CSR and Ethics

By

Prof Neha Sajnani

 Overview
• Today, apart from being economic entities business organizations
are considered as social institutions. Since they exist and operate in
society they need to have social acceptance.
• Secondly they need to be socially responsible as they influence the
lifestyle of the society.
• Corporations no longer exist only to earn profits, but also to satisfy
the society’s needs. Thus they are responsible for their business
activities.
• They need to be socially conscious and consider the social and
ethical implications of their decisions.
 What is CSR ?
• The definitions differ according to the perception of the analyst.
• The World Business Council for Sustainable Development defines
CSR as, ‘CSR is the continuing commitment by business to behave
ethically and contribute to economic development while improving
the quality of life of the workforce and their families as well of the
local community while improving the quality of life of the workforce
and their families, as well as of the local community and society at
large’
 Mahatma Gandhiji’s principle of
Trusteeship
• Mahatma Gandhiji says, “Each capitalist should consider himself to be a trustee of
the wealth that he possesses. He should consider himself to be a custodian of the
industry resources, labour and wealth that he uses for his business purposes. That
would transform the capitalist order of society into an egalitarian one, where the
‘greatest good of all’ could be achieved.”

• Few rich men in the world, like Bill Gates, Warren Buffet, JRD Tata etc. are practicing
the Gandhian principle of Trusteeship.

• These noble philanthropists are distributing a huge percentage of their wealth for
social causes like public improvement, funding AIDS research and higher education,
running programs for poverty alleviation, etc. Their willingness to solve community’s
problems as a moral responsibility is quite remarkable and deserve admiration.
 Development
• BPCL – Bharat Petroleum Corporation Ltd has been conferred the status
of ‘Maharatna’ .
• As a corporate responsibility it has adopted 37 villages across India’s
with objectives like: making them fully self-reliant; providing them fresh
drinking water, sanitation facilities, medical facilities, and imparting
vocational training and agricultural innovations. However, BPCL also
provides grants for opening schools and opening adult literacy camps,
in the villages.
• Unlike many organizations which operate centralized social programs,
the social programs of BPCL are on the basis of factory units. These
include
 Continued
• Village Adoption
• Infrastructure
• Agriculture Assistance
• Cattle care
• Rural health
• Education
• Livelihood Generation and Vocational Guidance
• AIDS Awareness
• Truckers Related Initiatives
• Mid-Day meal scheme
• Water Management
 Some other CSR activities of Corporate
• Tata’s set up a pension plan for his employees and introduced 8 hour
work day, much before the laws were enacted.
• ACC has been rendering social services from the past 6 decades. It
launched a village welfare scheme in 1953 and has continued the same
with setting up schools, colleges, health centers, agro-based and local
industries and co-operative societies with the aim of providing
employment and improving quality of rural life.
• Mafatlal Group has also rendered social services in helping the poor by
constructing homes for the homeless, providing drinking water,
distributing books and stationary and scholarships to students in the
rural areas.
 Continued
• Hero Group in 1940’s provided excellent transportation to the
common man at a price he could easily afford. This group was quite
ahead of the industry norms in rewarding its workers with a uniform
allowance, HRA, LTA long before any other company in India did so.
• TVS – started their social activities way back in 1929 in Tamil Nadu.
In 2004 Tsunami when East coast of South India was hit causing
damage to life and property, the trust of this Company SST ie
Srinivasan Service Trust took 15,000 people for relief food and
medicines. Subsequently they also undertook the long- term
rehabilitation plan by adopting the villages most affected.
 CSR Strategies and policies
• A primary duty of the Board is to establish its mission, and to set its values. If
they are not clear about the firm’s purpose and what it stands for, the rest of
the organization will be like a boat without a rudder.
• A clear CSR policy can also influence investors looking for socially responsible,
ethical or environmentally friendly enterprises in which to invest.
• Every company is different and must develop its CSR policies in the context of
its corporate strategies, policies and procedures, including a systems of
management supervision and accountability.
• If they are to be effective, CSR policies should be understood, accepted and
applied throughout the organization. They also need to be reviewed regularly
to reflect changing business, economic and social situations.
 Corporate Social Responsibility
as per Companies Act, 2013
• Companies Act, 2013 has formulated Sc 135, Companies (CSR) Rules, 2014 and Schedule VII
which prescribes mandatory provisions for companies to fulfill their CSR.
• Applicability :
• On every company including its holding or subsidiary having:
• Net worth of Rs. 500 Crore or more, or
• Turnover of Rs.1000 crore or more, or
• Net profit of Rs.5 crore or more
• during the immediately preceding financial year
• A foreign company having its branch office or project office in India, which fulfills the criteria
specified above.
• However if a company ceases to meet the above criteria for 3 consecutive financial years
then it is not required to comply with CSR provisions till such time as it meets the specified
criteria.
 Minimum amount to be spent on CSR each year
and CSR amendments under the Companies Act
• As per section 135 of Companies Act, 2013 every company having net worth of INR 500 crore or
more, or turnover of INR 1000 crore or more or net profit of INR 5 crore or more during the
immediately preceding financial Year (FY) shall spend at least 2% of its average net profits as
Corporate Social Responsibility.
• CSR amendments under the Companies (Amendment) Act, 2019
• Until now, if a company was unable to fully spend its CSR funds in a given year, it could carry the
amount forward and spend it in the next fiscal, in addition to the money allotted for that year.
• The CSR amendments introduced under the Act now require companies to deposit the unspent CSR
funds into a fund prescribed under Schedule VII of the Act within the end of the fiscal year. This
amount must be utilized within three years from the date of transfer, failing which the fund must be
deposited in to one of the specified funds.
• The new law prescribes for a monetary penalty as well as imprisonment in case of non-compliance.
The penalty ranges from INR 50,000 to INR 25 lakh whereas the defaulting officer of the company
may be liable to imprisonment for up to three years, or a fine up to INR 5 lakh or both.
• The government, however, is reviewing these rules after the industry objected to the strict
provisions, especially with respect to the jail terms for CSR violations, and is yet to operationalize
them.
 CSR Committee
• Every company to which CSR is applicable is required to constitute a
CSR Committee of the Board:
• Consisting of 3 or more directors, out of which at least one director
shall be an independent director. However if a company is not
required to appoint an independent director, then it shall have 2 or
more directors in the committee.
• Consisting of at least 2 persons in case of a foreign company of
which one person shall be its authorized resident in India nominated
by the foreign company.
 Functions of CSR Committee
• The CSR Committee shall-
• Formulate and recommend to the Board, a CSR Policy which shall indicate the
activities to be undertaken by the company
• Recommend the amount of expenditure to be incurred on the activities referred
to in Clause (i)
• Monitor the CSR policy of the company from time to time.
• Institute a transparent monitoring mechanism for implementation of the CSR
projects or programs or activities undertaken by the company
 Responsibility of the BOD
• The BOD of every company on which CSR is applicable shall:
• After considering the recommendations made by the CSR Committee, approve the CSR
policy for the company and disclose the contents of such policy in Board Report.
• Ensure that the activities as are included in CSR Policy of the company are undertaken
by the company
• Shall disclose the composition of the CSR Committee in Board Report.
• Ensure that the company spends, in every financial year, at least 2% of the average net
profits of the company made during the 3 immediately preceding financial years, in
pursuance of its CSR Policy. The CSR projects/programs /activities undertaken in India
only shall amount to CSR Expenditure.
• The company shall give preference to the local areas where it operates, for spending
the amount earmarked for CSR activities and shall specify the reasons for not
spending the whole of the amount (if it fails to spend some) in the Board Report.
 CSR Policy
• The CSR Policy of the company shall, inter-alia, include the following
namely:
• A list of CSR projects or programs which a company plans to
undertake specifying modalities of execution of such project or
programs and implementation schedules for the same.
• Monitoring process of such projects or programs
• A clause specifying that the surplus arising out of the CSR projects or
programs or activities shall not form part of the business profit of
the company.
 CSR Activities
• The CSR activities shall be undertaken by the company, as per the CSR Policy,
excluding activities undertaken in pursuance of its normal course of business
• The BOD may decide to undertake its CSR activities approved by the company,
either singly or along with any other company, or
• A section 25 company or a registered trust or a registered society, establish by the
CG or SG or any entity established under an Act of Parliament or a State Legislature.
• Sec 25 company or a registered trust or a registered society, other than those
specified in clauses (a) and (b) above, having an established track record of 3 years
in undertaking similar programs or projects;
• Collaboration with other companies
• For undertaking projects or programs or CSR activities in such manner that the CSR
committees of respective companies are in a position to report separately on such
projects or programs.
 Activities which cannot to be considered as
CSR
• According to Section 135 of the Companies Act 2103, CSR projects or programs that
benefit only the employees of the company and their families shall not be
considered as CSR activities
• Eg: One-off marathons, awards, charitable contribution, advertisement,
sponsorship of TV programs.
• Contribution of any amount directly or indirectly to any political party.
• According to the Companies Act it merely mentions that company is required to
spend on their CSR activities. The law is silent on the matter of spending cash or
giving in kind.
• Government has expanded the scope of CSR spending by allowing the funds to be
spent on incubators funded by the Centre or Stae or any state owned companies.
This is expected to attract more funds on research and development in the country.
 Display of CSR Activities on its
Website
• The Board of Directors shall disclose contents of CSR Policy in its
report and the same shall be displayed on the company website, if
any.

