“The business of business should not be about money. It should be about responsibility. It should be about public good, not private greed” ~ Anita Roddick
Envision a society in which companies are motivated by more than just financial gain. where businesses are responsible for the effects they have on the economy, society, and environment. Welcome to the nexus of law and corporate social responsibility (CSR), where the lines separating mandated legal obligations from voluntary activities are becoming increasingly hazy. A silent revolution is occurring in the corridors of power as we observe a profound change in the way businesses function. Businesses are being compelled to reevaluate their place in society as governments use legislation to compel social change more and more.
But the question that arises here is what occurs when CSR and the law collide? Is legislation only a box-ticking exercise, or can it actually lead to genuine change? Join me on a journey to explore the captivating intersection of CSR and Law. let’s begin this by understanding what is CSR.
What Is CSR?
The term CSR stands for “Corporate Social Responsibility” i.e. responsibility of the corporate towards the society. It is a concept that refers to a company’s efforts to contribute to society and operate in an ethical & sustainable manner.[1] Although responsible companies had already existed for more than a century before, the term Corporate Social Responsibility (CSR) was officially coined in 1953 by American economist Howard Bowen in his publication Social Responsibilities of the Businessman. As such, Bowen is often referred to as the father of Corporate Social Responsibility.[2] CSR is motivated by the idea that companies should support the sustainable growth of society & have wider responsibilities than just their financial performance. Companies try to create shared value for their business and the communities they operate in by incorporating social and environmental factors into their plans and operations.
History Of CSR: How CSR Evolved
In the U.S., the concept of CSR didn’t really take off until the 1970s. The Committee for Economic Development first proposed the idea of the “social contract”—which refers to corporate citizenship between firms and society in 1971.
This contract brought forward the idea that companies function and exist because of public consent and, therefore, there is an obligation to contribute to the needs of society. By the 1980s, early Corporate Social Responsibility continued to evolve as more organizations began incorporating social interests in their business practices while becoming more responsive to stakeholders.[3]
Stages Of CSR In India
There were four Phases in the development of CSR in India. The fundamental belief behind CSR was that not only the government is responsible for social & environmental development but also the corporate.
The four Phases are:
First Phase: The primary drivers of CSR in India during its early development were philanthropy and charity. Until 1850, CSR was majorly controlled by wealthy merchants. These merchants gave away a part of their money to causes like temple building, providing food during famine and epidemics from their godowns.[4] But this approach changed during the colonial rule over India, the major entities that were considered to hold the propensity towards the economic factors of CSR were: TATA, Godrej, Bajaj, Birla, etc. Nevertheless, the initiatives they have made in the areas of public and economic production were motivated not just by philanthropic and philosophical motivations but also by economic and governmental interests.[5]
Second Phase: the philosophy of Trusteeship, influenced by Mahatma Gandhi, aimed to make wealthy industrialists trustees of trusts for the welfare of the common people. This philosophy shaped the second phase of CSR during independence, leading to the establishment of trusts for education, training, & research, emphasizing nation-building & social & economic development.[6]
Third Phase: The post-independence era saw public sector undertakings emerge, Phase III focused on transparency, social accountability, & stakeholder dialogue. Indian academics, politicians, & businessmen organized a national workshop to improve corporate governance, reduce malpractices, & comply with environmental laws. Despite these efforts CSR failed to catch up.[7]
Fourth Phase: During the fourth phase, which began in the 1980s, companies began to move away from their traditional approach to CSR &instead integrated it into a sustainable business plan. The first steps toward globalization were taken in the 1990s. Partially eliminating controls and licensing requirements helped to stimulate the economy, the effects of which may still be seen today. Indian businesses grew quickly as a result of the economy’s enhanced economic pace, which increased their willingness and capacity to support social causes.[8]
Current Phase: In the current phase of CSR in India, the Company’s Law of 2013 has given separate priority to the concepts of CSR and Sustainable Development. Whereas, the Public Sector follows the guidelines given by Department of Public Enterprises (DPE). The Ministry of Heavy Industries and Public Sector Enterprises has released these rules. The CSR rules for PSUs were created in 2010. Nonetheless, CSR has been practiced for a while, and many businesses have decided to engage in it voluntarily in accordance with their own corporate values.[9]
CSR Revolution: From Optional To Obligatory
In today’s business environment Corporate Social Responsibility (CSR) is becoming a legal requirement, in addition to being a moral one. Through Section 135 of the Companies Act of 2013, CSR has become a mandate for businesses that meet specific conditions. India is among the first nations to make CSR a legal obligation, as this law requires businesses to allocate a minimum of 2% of their average net income to CSR initiatives.
