Special Articles

Vol. 56, Issue No. 26-27, 26 Jun, 2021

Updated on 8 July 2021
Shiv Nath Sinha
Shiv Nath Sinha (shiv@gim.ac.in) teaches at the Goa Institute of Management, Goa.
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CSR

Excessive Regulation

Companies Act 2013

Corporate Social Responsibility in

India
A Case of Government Overregulation?
Section 135 of the Companies Act, 2013 mandates companies with a particular
turnover, networth, and net profit to spend 2% of their average net profit on
corporate social responsibility, while Schedule VII of the act prescribes
activities which shall be called as CSR activities. Within a span of six years,
CSR rules have been amended multiple times and the central government has
at different times added more activities, as well as two high-level committees
on CSR. Is CSR in India facing a case of excessive overregulation, when it is
basically voluntary in nature?

Corporate social responsibility (CSR) has become an important issue in the

business world. There is an ongoing debate about the way CSR should be
regulated. Different countries follow different ways to implement CSR. In
many countries, CSR is self-regulated, while in others, it is regulated
through a code of conduct, and in very few countries, it is enforced through
specific legislation.1 The majority of the countries require disclosure
on CSR and sustainability practices through company law or listing
agreements of the stock exchange.2
The emergence of CSR legislation in some of the countries has raised a
debate. Supporters of shareholders primacy model3 of corporate
governance that holds shareholders interest as paramount,
criticise CSR legislation, stating that deviation from this principle would
jeopardise the interest of the business entity. Meanwhile, supporters of
stakeholder theory4 welcome this new CSR legislative endeavour in a few
countries, stating that the increased inequality, extreme poverty, hunger,
climate change, etc, does not leave any option in front of the national
governments except to make CSR mandatory. In 2019, even the Business
Roundtable, an association of chief executive officers of leading
corporations in the United States (US), redefined the purpose of a
corporation as to benefit all stakeholders—customers, employees,
suppliers, communities, and shareholders, moving away from shareholder
primacy.5
CSR Journey in India
CSR regulation in India started with the issue of Voluntary Guidelines
on CSR, 2009 by the Ministry of Corporate Affairs (MCA). These guidelines
were revised as National Voluntary Guidelines (NVGs) on social,
environmental and economic responsibilities, 2011. The guidelines consist
of nine broad principles6 which lay down a framework on what constitutes
responsible business conduct.
In August 2012, Securities and Exchange Board of India (SEBI) mandated
inclusion of Business Responsibility Reports (BRR) as a part of the annual
reports for the top 100 listed entities based on market capitalisation at the
National Stock Exchange (NSE) and Bombay Stock Exchange
(BSE).7 BRR requires detailed disclosure regarding steps taken by listed
entities from an environmental, social and governance (ESG) perspective in
a particular format.8 In November 2015, SEBI mandated the inclusion
of BRR in the annual report of the top 500 listed companies9 and in
November 2019, SEBI extended the inclusion of BRR to top 1,000 listed
companies.10
In 2019, MCA revised the NVGs to incorporate the principles of United
Nations Guiding Principles on Business and Human Rights (UNGPs),
Sustainable Development Goals (SDGs), Paris Agreement on Climate
Change, 2015 and International Labour Organization (ILO) Core
Conventions 138, minimum age convention, and 182, worst forms of child
labour convention. On 13 March 2019, the revised NVGs were issued as
National Guidelines on Responsible Business Conduct (NGRBC), which are
a set of nine principles encouraging business entities not only to operate
businesses responsibly and sustainably, but also support their suppliers,
vendors, distributors, partners and, other stakeholders to follow suit.
In 2018, MCA also constituted11 a committee on business responsibility
reporting to develop a new BRR format keeping in view the worldwide
development in sustainability reporting framework (KPMG et al
2016).12 MCA released the report of the committee on 11 August 2020,
which recommended a new reporting format called as Business
Responsibility and Sustainability Report (BRSR), which will serve as a
single source for all non-financial disclosures (GoI 2020). Based on the
recommendations of the committee, in May 2021, SEBI mandated the top
1,000 listed companies to submit a BRSR13 instead of a BRR on a voluntary
basis from financial year 2021–22, and on a mandatory basis from
2022–23.
Mandatory CSR Spending
Section 135 of the Companies Act, 2013 mandated companies to spend
on CSR with effect from 1 April 2014. There may be various reasons for the
government to mandate companies in India to spend on CSR, when it is
considered a voluntary act of a business organisation worldwide (Walton
1967; Carroll and Shabana 2010). The European Commission also
defines CSR as a concept “whereby companies integrate social and
environmental concerns in their business operations and in their
interaction with their stakeholders on a voluntary basis” (Commission of
the European Communities 2001).
