The Ineffective Corporate Social Responsibility (CSR) Law in India

About the author: Jasnoor Kaur a B.Com. LLB(Hons.) student from 4th-year UILS, Panjab University, Chandigarh.

Corporate Social responsibility (CSR) is continuing commitment by businesses to integrate social and environmental concerns into their business operations. Changes in the global environment increasingly challenge the world to look beyond financial performance, and to integrate social and environmental concerns into their strategic management. Prior to the Companies Act of 2013, CSR in India has traditionally been seen as a philanthropic activity and it was believed that every company has a moral responsibility to play an active role in discharging the social obligations, subject to the financial health of the company. India is the first country in the world to make corporate social responsibility (CSR) mandatory, following an amendment to the Companies Act, 2013 in April 2014.

Prior to that, the CSR clause was voluntary for companies, though it was mandatory to disclose their CSR spending to shareholders. CSR is the procedure for assessing an organization’s impact on society and evaluating its responsibilities. The most effective CSR plans ensure that while organizations comply with legislation, their investments also respect the growth and development of marginalized communities and the environment. Organizations in India have been quite sensible in taking up CSR initiatives and integrating them into their business processes. It has become progressively projected in the Indian corporate setting because organizations have recognized that besides growing their businesses, it is also important to shape responsible and supportable relationships with the community at large. In India Tata chemicals, Infosys, ITC group, Mahindra and Mahindra are among the top on the list of CSR. Infosys has beaten Tata Chemicals for the Number 1 position in the 2020 India sustainability and CSR chart. Infosys was the second ranker in 2019 and has risen to the top in CSR in 2020. All the companies mentioned are responsible businesses that place corporate social responsibility (CSR) high on the agenda. This ranking is based on the companies’ spending patterns on CSR, performance and spending with respect to the responsibility matrix, ESG performance and how companies are incorporating Sustainable Development Goals (SDGs) into their responsible business actions.

Companies are allowed to develop their own social investment strategies and decide where to invest and implement programs, but the government has recommended particular areas of need, including eradicating hunger and poverty, maternal and child health, HIV, TB and malaria, promoting gender equality and environmental sustainability. Companies should give preference to the local areas where they operate. If a company does not conduct its own CSR, it can give the required amount to the government’s socio-economic welfare programs such as the Prime Minister’s National Relief Fund. Amid the COVID-19 (coronavirus) outbreak, the Ministry of Corporate Affairs has notified that companies’ expenditure to fight the pandemic will be considered valid under CSR activities. Funds may be spent on various activities related to COVID-19 such as the promotion of healthcare including preventive healthcare and sanitation, and disaster management. Implementation in 2020 was a mixed bag with COVID-19 activities taking up the biggest chunk of funding. A number of cyclones and floods wreaked havoc in large parts of the subcontinent. As a result, funds were also directed to disaster relief operations in Assam, Kerala, Bihar, Odisha and West Bengal.

CSR is responsible for generating a lot of goodwill for companies either directly or indirectly. Making employees more loyal and helping companies retain them in the long run. Makes companies more legitimate and helps them in accessing a greater market share. Since companies act ethically, they face fewer legal hurdles. Bolster the goodwill of companies among the general public and help in strengthening their “brand value”. CSR helps companies and their components like their shareholders to help in the development of a country’s economy on a macro-level. They motivate companies to cooperate and communicate with each other, their customers and the administrative machinery. Ecosystems become healthier due to the balancing efforts of the corporate. Management of waste is improved. Helps the company to grow fiscally and makes it more competitive. CSR laws are meant to help in transferring excess capital from the haves to the have-nots via acts of charity. They will be forced to contribute beyond the surface level and help in changing society in a much deeper way.

Under Section 135 of the new act, CSR is compulsory for all companies- government or private or otherwise, provided they meet any one or more of the fiscal criteria mentioned thereunder. If the company meets any one of the three fiscal conditions, they are required to create a committee to enforce its CSR mandate. CSR acts should conform to Schedule VII of the Companies Act, 2013. The aforementioned committee must regularly assess the net profits earned by the company and ensure that at least 2 per cent of the same is spent on CSR related activities.

Eminent scholars have claimed that companies while having enormous fiscal resources lack adequate knowledge of existing public problems and policy measures. As a result, their CSR efforts are misguided and do not help the public in the long run with sustaining benefits. For example- companies blinded to carrying out their mandated CSR activities might employ contractual workers with extremely low pay packages and virtually no other benefits. CSR activities carried out by companies often clash with their commercial and other vested interest which are prioritized over serving society. Furthermore, social issues often cannot be solved by money alone and most corporates do not want to look beyond fiscal measures to help the society. They also do not realize that money can often worsen existing problems. As per section 135 of the Companies Act, 2013, CSR efforts will be equated with the money spent- which should be at least 2 per cent of the net profit. However, companies are not very transparent in declaring their CSR income. Companies in the past have fudged figures to meet the mandatory CSR spending. Furthermore, companies that we're spending more than 2 per cent before the said law came into place, have started spending much less these days.

According to available data, companies have engaged in selective CSR tasks that ultimately benefit their brand value and help them prosper rather than activities that genuinely help society at large. According to some corporates, the mandated 2 per cent CSR on net profit is also a way of extracting higher profits illegitimately via a “back door” and forcing them to fill in areas where the government has not acted enough. CSR in India suffers from some serious infirmities- policy and procedure-wise. As a result, it can be argued that some more measures are needed to help implement CSR activities better. Specialization of companies should be utilized better. CSR should not be simply seen as the spending of fiscal resources but as the smart spending of CSR resources. For example- a multi-national company engaged in the production of packaged food should provide those below the poverty line with similar assets, and telephone companies should set up telecom services in remote areas lacking such services. Section 135 of the Companies Act should be amended to include measures to allow companies to do CSR activities as per their strengths and specialities based on expert data. Companies should not blindly spend fiscal resources but rely on data and suggestions of research institutes so that their efforts result in the actual eradication of pre-existing social problems. Therefore, companies should collaborate with social enterprises and research institutes and with the people on the ground- those who are supposed to receive their CSR aid. This will help them realize what people actually need, and what their actual problems are and accordingly they can humanize their CSR aid to help a number of people with greater efficiency. Companies must also compulsorily collaborate with specialist non-government institutions, that have acted in a particular field with specialist experience. This will help them utilize their fiscal resources better as dedicated NGOs will guide them in effectively implementing their aid programmes.

CSR in India was legislated with the hope that it would bring about a change in the attitude of corporate institutions, who would give back to the society in a big way as it was the society whose needs helped them prosper in the first place. Similarly, it was also felt that the society would also get help as the government has been found to be wanting in its efforts to help the local populace in several instances. The CSR act, in spite of all its good intentions, has failed to cover a lot of ground. It has given an impetus to companies to give back to society. However, due to some policy and procedural inadequacies, it has failed to set up a full-proof method of imparting CSR. Faulty criteria to determine the extent of money spent, fudging of data, selective and self-serving CSR tasks or short-term money spending are some of the core problems that India’s CSR laws and policy suffer from. Therefore, the need of the hour is to change the CSR laws and amend them to become long-term, simple and easier to monitor. CSR laws, with some tweaks, will greatly help society in the near future.

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