Corporate Social Responsibility or popularly known as CSR was mandated in India and India became the first ever country to do so under section 135 of the Companies Act,2013, which primarily states that a company must contribute in the social, environmental and economic growth of India.
However, there are a few specific requirements for a company to fall under the mandate of CSR and those are:
Net worth: More than INR 5 billion.
Turnover: More than INR 10 billion.
Net profit: More than INR 50 million.
Companies which fall under these category must spend 2% of their net profit over the last three years on CSR activities.
For newly incorporated companies with less than three years of operations, the average net profit of available years is considered. For example, Company A was incorporated in FY 2018-19 and meets the eligibility criteria under Section 135(1) for FY 2020-21. Consequently, Company A’s CSR spending obligation under Section 135(5) would amount to at least two percent of the average net profits generated during FY 2018-19 and FY 2019-20.
The average net profit for determining CSR expenditure is calculated as per the provisions of Section 198 of the Companies Act, 2013, excluding the items specified under Rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. Section 198 outlines specific adjustments to be made when calculating a company’s net profit, excluding elements such as capital payments or receipts, income tax, and the set-off of previous losses. Profit Before Tax (PBT) is used for the computation of net profit under section 135 of the Act.
Excess CSR spending can be set off against the mandated 2 percent CSR expenditure for up to the immediately succeeding three financial years, provided that the conditions outlined in Rule 7(3) of the Companies (CSR Policy) Rules, 2014 are met. However, it is important to note that excess amounts spent on CSR activities can only be carried forward from January 22, 2021, onwards.
Now , the real question that arises is that is CSR a boon or a burden and to understand that let us take a look at the permitted activities for CSR under the companies act,2013:
1. Poverty, health, and sanitation
2. Education and employment
3. Gender equality and support for vulnerable groups
4. Environmental sustainability
5. National heritage and culture
6. Support for armed forces and their families
7. Promotion of sports
8. Contributions to government funds
9. Support for research and development
10. Support for educational institutions
11. Rural development projects
12. Slum area development
13. Disaster management
These are the 13 domains where in a company could use the CSR funds however the main question arises here is that are these funds used for these activities actually making the impact that they are aimed at making? Let’s take an example for it, suppose a company is spending the money to plant trees as a CSR activity which is commendable but they fail to take care of that tree in the long run which just defeats the entire purpose of CSR in itself because we are back to where we started eventually.
To actually understand if it is truly a boon or a burden given to the companies we will have to look at both the good and bad of it.
Pros of CSR in India:
Improved Company Image: By participating in CSR activities, companies can improve their image. Supporting social and environmental causes shows a company's commitment to the community, which can increase customer loyalty and trust.
Community Support: CSR often involves projects that benefit communities, like improving education, healthcare, and infrastructure. These efforts can raise living standards and help underprivileged groups in India.
Better Employee Morale: When companies engage in CSR, it can boost employees' spirits and job satisfaction. Working for a socially responsible company can make employees feel proud and motivated.
Sustainable Practices: CSR encourages businesses to adopt sustainable practices, leading to benefits like less waste and lower energy use, which positively impacts the environment.
Legal Compliance: By following the CSR spending requirements of the Companies Act, companies can avoid legal issues and penalties, promoting a culture of responsibility.
Cons of CSR in India:
Financial Strain: For smaller companies, mandatory CSR spending can be a financial challenge. Diverting funds to CSR might affect their core business activities and profitability.
Superficial Efforts: There's a risk that some companies might perform CSR activities just to meet legal requirements, without genuinely helping society. This can lead to more focus on publicity than real impact.
Lack of Skills: Many companies don't have the necessary expertise to effectively carry out CSR projects, leading to poorly executed initiatives that don't address real societal issues.
Corruption Issues: Sometimes, CSR funds are mismanaged or misused, with corruption interfering with project implementation. This can lead to distrust towards corporate efforts.
Challenges in Measuring Impact: It's difficult to measure the impact of CSR activities. Without proper evaluation and reporting, assessing the effectiveness of CSR efforts can be challenging.
CSR in India offers both opportunities and challenges. It has the potential to create positive social change and enhance corporate reputations, but its success depends on sincere and well-planned implementation. Companies should focus on genuine community involvement, transparent practices, and effective impact measurement to maximize CSR benefits. By addressing the drawbacks and capitalizing on the advantages, CSR can be a strong tool for In India, several landmark cases have shaped the understanding of Corporate Social Responsibility (CSR), influencing corporate behavior and setting precedents in business ethics.
Tata Iron & Steel Co. Ltd. v. State of Bihar (1958)
This case emphasized corporate responsibility towards community welfare, laying the foundation for future CSR obligations.
Indian Council for Enviro-Legal Action v. Union of India (1996)
The Supreme Court held companies accountable for environmental damage, reinforcing sustainable and ethical business practices.
M.C. Mehta v. Union of India (1986)
This case led to stricter pollution regulations, highlighting the duty of companies to protect the environment and public health.
Sterlite Industries (India) Ltd. v. Union of India (2013)
The closure of Sterlite's plant underscored the need to adhere to environmental standards, emphasizing CSR's role in respecting community rights.
National Green Tribunal Bar Association v. Virender Singh (2012)
This case reinforced sustainable development as a core aspect of CSR, balancing economic growth with environmental preservation.
These cases have been pivotal in defining CSR in India, ensuring businesses act ethically and contribute positively to society and the environment.sustainable development in India.