India ranks 131 out of 189 countries in the UNDP’s Human Development
Index (HDI) 2020 with an HDI value of 0.645.14 The country ranks 94 out of
107 countries on Global Hunger Index (GHI) with a score of 27.2, which is a
serious matter, considering the neighbouring countries rank far better
(China, ranked between 1 and 17;15 Iran: 39; Sri Lanka: 64; Myanmar: 78;
Nepal: 73; Bangladesh: 75; Pakistan: 88).16 The richest 1% of people own
51.5% of the country’s wealth, and around 10% own 77.4% of the country’s
wealth, while the bottom 60% owns a mere 4.7% of the country’s wealth,
highlighting the deep inequality in the country.17 India is the fifth most
polluted country in the world and 21 of world’s 30 most polluted cities are
in India.18 This data highlights the issues and challenges in front of the
governments across the world.
The Indian Constitution, in its directive principles, aspires to establish a
welfare state.19 The purpose of the welfare state is to create economic
equality and to assure equitable standards of living for all. A welfare state
believes that economic growth does not mean concentration of economic
benefits in the hands of a few persons in society but should aim at a
common good. The government has also enacted various laws20 which
address the basic responsibilities of the business entities towards their
employees and the environment. Similarly, the government mandates that
every company of a particular size should spend 2% of their average net
profit on specified CSR activities.21
CSR Provisions
Section 135 of the Companies Act states that every company having net
worth of `500 crore or more, or turnover of `1,000 crore or more or a net
profit of `5 crore or more during the immediately preceding financial year
shall spend in every financial year, at least 2% of the average net profits of
the company during the three immediately preceding financial years, in
pursuance of its CSR policy. The provision prescribes that the company
shall mandatorily spend if it fulfils the requirement for any of the three
criteria—net worth, turnover, net profit. In the case of a company with
negligible or negative profit but fulfilling the criteria of net worth or
turnover, it still must spend on CSR, which may not be sustainable. The
regulation should have given exemption to those companies whose net
profit are at break even or negative or the net profit should have been put
as an additional criterion rather than as a substitution criterion.
It also states that if the company fails to spend this amount, the board
shall, in its report, specify the reasons for not spending the amount and
unless the unspent amount relates to any ongoing project, transfer such
unspent amount to a fund specified in Schedule VII.
Compliance Failures
Initially, Section 135 did not specify any penalty in case the company was
unable to spend on CSR. It simply provided that the board shall, in its
report, specify the reasons for not spending the amount that is based on
the principle of “comply or explain.” But, the Companies (Amendment)
Act, 2019 incorporated sub-section (7) of Section 135 which provided that
the company shall be punishable with a fine which shall not be less
than `50,000 but which may extend to `25,00,000 and every officer in
default shall be punishable with imprisonment for a term which may
extend to three years or with fine which shall not be less than `50,000 but
which may extend to `5,00,000 or with both. In this regard, it is also
interesting to discuss the ministry reply to the parliamentary standing
committee on finance’s question as to “who will be monitoring the social
obligation of companies.”22 MCA stated that the whole emphasis of
the CSR provision is on public disclosure. It further stated that the
ministry has not thought of establishing any oversight mechanism to
monitor the compliance by corporates.23 Even the high-level
committee (HLC) 2015 stated in its report that “as regards penalty for
non-compliance with the CSR provisions of the Companies Act, the present
provisions in the law appear to be sufficient”(GoI 2015: 28). The question is
what happened that led to the incorporation of fines and imprisonment for
violation of Section 135. In 2021, the government again reviewed
the provisions and made it a civil offence by stating that in case of
violation of the CSR provisions, the company shall be liable to a penalty of
twice the amount required to be transferred by the company to the
specified fund or the unspent CSR account or `1 crore whichever is less and
the officer in default shall be liable to a penalty of one-tenth of the amount
required to be transferred by the company to the specified fund or
unspent CSR account or `2,00,000, whichever is less.24
Charitable Contributions
One-off events or expenditure, such as marathons, awards, charitable
contribution, advertisement, sponsorships of television programmes, etc,
would not be qualified as part of CSR expenditure.25 If charitable
contribution is not CSR then what is the significance of inclusion under
Schedule VII of the Companies Act of (i) contribution to the Swachh Bharat
Kosh for the promotion of sanitation;26 (ii) contribution to the Clean Ganga
fund for rejuvenation of river Ganga;27 (iii) contribution to the Prime
Ministers National Relief Fund (PMNRF)28 or Prime Minister’s Citizen
Assistance and Relief in Emergency Situations fund (PM CARES fund)29 or
any other fund set up by the central government for socioeconomic
development and relief and welfare of Scheduled Castes, Scheduled Tribes,
Backward Classes, minorities and women; (iv) contribution to incubators
or research and development projects in the field of science, technology,
engineering and medicine funded by central or state governments or public
sector undertakings (PSUs); (v) contribution to public-funded universities,
Indian Institutes of Technology (IITs), national laboratories, Indian
Council of Medical Research, Council of Scientific and Industrial
Research, Department of Atomic Energy, Defence Research and
Development Organisation, Department of Biotechnology, Department of
Science and Technology.30 It clearly shows a mismatch between
the FAQs issued by MCA, which prohibits31 charitable contribution
as CSR expenditure while at the same time Schedule VII of the Companies
Act mentions certain charitable contribution as CSR expenditure. Further,
there is no logic of excluding a marathon from CSR activity as a marathon
has great health benefits for the participants apart from raising the
awareness on health issues.