Section 135 Of The Companies Act: A Game Changer For CSR
The concept of Corporate Social Responsibility (CSR) was introduced through the Companies Act, 2013 which puts responsibility on companies in India to set out a clear CSR framework. Section 135 of the Companies Act, 2013 which came into effect on April 1, 2014, imposes obligations on certain companies regarding Corporate Social Responsibility (CSR) activities. [10]
Section 135 Of the Companies Act states: Every company having net worth[11] of rupees five hundred crore or more, or turnover[12] of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.[13]
Therefore, Companies that meet specified financial benchmarks are required by the Companies Act, 2013 to allocate at least 2% of their average net income to corporate social responsibility (CSR) initiatives. Penalties and legal repercussions may result from breaking this legal requirement. The purpose of this regulatory obligation is to incentivize companies to accept accountability for their environmental and social impact. The law highlights the value of businesses’ contributions to society by requiring CSR spending, making it a legal requirement for qualified organizations.
Fines And Penalties For Non-Compliance
Failure of a company to comply with CSR spending provisions or transferring and utilizing the unspent amount out of the CSR funds, a company will be punishable with a fine which may increase to Rs. 25 lakhs but not less than Rs. 50,000. The Act also provides for punishment of company officers who default in compliance. It states that every such officer of the company will be liable to for a punishment with a fine which may increase to Rs. 5 lakh but not less than Rs. 50,000 or imprisonment for a maximum term of three years of with both.[14]
Challenges To CSR Activities
According to the India CSR Outlook Report 2023, following are the challenges to the CSR activities:[15]
- Limited NGO-Community Connect
- Incapacitated Financial Management System
- Inability to Meet Project Timelines
- Constrained Relationship with Government Agencies
- Insufficient Technical Expertise
- Lack of Sustainability Plan in Intervention
- Insufficient Reporting and Impact Communication
Conclusion
In Conclusion, there has been a substantial change in the way businesses function in India as a result of the convergence of CSR and the law, as expressed in Section 135 of the Companies Act. The government has made it very evident that businesses have an obligation to give back to society by requiring CSR spending. Despite difficulties and complications, this legislation has the power to advance sustainable development and bring about significant change. It is imperative that businesses adopt this new paradigm going ahead and incorporate CSR into their main business plans. They can then take advantage of chances for development, creativity, and social impact. The confluence of law and CSR is now a motivator for change rather than merely a need for compliance.
Ultimately, the success of Section 135 will depend on the collective efforts of companies, governments, and stakeholders to create a more equitable and sustainable future. As we navigate this new landscape, let us remember that CSR is not just a legal requirement, but a moral imperative – one that has the power to shape a better world for generations to come.
[1] Tamanna Gaba, CSR Compliance: Unveiling the Legal Obligation and Social Responsibility under the Company Law,< https://www.taxmann.com/research/company-and-sebi/top-story/105010000000023032/> accessed 12th September 2024
[2] A Brief History of Corporate Social Responsibility (CSR), < https://www.thomasnet.com/insights/history-of-corporate-social-responsibility/> accessed 13th September 2024
[3] Ibid
[4] Swathi Subramaniam, EVOLUTION OF CSR IN INDIA, International Journal of Social Science and Economic Research ISSN: 2455-8834 Volume: 04, Issue: 07 “July 2019″< <https://www.ijsser.org/files_2019/ijsser_04__383.pdf> accessed 13th September 2024
[5] Dhanishtha Gupta& Lakshmi Sri Lekha Maddula, Corporate Social Responsibility, 2.2 JCLJ (2022) 774, accessesd 13th September 2024
[6] Subramaniam(n4)
[7] Maddula(n5)
[8] Four phases of corporate social responsibility – CSR,< https://indiaCSR.in/four-phases-of-corporate-social-responsibility-CSR/> accessed 13th September 2024
[9] Subramaniam (n4)
[10] Gaba(n1)
[11]Defined under S/2(57) of the Companies Act, 2013
[12] Defined under S/2(91) of the Companies Act, 2013
[13] < https://ca2013.com/135-corporate-social-responsibility/> accessed 13th September 2024
[14] Radhika, Corporate Social Responsibility under Companies Act, 2013,< https://www.legalserviceindia.com/legal/article-5998-corporate-social-responsibility-under-companies-act-2013.html#:> accessed 13th September 2024.
[15] < https://indiaCSR.in/wp-content/uploads/2023/10/India-CSR-Outlook-Report-2023.pdf> accessed 13th September 2024
Author: Saloni Yadav
