By Gauri Gaur
Corporate Social Responsibility was first defined by Mr Frank Abrams as a business obligation to conduct the affairs of the enterprise to maintain an equitable and workable balance among the claims of the various directly interested groups, a harmonious balance among stockholders, employees, customers, and the public at large. The rudimentary principle behind CSR involves the evaluation of a firms profits, as well as their utilization. The latest definition of CSR encompasses seven principles: organizational governance, community involvement and development, human rights, labor practices, the environment, fair operating practices and consumer issues. As organizations have evolved since the advent of the Industrial Revolution, the role of corporations has become much more important and the influence of societies on their activities has increased. The companys responsibility is not solely to shareholders anymore and they need to make contributions that benefit society. CSR necessitates that wealth created is to be distributed to the stakeholders. Stakeholders are an essential component of effective CSR. They can include investors, lenders, employees, consumers, non- governmental organizations, debtors, suppliers and the government. All stakeholders need to be managed comprehensively, for example, corporate decisions to cut costs and increase profits can be a detriment to the environment as well as to healthy relations with consumers and NGOs. Therefore, pleasing investors is no longer the sole aim of organizations. Generation of profits is insufficient for corporations that wish to practice CSR, rather, it is the production and distribution of wealth for the betterment of its stakeholders. Thus good CSR requires the formulation of an ethical and social structure that promotes sustainable management practices. Sustainability requires that organizations think about the long term impact of their policies on society and recognize the key factors that affect technology, economics and the environment.
Historically, India has always espoused the underlying principles of CSR. Before colonization, wealthy merchants often practiced philanthropy by setting up temples and providing food during times of scarcity. Cultural, religious and family values were the driving forces behind social contribution. After Independence, economic policy, such as industrial licensing, high taxes and other restrictions led to many corporate malpractices. There was a severe degradation of the private sector and Public Sector Undertakings (PSUs) were set up to ensure equitable distribution of resources. However, the PSUs had a limited impact and the need for the inclusion of the private sector was evident. The Companies Act, introduced in 1956 (applicable to both listed and unlisted companies) and the Securities and Exchange Board (SEBI) were unable to bring an impact on CSR governance.
A revised form of the Companies Act, enacted on 29th August, 2013 included new CSR rules for corporations in India. Section 135 of the Act has the potential to kick start a new era and provide and opportunity for Indian businesses to work in collaboration with civil society and the government to promote sustainable development. A streamlined distribution of wealth will also help eradicate the social and economic injustice that persists in the country.
Section 135 of the 2013 Act states that every company having a net worth of Rs 500 crore or more, or a turnover of Rs 1000 crore or more ,or a net profit of Rs 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board which would comprise of three or more directors, out of which at least one director shall be an independent director. 2% of average net profits of the last three years is compulsorily to be spent on CSR by companies (average net profit to be calculated as per the provisions of Section 198 of the 2013 Act). If the Company fails to spend the specified amount, the Board will have to disclose in its report as to why it was unable to do so. Failaure to explain will lead to the imposition of a hefty fine. The mandate of the CSR Committee is to develop and monitor a Corporate Social Responsibility Policy to the Board. The policy has to specify the projects and programmes to be undertaken , prepare a list of CSR projects which a company plans to execute during the implementation year, and implementation schedules for the same. After consideration of the recommendations of the CSR Committee the Board has to approve the CSR policy for the company and disclose its contents in its report and place it on the companys website. Therefore, it is their responsibility to ensure that the activities incorporated in the policy are undertaken by the company.
CSR activities as per Schedule VII include eradication of extreme hunger and poverty, promotion of education, promotion of gender equality and empowerment of women, reduction of child mortality and improvement of maternal health, combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases, ensuring environmental sustainability ,employment enhancing vocational skills ,social business projects , contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women. The 2013 Act also states that companies are to prioritize the development of areas in which they operate. CSR activities can be conducted as projects or programmes as long as they are not exclusively for the benefit of the employees of the company. Furthermore, in case of the establishment of any Trust/Foundation for implementation of its CSR policy by a company, a monitoring mechanism will have to be put into place to ensure no improper utilization of funds allocated. CSR initiatives can also include integrating business models with social and environmental priorities. The surplus arising out of any CSR initiative is not to be a part of business profits. Also, activities will be taken into consideration only if they are carried out in India.
It is estimated that this policy will generate around USD 3 billion dollars annually. Therefore, the biggest task for both corporations as well as the government is to ensure optimal utilization of these funds. The full potential of the Indian economy can be exploited only if the private sector, civil society and the public sector can work in tandem to bring about change. Businesses are to be encouraged to incorporate practices such as long term financial management along with scenario planning so that that may produce and distribute wealth for generations.
The author is currently pursuing Economics Hons at Jesus and Mary College, Delhi University and has managed to make it into her second year. She enjoys reading, sleeping, eating and watching movies. One day, she hopes to fulfill her dreams of becoming an economist and bring about world peace. You can contact her at gaur.gauri17@gmail.com