Again, contribution to the corpus of a registered public trust or a registered
society or a Section 8 company qualify as CSR expenditure as long as the
trust or the society or Section 8 company is created exclusively for
undertaking CSR activities or where the corpus is created exclusively for a
purpose directly relatable to a subject covered under Schedule VII.32 The
question remains how such charitable contribution is CSR expenditure
when it is also clarified that to be eligible for CSR, it has to be in a project
or programme mode. These are clearly conflicting in nature and contrary
to the concept of CSR.
CSR and Normal Business Operations
Any activity undertaken by the company in pursuance of its normal course
of business would not qualify as CSR.33 There is no reason to preclude such
activities from CSR, as business entities are expected to help the society
through their core competency which lies in their nature of business,
products and services. If a company is able to help society through its
business model, there is no harm in such an endeavour to qualify as CSR.
The exclusion is certainly based on the lack of trust between the regulator
and the company complying with the law. To complicate this further, from
22 January 2021, the Companies (CSR​Policy) Amendment Rules, 2021 have
allowed a company engaged in research and development activity of new
vaccine, drugs and medical devices in their normal course of business to
undertake research and development activity of new vaccine, drugs and
medical devices related to COVID-19 for financial years 2020–21, 2021–22,
and 2022–23, provided such research and development activities shall be
carried out in collaboration with any of the specified institutions
mentioned under scheduled.34 Such frequent change in law creates
uncertainty and encourages unplanned CSR initiatives without any long
term impact.
Section 8 Charitable Companies
The CSR provision is also applicable on Section 8 companies,35 the way it is
applicable to a profit-making company. Even, the HLC in its
recommendation stated that CSR provision should not be applicable to
Section 8 companies, as these companies are incorporated with the basic
object of working in the social and developmental sector (GoI 2015: 30).
Their involvement in charitable and philanthropic activities is already
100%. These companies prepare income and expenditure statements which
reflect the surplus/deficit of an organisation and not the profit of the
company. Further, any surplus made by such organisations is not
distributed to the members but used to promote its own charitable objects,
which is similar to CSR activities as prescribed under
Schedule VII (GoI 2015: 21). Therefore, it may not be necessary for these
companies to undertake CSR activities outside the ambit of their normal
course of business. But this recommendation was negated by the
companies law committee as they felt that it would not be appropriate to
give differential treatment to Section 8 companies in the matter of
providing exemptions from compliance of CSR provisions (GoI 2016: 45).
The question is why should one force a non-profit Section 8 company to
pursue CSR activities, when such companies are incorporated with the sole
objective to benefit society and protect the environment.
Area of Operation
The provision prescribes that the company shall give preference to the
local area and areas around it where it operates, for spending the amount
earmarked for CSR activities.36 From an operational point of view also,
most companies would like to spend in their local area of operation rather
than spending in far-flung geographical areas as that increases the cost of
implementation and consumes time and resources of the company. But,
this provision has a completely different implication as most of the
companies in India are primarily located, either their registered office or
corporate office or factory or warehouse, in a few industrialised states.
If CSR money is being directed in the local area of operations, then it
will encourage spending in only a few industrialised states and may result
in duplication of CSR work by different companies. Table 1 shows the
highest percentage of the CSR investment received by top seven states in
India (percentage does not include the amount shown in the annual report
as spent across India or where no geographical area was mentioned).

Meanwhile, Table 2 shows the states and union territories which attracted
minimum CSR investment during the financial yea 2014–15 to 2018–19
(percentage does not include the amount shown in the annual report as
spent across India or where no geographical area was mentioned). These
12 states cumulatively attracted less than 1% of the total CSR investment.

