made in the Companies Act:
1. Company having turnover of rupees five crores or more in the immediately preceding financial year shall constitute a CSR committee.
2. In case of an unlisted company, where the company is not required to appoint an independent director, the CSR committee shall have two or more directors.
3. The CSR committee shall indicate the activities to be undertaken by the company prescribed under 7th schedule.
After these amendments, it has become mandatory for companies to comply with CSR provisions. But even after the mandated compliance, the mandatory philanthropy is not entirely compulsory in nature.

Features and scope of CSR under Indian company law-
According to Section 135 of the Companies Act 2013,
Every company having:
a.) net worth of rupees five hundred crore or more, or
b.) turnover of rupees one thousand crore or more or
c.) a net profit of rupees five crore or more
shall constitute a CSR committee and allocate 2% of its net profits of preceding 3 financial years to undertake the activities mentioned in Schedule VII according to the directions of CSR committee.
Rule 3(2) of the Corporate Social Responsibility Rules, 2014 provides that every company which ceases to be a company covered under section 135(1) of the Act for three consecutive financial years shall not be required to:
a.) constitute a CSR Committee ; and
b.) comply with the provisions contained in subsection (2) to (5) of the said section till such time it meets the criteria specified in sub section (1) of Section 135.
The activities mentioned in Schedule VII are-
Activities relating to –
a.) Eradicating extreme hunger and poverty
b.) Promotion of education
c.) Promoting gender equality and empowering women
d.) Reducing child mortality and improving maternal health
e.) Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases.
f.) Ensuring environment sustainability
g.) Employment enhancing vocational skills

h.) Social business project
i.) Contribution to Prime Ministers National Relief Fund or any other fund set up by central government or state government for socio economic development and relief and funds for the welfare of Schedule Castes and Schedule Tribes and other backward classes, minorities and women and
j.) Such other matters as may be prescribed.

Punishment for non compliance-
In case of any non compliance, the Companies Act, 2013 imposes an obligation on the board to the company at Annual General Meeting (AGM).
Though there is no specific provision provided for non compliance for spending on CSR under the Companies Act 2013, Section 450 is an overarching provision for punishing a company or its officers in case where there is no specific punishment provided for an offence in the act. It says, “If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made there under, for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.”

Whether CSR contribution is mandatory or not-
Although these CSR provisions make it mandatory for a company to comply and contribute the fixed profit percentage to weaker sections of society, there is no sanction for non compliance of these provisions. Companies can get away with not contributing to the prescribed activities. Section 135 does not specify penal consequences if a company fails to comply with these provisions. However, section 135(5) provides that If a company fails to spend the prescribed amount on activities prescribed under schedule 7, it shall, under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount. In case company does not comply with Section 134, the company shall be punishable under Section 134(8).

It can be said that in the present scenario, although companies are required to comply with the provisions of section 135 of Companies Act and contribute with their wealth, there are no repercussions or penal consequences for it's non compliance. Without there being any punishment, the chances of companies contributing towards the weaker sections of society seem very minimal. The penal provisions and punishment act like guiding force or encouragement there very existence are important for every statutory scheme to effectively work.

However there have been by the government to sharpen the CSR provisions and giving the penal provisions more teeth but these talks are yet to formalize.

It can finally be said that CSR provisions in the company law of country is a great step towards corporate contribution in the growth and development of the country. Corporate houses have been contributing towards this for generations. But for encouraging newer businesses for this, these provisions needs to be sharpened and new amendments need to be done in this direction.

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