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Impact of CSR on Indian Companies

What is CSR?

CSR stands for Corporate Social Responsibility it has been incorporated in Companies Act 2013 under section 135.[1]

India is one of the first countries in the world to make corporate social responsibility (CSR) mandatory, Due to an amendment in the Companies Act, 2013 in April 2014. Businesses are able to invest their profits in areas such as education, betterment of society, sanitization, and disaster relief as part of any CSR compliance.

Amid the COVID-19 (corona virus) outbreak, the Ministry of Corporate Affairs has notified that companies' expenditure to fight the pandemic will be considered valid under CSR activities. Profits may be utilized on various activities related to COVID-19 such as donation to PM-CARES Fund and promotion of healthcare including preventive healthcare and sanitation, and disaster management.

CSR was introduced as a measure to assess the corporate responsibility of a business towards the:

  • Society
  • Customers
  • Suppliers
  • Shareholders
  • Employees
A business uses the resources of the society so it is the responsibility of a business to give something in return. Nowadays investors are considering company's CSR report before investing in it.

Impact of CSR:

  • Mandatory requirement to form CSR committee to the companies qualifying the criteria given under Sec. 135 of Companies Act 2013
  • Formation of CSR Policy and uploading the same on the website of the company.
  • Mandatory expenditure of prescribed amount on CSR activities such as education, poverty, gender equality and hunger.
  • Increased trust of shareholders, employees and society in general towards the company.
  • Businesses in India have now started integrating CSR initiatives with their corporate strategies.

Companies now have specific departments to monitor the CSR activities, prepare CSR policies and strategies, set separate goals and budgets for CSR activities.
Increased compliance and filing of reports for the Companies.

Impact of The Companies (Amendment) Act, 2020 on CSR:

Setting off excess CSR expenditure:
Currently, excess CSR spend cannot be carried forward. Therefore, a 3rd proviso has been added to sub-section 5 of Section 135 whereby: if the corporate spends an amount in more than two per cent of the typical net profits of the company made during the three immediately preceding financial years, such company may set off such excess amount against the requirement to spend under this sub-section for the number of prescribed financial years in a manner as provided.

In simple words, the businesses which spend quite the prescribed two per cent on CSR during a particular fiscal year may carry it forward as credit for fulfillment of CSR obligations for the next few years.

Amendments relating to Social Stock Exchange:

Companies which are spending above the mandatory two percent of their pre-tax profits on Corporate Social Responsibility (CSR) may soon be ready to trade this excess CSR expenditure. This has also been recommended by market watchdog SEBI's High-Powered Committee on Social Stock Exchange (SSE).

Under this allowance, companies that are spending more than the limit of two per cent set under Section 135(5) of the Indian Companies Act 2013 can sell or trade this excess amount to the companies which have failed to meet their annual quota.

Penalty for Non Compliance:

According to the new sub-section 7 to Section 135: “If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the quantity required to be transferred by the corporate to the Fund laid out in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case could also be , or one crore rupees, whichever is a smaller amount , and each officer of the corporate who is in default shall be susceptible to a penalty of one-tenth of the amount required to be transferred by the corporate to such Fund laid out in Schedule VII, or the Unspent Corporate Social Responsibility Account, because the case could also be , or two lakh rupees, whichever is less.”

CSR Committee:

Under the new sub-clause 9: “Where the amount to be spent by a corporation under sub-section (5) doesn't exceed fifty lakh rupees, the need under sub-section (1) for constitution of the company Social Responsibility Committee shall not be applicable and therefore the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.”

In simple words, the businesses which have but fifty lakh rupees to spend on CSR activities don't need to constitute a CSR committee and therefore the CSR obligations could also be fulfilled by the Board of Directors of such company.

Examples of CSR in India:

ITC Group:
It is a conglomerate which was able to create job opportunities for over 6 million people through its CSR activities. It has also introduced a platform called E-Choupal for the farmers through which they can sell their produce using internet and get better profit margin for their crops.

Tata Group:
The Tata Group India carries out various CSR projects, most of which are Society development and poverty alleviation programs. It also works in the field of women empowerment activities, income generation, rural community development, and other social welfare programs. Tata Group has established various educational institutions and also provides various scholarships.

The group also engages in healthcare projects, child education, immunization, spreading awareness of AIDS. The other areas are economic development various agriculture programs, environment sustainability, providing, and infrastructure development, like hospitals, research centers, educational institutions.
Ultratech Cement:
Ultratech Cement, India's eminent cement company is involved in social work across various villages in the country with aim to create self sustainability and independent lifestyle. It perform various CSR activities in the field of healthcare and poverty alleviation, education, infrastructure, environment, social welfare, and sustainable livelihood.

Mahindra & Mahindra:

Indian automobile manufacturer Mahindra & Mahindra (M&M) it formed the K. C. Mahindra Educational Trust in 1954 and Mahindra Foundation in 1969 with the aim of promoting education. The company's main aim is to develop various education programs to assist economically and socially disadvantaged communities.

Its CSR programs invest in education, scholarships and livelihood training, healthcare for rural areas, water preservation, and disaster management programs. It also runs programs such as Nanhi Kali for education of girls, Mahindra Pride Schools for industrial training, and Lifeline Express for healthcare services in remote areas.

Conclusion:
CSR plays a pivotal role in the industry for the businesses to gain trust of its stakeholders. Companies should start focusing on areas that are neglected by government to perform CSR activities and achieve inclusive and sustainable development of Indian economy.

Nowadays businesses are not only focused on profit maximization but to achieve an inclusive growth of society as a whole. It's a need of the hour for the businesses to start focusing on activities such as:
  • Medical technology and developing Healthcare infrastructure in India.
  • Providing quality education in the rural region of India and providing various scholarships to the underprivileged students.
  • Contributing to Clean India Mission with an aim to improve standard of living of the society.
  • Minimize the environmental pollution and maximize the social benefits and provide healthy environment for the people.
Companies should prepare a periodical CSR Report to inform its stakeholders about the commitments and actions in social and environmental areas. The main aim of the CSR Report is to increase transparency and to enable companies to measure the impact of their activities on the environment, on society and on the Indian economy.

Government should ensure strict implementation of CSR activities across the India by monitoring the prescribed expenditure by companies and the progress of various CSR projects undertaken by the companies.

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