Hence, regulation should encourage companies to

undertake CSR initiatives based on need assessment rather than with
communities in the proximity of their business operation. It is also to be
kept in mind that business entities have been transformed through
information technology innovations and hence, the physical boundary of a
company has no significance for the stakeholders. Today, many companies
are running and operating business through internet platforms like
Flipkart, Amazon, Uber, Ola, Oyo, MakeMyTrip, Zomato, etc, and for such
companies, the provision that requires spending in the local area of
operation makes little business sense.
Deductions under Income Tax Act
The Income Tax Act, 1961 (IT Act) allowed deductions37 for expenditure
which were for public welfare like establishing a school for the children of
employees,38 donating a bus where the employees children were
studying,39 establishing drinking water facility in the vicinity of the
refinery,40 installation of traffic signal used by the company’s
employees,41 etc. These expenses were allowed as deduction as it was spent
wholly and exclusively for the purpose of the business. After the
incorporation of Section 135, an explanation42 was added which prescribed
that any expenditure on activities relating to CSR shall not be allowed as
deduction as it shall not be deemed to be an expenditure incurred for the
purpose of business or profession. It was also clarified by the Finance Act,
2014 that the purpose of CSR is to share the burden of the government by
the business entity of a particular size and if the CSR expenses are allowed
as deduction, it will be like subsidising one-third of the expenses by the
government by way of tax expenditure.43 But, it is incorrect to interpret
that CSR expenditure is not incurred for the purpose of carrying on
business. Disallowing such expenditure just because it is also good for the
business, as it decreases the tax liability, is not logical and against the
concept of CSR. The word CSR is defined as integrating the social and
environmental concerns into the business operation and it is also a way in
which business entities establish a balance of economic, environmental
and social imperatives.
Irrational and Questionable Deductions
Another contentious issue is the treatment of some CSR activities as tax
deductible, while disallowing other activities under the IT Act. If a
company donates money to the PMNRF or PM CARES fund or Clean Ganga
fund or Swachh Bharat Kosh, it shall be construed as CSR as it is one of the
activities mentioned under Schedule VII and shall also get 100% tax
deduction under Section 80G of the IT Act. Apart from the tax exemption,
transferring money to the PMNRF or PM CARES fund or Clean Ganga fund
or Swachh Bharat Kosh is the safest and easiest option. After all, why
would a company invest its resources in CSR, when it has an option of
simply transferring the prescribed amount into a fund, rather than terming
it as “unspent”? But this option defeats the concept of CSR, which is all
about integrating the societal interests with business objectives.
Transferring money to a government fund is not CSR, but corporate
philanthropy. Similarly, any expenditure towards promoting employment
enhancing vocational skills shall be considered as CSR expenditure under
Schedule VII (ii) of the Companies Act, and if that activity comes under a
notified skill development project, it shall be eligible for a deduction of a
sum equal to one and one-half times to such expenditure under Section
35CCD of the IT Act. So, certain specified CSR activities receiving tax
deduction, while others do not, is irrational and questionable.
PM CARES and Emergency Relief
PM CARES fund accepts any voluntary donation and qualifies for 100% tax
exemption44 and qualifies as CSR expenditure.45 The fund
collected `3,076.62 crore by 31 March 2020.46 Government of India has
already issued a general circular, notification, office memorandum and
a FAQ on PM CARES fund. MCA has also stated that a contribution to more
than the minimum prescribed amount to PM CARES fund (2% of the net
profit) can be offset against CSR obligation arising in subsequent years
(Noronha 2020). Thirty-eight PSUs contributed `2105 crore
to PM CARES fund (Table 3) from their unused CSR funds of 2019–20 and
some of them used their CSR budget of 2020–21, even though the
allocation is yet to be done (Wire 2020).

The fallout of the creation of the PM CARES fund is that a lot of companies
will divert their contribution to the PM CARES fund, which will
consequently lead to a substantial freeze in the funding of the
non-governmental organisations (NGOs), resulting in a halt of many social
schemes in the rural as well as urban areas. The unplanned contribution
will even interrupt the long-term CSR policies and plans of business
entities and make it redundant.
Contribution in Kind
MCA has clarified through the FAQs that contribution in kind is not CSR as
the Companies Act states that the board shall ensure that the company
shall spend the amount on CSR. Why cannot donation of medicine by a
pharmaceutical company to a government hospital, donation of software
or refurbished computers and laptops to a government school and colleges
be considered as CSR? There is no logic of excluding contribution in kind
from CSR, except that there is a trust deficit between the government and
the eligible companies that it shall be misused by the companies as they
may donate substandard products or at an overvaluation and show it
as CSR.
