Importance of CSR in India

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Importance of CSR in India

The challenge for corporate social responsibility (CSR) in India is framed by a vision that was distilled in 2000 into the Millennium Development Goals – ‘a world with less poverty, hunger and disease, greater survival prospects for mothers and their infants, better-educated children, equal opportunities for women, and a healthier environment (UN, 2006: 3).

Unfortunately, these global aspirations remain far from being met. The rationale for focusing on CSR in India as well as other developing countries as distinct from CSR in the developed world is fourfold:

  • India represents the most rapidly expanding economies, and hence the most lucrative growth markets for business (IMF, 2006);

  • India is one of the developing nations where social and environmental crises are usually most acutely felt. (WRI, 2005; UNDP, 2006);

  • India is one of the developing countries where globalisation, economic growth, investment, and business activity is likely to have the most dramatic social and environmental impacts (both positive and negative) (World Bank, 2006); and

  • India like other developing countries presents a distinctive set of CSR agenda challenges, which are collectively quite different to those, faced in the developed world.

Current Business Scenario in India

The 20th century business environment in India was driven by the government, but the 21st-century business across the world, including India, is governed by the free market economy. In India, economic crime is emerging as a bigger threat than before.

Amongst the growing unethical business practices in India, Ernst & Young reports the incidence of fraud becoming an increasing menace. 55% of Indian companies in the past two years had reported incidents of fraud and a PricewaterhouseCoopers (PwC) study (2014) indicates that more than 1 in 3 organisations are impacted by economic crime.

Bribery and corruption poses the greatest threat to global businesses because of the fewer regulations, and less-consistent enforcement of those regulations. Every region reported a significant number of incidences of bribery and corruption. Consequently, employees, business associates and shareholders are worst affected in the process.

Bribery and corruption (considered by foreign companies as the biggest threats to doing business in India), insider trading in the stock market, falsifying export/import documents and evading income-tax, have all been a regular feature of the Indian black economy.

The PWC report (2014) reveals that Twenty-seven percent of all respondents who reported economic crime experienced corruption during the survey period, making it the third-highest crime specified and a relative increase of 13% from the 24% reported in 2011.

In 2013, the “Doing Business Report”, published by the World Bank ranked India low in terms of transparency, equity and fairness. India was ranked low (94) on transparency meaning high on corruption, by Transparency International. This is a clear indication of the internal business environment. Instances like these create a bad environment and impact the reputation of companies. At another level, they raise significant issues on governance for stakeholders.

Working conditions of staff specifically in IT industry, BPOs, construction, mining, textile and manufacturing industries to a large extent, being contractual in nature, are only compliance oriented. Discrimination against women and vulnerable groups like the handicapped and socially backward groups is evident at workplaces in varied aspects and degrees. Sexual harassment at workplace though observed, is seldom reported.

The explosive growth and concomitant deregulation of the global economy has produced a myriad of issues in India in the areas of work place, market place and environmental practices which are not sufficiently accounted for by state domestic laws or international legal systems. Among the more abhorrent social problems created and proliferated by the existence of a global economy lacking global regulation is the insidious practice of exploiting child labour because it helps in cutting labour costs.

In the new millennium, India has seen its economic momentum losing steam due to compliance, regulatory and governance issues. Corporate corruption allegations that have surface in the aftermath of the 2G spectrum issue, coal block allocation and gas exploration have brought out an ugly side of government corporate nexus in matters that amount to bribery and nepotism. Issues like the levy of corporate income tax with retrospective effect on Vodafone have dented animal spirits and slowed down governmental clearance of corporate investment proposals. It has been referred to as ‘policy paralysis’.

World Bank Group Goals 2030 and India

The World Bank Group has established ambitious but achievable goals to anchor its overarching mission and to galvanise international and national efforts in this endeavour. Accordingly, the institution will strive to (i) end extreme poverty at the global level within a generation and (ii) promote what may be called “shared prosperity”: a sustainable increase in the well-being of the poorer segments of society.

This second goal reflects the fact that all countries aspire to rapid and sustained increases in living standards for all of their citizens, not just the already privileged.

These two goals and their respective indicators can be summarised as:

  • End extreme poverty: The percentage of people living with less than $1.25 a day to fall to no more than 3 per cent globally by 2030.

  • Promote shared prosperity: Foster income growth of the bottom 40 per cent of the population in every country.

Ending extreme poverty within a generation and promoting shared prosperity must be achieved in such a way as to be sustainable over time and across generations. This requires promoting environmental, social, and fiscal sustainability. They need to secure the long-term future of the planet and its resources so future generations do not find themselves in a wasteland. They are also aiming for sustained social inclusion and limit the size of economic debt inherited by future generations.

The World Bank assesses that India will join China as an emerging economy growth pole by 2025 which could help to strengthen the global economy. World Bank modelling suggests that India and China will serve as nearly twice the growth as that of the United States and the Eurozone combined by 2025.

However, India faces many of the same problems as China like inequalities between rural and urban sectors, increasing constraints on water and food, and greater need for investment in research and development in order to move its economy up a notch.

India in contrast to China will get benefit from the demographic dividend as India’s population will continue to remain between the age group of 15-65 i.e. a youthful country. India’s declining death rate combined with the greater proportion of dependent senior will not begin to create an economic burden before 2050.