• Other Important Points :

• The balance sheet of a foreign company to be filed under Sec 381(b)
of the Act shall contain an Annexure regarding report of CSR.
• The Board of Directors shall ensure that activities included by a
company in its CSR Policy are related to the areas or subjects specified
in Schedule VII of the Act.
 Schedule VII
• Activities which may be included by companies in their Corporate Social Responsibility Policies
relating to:
• Eradicating hunger, poverty and malnutrition, promoting health care including preventive
health care and sanitation including contribution to the Swatch Bharat Kosh set-up by the CG
for the promotion of sanitation and making available safe drinking water.
• Promoting education, including special education and employment enhancing vocation skills
especially among children, women, elderly and the differently abled and livelihood
enhancement projects.
• Measures for the benefit of armed force veterans, war widows and their dependents;
Promoting gender equality, empowering women, setting up homes and hotels for women and
orphans; setting up old age homes, day care centers and such other facilities for senior citizens
and measures for reducing inequalities faced by socially and economically backward groups.
• Ensuring environmental sustainability, ecological balance, protection of flora and fauna,
animal welfare, agro forestry, conservation of natural resources and maintaining quality of
soil, air and water including contribution to the Clean Ganga Fund set-up by the CG for
rejuvenation of river Ganga.
 Continued
• 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.
• Training to promote rural sports, nationally recognized sports, Paralympic
sports and Olympic sports.
• Contribution to the Prime Minister’s national relief fund or any other fund set
up by the CG for socio economic development and relief and welfare of the
scheduled caste, tribes, other backward classes, minorities and women;
• Contributions or funds provided to technology incubators located within
academic institutions which are approved by the CG.
• Rural development projects
• Slum area development.
 Questions

• Explain the concept of CSR. Examining the provisions of the Act, answer the following
• (i) Which companies are required to constitute a CSR committee?
• (ii) Which companies are excluded from the requirements of the provisions of the Act in relation to
CSR Committee?
• (iii) What is the minimum contribution the companies are required to make towards CSR?