CSR Funds for Government Schemes
Companies especially PSUs have spent their CSR funds on the
government’s pet project which cannot be construed
as CSR. PSUs contributed huge sums of money for the construction of
Statue of Unity in Gujarat, which was even objected to by the government
auditor, Comptroller and Auditor General of India (CAG) in its report
presented in Parliament. The report stated that such contribution does not
qualify as CSR activity.47 PSUs and the private sector have contributed an
amount of `53.2 crore and `19.41 crore, respectively, to Clean Ganga funds
between the financial years 2015–16 to 2018–19.48 Similarly, PSUs and the
private sector have contributed an amount of `633.79 crore and `297.14
crore, respectively, to Swachh Bharat Kosh between the financial years
2015–16 to 2018–19.49 Political interference in the conceptualisation
of CSR projects and their implementation will lead to funding of projects
without any long term value creation for the stakeholders.
Schedule VII
Schedule VII of the Companies Act specifies activities which may be
included by companies in the CSR policies. The activities include
eradicating hunger, poverty, malnutrition, promoting healthcare and
sanitation, promoting education, and employment enhancing vocation
skills, promoting gender equality, supporting rural development projects,
empowering women, ensuring environmental sustainability, conservation
of natural resources, protection of national heritage, art and culture,
setting up of libraries, measures for the benefit of armed forces, promoting
sports, contribution to PMNRF, incubators or public funded
universities, IITs, etc. Over time, other activities have also been included
under Schedule VII, such as contribution to Swachh Bharat Kosh, Clean
Ganga fund, PM CARES fund, slum area development, disaster
management. In March 2020, MCA clarified that spending of CSR funds
on COVID-19 shall be considered as eligible CSR activity.50 In January
2021, MCA again clarified that spending of CSR funds for carrying out
awareness programmes or public outreach campaigns for COVID-19
vaccination programmes is an eligible CSR activity under Schedule VII.51 In
May 2021, MCA gave another clarification stating that spending
of CSR funds for “creating health infrastructure for COVID care,”
“establishment of medical oxygen generation and storage plants,”
“manufacturing and supply of oxygen concentrators, ventilators, cylinders
and other medical equipment for countering COVID-19” or similar such
activities are eligible CSR activities under Schedule VII.52 By going through
the schedule, it looks haphazard and unconnected to each other. The
better way to define the CSR activity is either to provide a few broad areas
based on the country’s priority and mapped as per the 17 SDGs or to simply
prescribe a negative list of activities which shall not be considered
as CSR activity like political or religious donations.
Is Government Overregulating CSR?
Within a year of implementation of the CSR provision, MCA constituted
the first HLC on CSR on 3 February 2015 which gave its report on 22
September 2015. Financial year 2014–15 was the first year of
implementation of the CSR provision. The first ever statutory annual
report on the implementation of CSR was not even filed, before
the HLC was set up. So, the committee did not have any chance to go
through the CSR reports filed by companies to understand the spending
pattern or the reason for not spending. This really raises a pertinent
question regarding the urgency to set up HLCs. The HLC in its
recommendation itself felt that constituting the committee was premature.
A second HLC was formed on 28 September 2018 to review the existing
framework and recommend a road map for developing a robust and
coherent policy on CSR, which submitted its report on 7 August 2019. The
committed gave 25 recommendations to the MCA which included
extending the applicability of the CSR provision to limited liability
partnerships (LLPs) and banks, compulsory due diligence of implementing
agency, registration of the implementing agency with MCA, need
assessment and impact assessment of CSR programmes, engaging
a CSR professional and putting CSR within the purview of statutory
financial audit.
To implement the CSR provision, MCA issued 14 notifications, eight
general circulars, two office memoranda, one corrigendum. This comprised
issuing of two FAQs, six clarifications, nine amendments to
Schedule VII and five amendments to company (CSR) policy rules, 2014. Do
business entities in India really require so much of regulation to
implement Section 135 of the Companies Act, when the government keeps
talking about ease of business?
Conclusions
When the whole world is talking about sustainability, climate change, and
responsible and ethical ways to run a business, regulations in India are
creating a web of CSR compliance ecosystems. Table 4 illustrates that there
is a substantial increase in the total number of companies spending
on CSR, total amount spent on CSR and the total number of projects
undertaken from the financial year 2014–15 to financial year 2018–19. So,
there is no point of overregulating the CSR law as this will make the spirit
of the law redundant.

While the object of the CSR provision was well intentioned as it

encourages business entities to be more responsible towards the society
and the environment. But over the years, the MCA has turned a simple
rule, which was based on the judgment of a company’s board, into a
complex web of circulars, notifications, FAQs, constitution of two HLCs,
amendments to the act and has also proposed changes through Companies
(CSR Policy) Amendment Rules. The current CSR regulation and
framework in defining what is and what is not CSR is an exercise
in micromanagement by the government. The list of CSR activities
prescribed under Schedule VII is very precise giving less flexibility to
business entities, at the same time disorganised as there is an absence of
connectedness from one activity to another and above all the list is being
expanded every year depending on government priority.