Therefore, long-term forecasts show Indian economic power growing steadily throughout the 21st century and overtaking China at the end of the century because of China’s maturing age structure, but to maximise its advantage from the youth section India has to boost its educational system, make substantial improvements in governance particularly in countering corruption and undertake large scale infrastructure programs to keep pace with rapid urbanisation and the need of a more advanced society.

Corporate Social Responsibility Under Section 135 of Companies Act 2013

The Companies Act 2013 is divided into 29 chapters containing 470 clauses as against 658 Sections in the Companies Act, 1956 and has 7 schedules. The new Companies Act, replaced the old Companies Act 1956, which although amended approximately 25 times was still considered to be out of date and inadequate compared to the legislation regulating companies in many other jurisdictions.

It took four years to implement the Companies Act since it was first introduced as a Companies Bill in 2009 but not all of its provisions will come into force immediately as a number of them require the Indian Government to draft rules and regulations for their implementation.

Some of the provisions of the Companies Act 2013 that did not require any additional rules or regulations for their implementation were brought into force on 12 September 2013, following a notification by the Ministry of Corporate Affairs.

The 2013 Act has introduced several provisions which would change the way Indian corporates do business and one such provision is spending on Corporate Social Responsibility (CSR) activities. CSR has now been included in the law, which was largely a voluntary contribution by corporates in the past.

On the basis of the CSR provisions, as laid down under the 2013 Act and the draft CSR rules made available for public comments, the key stipulations which the corporates need to consider are:

  • Section 135 of the 2013 Act states that every company having:

    1. net worth of ₹500 crore or more, or

    2. turnover of ₹1,000 crore or more ,or

    3. net profit of ₹5 crore or more during any financial year

    shall constitute a Corporate Social Responsibility Committee of the Board.

  • The committee would comprise of three or more directors, out of which at least one director shall be an independent director.

  • The mandate of the said CSR committee shall be:

    1. To formulate and recommend to the Board, a Corporate Social Responsibility Policy, which shall indicate the activities to be undertaken by the company as specified in Schedule VII;

    2. To recommend the amount of expenditure to be incurred on the activities referred to above;

    3. To monitor the Corporate Social Responsibility Policy of the company from time to time.

  • The Board of every company, referred to above, shall after taking into account the recommendations made by CSR Committee:

    1. Approve the CSR Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website,

    2. Ensure that the activities included in CSR Policy of the company are undertaken by the company as it is, and

    3. Ensure that the company spends, in every financial year, at least two per cent of the average net profits.

  • If the Company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the amount.

  • “Average net profit” shall be calculated in accordance with the provisions of section 198 of the 2013 Act.

  • CSR activities need to include:

    1. Eradicating extreme hunger and poverty,

    2. Promoting education,

    3. Promoting gender equality and empowering women,

    4. Reducing child mortality and improving maternal health,

    5. Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases,

    6. Ensuring environmental sustainability,

    7. Promoting employment enhancing vocational skills,

    8. Promoting social business projects,

    9. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and

    10. Such other matters as may be prescribed.

  • The 2013 Act provides that the company shall give preference to the local area and areas around it where it operates.

Draft CSR rules provide for the following:

  • ‘Net Profit’ for the section 135 and these rules shall mean, net profit before tax as per books of accounts and shall not include profits arising from branches outside India.

  • Reporting will be done on an annual basis commencing from FY 2014-15.

  • Tax treatment of CSR spend will be in accordance with the IT Act as may be notified by the Central Board of Direct Taxes (CBDT).

  • CSR activities may generally be conducted as projects or programmes (either new or ongoing) excluding activities undertaken in pursuance of the normal course of business of a company.

  • The CSR Committee shall prepare the CSR Policy of the company which shall include the following:

    1. Specify the projects and programmes to be undertaken

    2. Prepare a list of CSR projects/programmes which a company plans to undertake during the implementation year, specifying modalities of execution in the areas/sectors chosen and implementation schedules for the same

    3. CSR projects/programmes of a company may also focus on integrating business models with social and environmental priorities and processes in order to create shared value

    4. Surplus arising out of the CSR activity will not be part of business profits of a company

    5. Would specify that the corpus would include 2 percent of the average net profits, any income arising therefrom, and surplus arising out of CSR activities.

  • Where a company has been set up with a charitable objective or is a Trust/Society/Foundation/any other form of entity operating within India to facilitate implementation of its CSR activities, the following shall apply:

    1. contributing company would need to specify the projects/ programmes to be undertaken by such an organisation, for utilising funds provided by it;

    2. contributing company shall establish a monitoring mechanism to ensure that the allocation is spent for the intended purpose only

  • A company may also implement its CSR programs through notfor-profit organisations that are not set up by the company itself.

    Such spends may be included as part of its prescribed CSR spend only if such organisations have an established track record of at least three years in carrying out activities in related areas

  • Companies may collaborate or pool resources with other companies to undertake CSR activities.

  • Only such CSR activities will be taken into consideration that are undertaken within India

  • Only activities which are not exclusively for the benefit of employees of the company or their family members shall be considered as CSR activity

  • Companies shall report, in the prescribed format, the details of their CSR initiatives in the Directors’ Report and in the company’s website

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