The CSR provision is currently inclined towards the concept of
philanthropy rather than CSR, which is based on integrating societal needs
with the business objectives. CSR law should encourage innovation rather
than how CSR budgets should be spent. The government directing
corporates to spend on building toilets to improve sanitation or
funding gaushalas (shelters for cows) or contributing money to certain
funds is certainly not CSR.
The way forward is to simplify Section 135 by stating that the companies
shall spend 2% on CSR in a broad category of CSR activities based on the
17 SDGs. The insistence shall be on the process followed by the company in
initiating, implementing, monitoring, and assessing the impact. The
compliance of the provision shall be based entirely on disclosure and on a
“comply or explain” basis. To be impactful, the concept of CSR shall be
based on minimum regulations and maximum disclosures.
Notes
1 Mauritius made CSR mandatory through Section 50L of the Finance
(Miscellaneous Provisions) Act, 2009, which states that any company
making profit is required to contribute 2% of their book profits for carrying
out CSR activities under approved programmes. In Indonesia, Article 74 of
Chapter V of “Company Law” states the Company having its business
activities in the field of and/or related to natural resources, shall be obliged
to perform its social and environmental responsibility and in the case of
failure to perform its obligation, sanctioned shall be imposed as per the
regulation. In Nepal, the Industrial Enterprise Act, 2020 stipulates that all
medium, large industries and cottage industries and small industries
having annual turnover more than NPR 15,00,00,000 shall spend at least
1% of the annual net profit on CSR on areas or activities specified by the
Government of Nepal and in case of violation of the provisions, a fine
equivalent to 1.5% of gross profit shall be levied. In 2018, UAE Council of
Ministers issued a CSR Law, through a cabinet decision No 2 of 2018 which
provides a mandatory annual contribution into the CSR fund, currently at
AED 1,500, as part of UAE business’s contribution to social responsibility.
2 Bursa Malaysia Stock Exchange made sustainability reporting mandatory
for all the listed companies in Malaysia from 31 December 2007. In France,
the Grenelle Act, 2010 made social and environmental reporting
mandatory for all companies employing more than 500 employees. In
South Africa, Johannesburg Listing Agreement requires all listed
companies to issue an integrated report as per the Kings Report, 2009. UK
Companies Act, 2006 has made non-financial reporting mandatory for all
the listed companies. In June 2016, Singapore Stock Exchange vide Listing
Rule 711A made annual sustainability report mandatory. European Union
vide directive 2014/95/EU has made non-financial reporting mandatory for
a large entity employing more than 500 employees. In China, Shanghai and
Shenzhen Stock exchange has made ESG reporting mandatory for listed
companies.
3 Shareholder theory is the view that the only objective of a corporation is
to maximise the profits accruing to the shareholders. Milton Friedman
(1970) referred to CSR programmes as “hypocritical window-dressing,” and
said that “there is one and only one social responsibility of business to use
its resources and engage in activities designed to increase its profits so
long as it stays in the rules of the game, which is to say, engages in open
and free competition, without deception or fraud.”
4 Stakeholder theory states that a company owes a responsibility to a wider
group of stakeholders, other than just shareholders. Freeman (1984)
defines stakeholders as “any group or individual that can affect or be
affected by the realisation of a company’s objectives.” It Includes
employees, customers, suppliers, creditors, local community and even
competitors. The theory argues that a business organisation should create
value for all its stakeholders and not just shareholder.
5 Business Roundtable is an association of chief executive officers (CEOs)
of America’s leading companies. It has periodically issued principles of
corporate governance since 1978 wherein it has endorsed the principles of
shareholder primacy—that corporations exist principally to serve
shareholders. On 19 August 2019, it issued a new “statement on the
purpose of a corporation,” signed by 181 CEOs who pledge to run their
companies in the best interest of all the stakeholders.
6 The nine NVGs principles are: businesses should (i) conduct and govern
themselves with integrity in a manner that is ethical, transparent and
accountable, (ii) provide goods and services in a manner that is sustainable
and safe, (iii) respect and promote the well-being of all employees,
including those in their value chains, (iv) respect the interests of and
be responsive to all their stakeholders, (v) respect and promote human
rights, (vi) respect and make efforts to protect and restore the
environment, (vii) engage in influencing public and regulatory policy in a
manner that is responsible and transparent, (viii) promote inclusive
growth and equitable development, and (ix) engage with and provide value
to their consumers in a responsible manner.
7 SEBI circular (CIR/CFD/DIL/8/2012) dated 13 August 2012.
8 In Business Responsibility (BR) report, specified listed entities are
required to report on (i) general information about the company, (ii)
financial details of the company, including spending on CSR and list of CSR
activities in which expenditure has been incurred, (iii) subsidiary
companies, suppliers, distributors and their participation in company’s
business responsibility initiatives, (iv) BR information disclosure on
whether the company has adopted policies as per the nine principles of
NVGs, whether these policies are formulated in consultation with the
stakeholders, conform to national and international standards, approved
by the board, implemented by a specified
committee, and (v) principle wise performance for each NVGs principles,
such as disclosure on sustainable sourcing, local procurement, percentage
of recycling of products and waste, workforce diversity in terms gender,
physical disability, casual/temporary, company strategies on climate
change, global warming, identification of potential environmental risks,
initiatives, on clean technology, energy efficiency, renewable energy, etc.
9 Regulation 34(2) (f) of SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015, wef 1 April 2016.
10 SEBI (Listing Obligations and Disclosure Requirements) (Fifth
Amendment) Regulations, 2019, wef 26 December 2019.
11 Office Order dated 14 November 2018, F No 10/19/2018-CSR (Part File -
2), Ministry of Corporate Affairs, Government of India.
12 As per the KPMG et al (2016), there is a substantial increase in
regulation worldwide, requiring mandatory CSR/sustainability reporting.
In a study undertaken on top 64 economies based on gross domestic
production (GDP), there are 248 mandatory sustainability reporting
instruments in 64 countries in 2015, while it was only 35 mandatory
sustainability reporting instruments in 19 countries in 2006.
13 SEBI Circular (SEBI/HO/CFD/CMD-2/P/CIR/2021/562) dated 10 May
2021. BRSR gives more importance on quantifiable metrics, which allows
for easy measurement and comparability across companies, sectors, and
time periods. BRSR disclosures on climate and social issues of the business
entity and its value chains are significantly enhanced and more granular.
14 Human Development Report 2020, UNDP,
http://hdr.undp.org/en/countries/profiles/IND.html.
15 The top 17 countries with 2020 GHI scores of less than five are not
assigned individual ranks. They are collectively ranked 1–17,
https://www.globalhungerindex.org/ranking.html.
16 The 2020 Global Hunger Index, One Decade to Zero Hunger: Linking
Health and Sustainable Food
Systems, https://www.globalhungerindex.org/ranking.html.
17 Global Wealth Report, 2018 and Global Wealth Databook 2018, Credit
Suisse
18 As per 2019 World Air Quality Report, IQ Air.
19 Part IV of the Indian Constitution deals with Directive Principles of
State Policy consisting of Articles 36 to 51. The concept behind Directive
Principles of State Policy is to create a “welfare state.”
20 Some of these legislations are Employee Compensation Act, 1981,
Minimum Wages Act, 1948, Equal Remuneration Act, 1976, Contract
Labour (Regulation and Abolition) Act, 1970, the Water (Prevention and
Control of Pollution) Act, 1974, the Air (Prevention and Control of
Pollution) Act, 1981, Environment Protection Act, 1986.
21 The Standing Committee on Finance (2011–12) gave its
recommendations on various provisions of the Companies Bill, 2011. On
the inclusion of the CSR provision in the bill, it stated “The Committee are
of the view that corporates in general are expected to contribute to the
welfare of the society in which they operate and wherefrom they draw their
resources to generate
profits,” https://prsindia.org/billtrack/the-companies-bill-2011.
22 Twenty First Report of the Parliamentary Standing Committee on
Finance (2009–10, Fifteenth Lok Sabha), August 2010 on the Companies
Bill, 2009 (Presented to Lok Sabha on 31 August 2010 and Laid in Rajya
Sabha on 31 August 2010).
23 Same as note 22.
24 Section 135(7) of the Companies Act substituted by Companies
(Amendment) Act, 2020.
25 FAQs on CSR vide General Circular No 1/2016 dated 12 January 2016
along with response issued by MCA.
26 Inserted by notification dated 24 October 2014, Swachh Bharat Kosh is a
fund constituted with the objective of clean India.
27 Inserted by MCA Notification No GSR 741(E) dated 24 October 2014.
Through Schedule VII (iv), Companies Act, contribution to the Clean
Ganga fund set-up by the central government for rejuvenation of river
Ganga was included as CSR activity.
28 As originally incorporated under Schedule VII (vii) of the Companies
Act, PMNRF was constituted by the central government to receive
voluntary contributions from individuals, business organisations,
companies, trusts and Institutions.
29 Inserted by notification dated 26 May 2020, PM CARES fund was
constituted to support relief or assistance relating to health emergency like
COVID-19 or other calamities or distress.
30 Inserted by Notification dated 11 October 2019.
31 FAQs on CSR, issued on 12 January 2016 vide general circular No
01/2016, MCA.
32 General circular No 21/2014 of MCA dated 18 June 2014.
33 FAQs on CSR vide General Circular No 1/2016 dated 12 January 2016
along with response issued by MCA.
34 MCA vide Notification No GSR 40(E) dated 22 January 2021 issued
Companies (CSR Policy) Amendment Rules, 2021. The same has been made
effective from 22 January 2021.
35 A company is registered as a Section 8 company under the Companies
Act if it satisfies the central government that (i) its objects includes
promotion of commerce, art, science, sports, education, research, social
welfare, religion, charity, protection of environment or any such other
object; (ii) the company after incorporation intends to apply its profits, if
any, or other income in promoting such objects only; and (iii) the company
intends to prohibit the payment of any dividend to its members.
36 First proviso to Section 135(5) of the Companies Act.
37 Vide Section 37(1) of the Income Tax Act, 1961.
38 Mysore Kirloskar Ltd v Commissioner of Income Tax (1987), 166 ITR
836.
39 Commissioner of Income Tax v Rajasthan Spg & Wvg Mills Ltd (2006),
281 ITR 408.
40 Commissioner of Income Tax v Madras Refineries Ltd (2004), 266 ITR
170.
41 Commissioner of Income Tax V Infosys Technologies Ltd (2014), 360
ITR 714.
42 Explanation 2 to Section 37(1) of the Income Tax Act, 1961, Vide the
Finance Act, 2014.
43 Finance (No 2) Bill, 2014–Memorandum–Provisions relating to Direct
Taxes.
44 Under Section 80G of the Income Tax Act, 1961.
45 Inserted under Schedule VII (viii) of the Companies Act vide
Notification dated 26 May 2020 read along with MCA general circular No
10/2020 dated 23 March 2020.
46 As per the data published on pmcares.gov.in, MCA, GoI, viewed on 16
August 2020.
47 Report of CAG (Report No 18 of 2018) for the year ended 31 March 2017
stated Oil and Natural Gas Corporation, Hindustan Petroleum Corporation
Limited, Bharat Petroleum Corporation Limited, Indian Oil Corporation
Limited and Oil India Limited made contribution towards the construction
of Statue of Unity. The contributing PSUs showed the contribution under
Schedule VII (v) which includes protection of national heritage, art and
culture including restoration of buildings and sites of historical
importance and works of art; setting up public libraries; promotion and
development of traditional art and handicrafts as CSR activity. CAG report
stated that contribution towards this project did not qualify as CSR activity
as it was not a heritage asset.
48 Data available on csrgov.in which is a National CSR data portal MCA.
49 Data available on csrgov.in which is a National CSR data portal MCA.
50 General Circular No 10/2020 dated 23 March 2020, Ministry of
Corporate Affairs, GoI.
51 General Circular No 01/2021 dated 13 January 2021, Ministry of
Corporate Affairs, GoI.
52 General Circular No 09/2021 dated 5 May 2021, Ministry of Corporate
Affairs, GoI.
References
Carroll, A B and K M Shabana (2010): “The Business Case for Corporate
Social Responsibility: A Review of Concepts, Research and
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Commission of European Communities (2001): Promoting a European
framework for Corporate Social Responsibility, Brussels.
Friedman, M (1970): “The Social Responsibility of Business Is to Increase
Its Profits,” New York Times Magazine, 13 September, pp 32–33.
Freeman, E R (1984): Strategic Management: A Stakeholder Approach,
Boston: Pitman.
GoI (2015): “Report of the High-Level Committee to Suggest Measures for
Improved Monitoring of the Implementation of Corporate Social
Responsibility Policies,” September, Ministry of Corporate Affairs, New
Delhi, https://www.mca.gov.in/Ministry/pdf/HLC_report_05102015.pdf.
— (2016): “Report of the Companies Law Committee,” February, Ministry
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https://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_
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— (2020): “Report of the Committee on Business Responsibility Reporting,”
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KPMG, Global Reporting Initiative, United Nations Environmental
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Noronha, Gaurav (2020): “Govt Clarifies on Company’s Contributions to
PM CARES Fund Above CSR Limit,” Economic Times, 31 March,
https://economictimes.indiatimes.com/news/economy/policy/govt-clarifies
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Wire Staff (2020): “RTIs Reveal PSUs Contributed `2,105 Crores to
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Updated On : 8th Jul, 2021