The Journey of CSR

1. The Journey of CSR

2. CSR or Corporate Social Responsibility is a well-known concept and a globally recognized practice today. Though the term was coined first in 1953, it has gained momentum in the last one or two decades. India is leading the way if we analyze the current scenario. While CSR is a voluntary activity or is fragmented across multiple statutory requirements worldwide, India is the first nation to mandate it through the provisions of Companies Act 2013 and Companies (CSR Policy) Rules, 2014. India is also among the first few nations to establish a Social Stock Exchange which is expected to facilitate utilization of CSR funds in a more effective and disciplined manner. Evolution of the concept of CSR The concept of Corporate Social Responsibility (CSR) has evolved over time, drawing from various historical and philosophical influences. Here is a revised version: Throughout history, the importance of considering the well-being of all stakeholders in economic structures has been emphasized. Ancient texts like the Vedas in India advocated for “Sarvalokahitam,” which means the well-being of all. In Rome, ancient laws prescribed measures such as asylums and homes for the poor and elderly, reflecting the recognition of social responsibility. The term “CSR” was first introduced by American economist Howard Bowen in his publication “Social Responsibilities of the Businessman,” earning him the title of the “Father of CSR.” In the Middle Ages, English Law adopted the concept of corporate social responsibility. In 1971, the Committee for Economic Development in the United States declared the concept of the “social contract” between business and society. This concept was based on the understanding that businesses function with public consent and, therefore, have an obligation to serve the needs of society constructively. This idea is often referred to today as the “license to operate,” which entails contributing to society beyond the mere sale of products.

3. According to the United Nations Industrial Development Organization (UNIDO), CSR is a business management concept that involves integrating social and environmental concerns into business operations and interactions with stakeholders. It is seen as a means for companies to achieve a balance between economic, environmental, and social objectives, while also addressing the expectations of shareholders and stakeholders. Overall, the evolution of CSR highlights the growing recognition of the importance of businesses taking responsibility for their impact on society and the environment. It involves actively engaging in sustainable and socially responsible practices, while considering the well-being of all stakeholders involved. CSR in India The concept of CSR is deep rooted in Indian philosophy. ‘Ramrajya’ is considered as a benchmark for governance which signifies the importance of social responsibilities since ancient times in India. The great philosopher Chanakya had emphasized on ethical practices and principles while conducting business. In modern times, philanthropy by Indian corporates is more than a century old tradition, practiced voluntarily by all frontline corporate houses. ShriJamsetjeeNusserwanjee Tata, the founder of Tata group, had established “The J. N. Tata Endowment” in 1892 to award loan scholarships to Indians for overseas higher studies, based only on individual merit, irrespective of caste, creed, religion or any other factor. Since then, numbers of philanthropic initiatives are developed by Tata and many other groups in various thematic areas of social activities. During the independence movement, Mahatma Gandhi introduced the notion of trusteeship, according to which the industry leaders had to manage their wealth to benefit the common man. With changing times, philanthropy has turned into Business Responsibility. Every business now needs to be responsible towards protection of environment and upliftment of society. Sustainability of a business depends heavily on the fact how it handles environmental and social needs. No responsible business can afford to ignore this aspect anymore. In India, the governmental initiatives started in the year 2007, with adoption of ‘Inclusive Growth’ in 11th 5-year plan. Later, Ministry of Corporate Affairs (MCA) issued ‘Voluntary Guidelines on Corporate Social Responsibility, 2009’ as a first step towards mainstreaming the concept of Business Responsibilities. In July 2011, MCA issued ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011’ which were further revised in 2015 to align with International Standards and Sustainable Development Goals (SDGs) and in March 2019, the guidelines were updated and released as ‘National Guidelines on Responsible Business Conduct’ (NGRBC). NGRBC provides a framework for the companies to grow in an inclusive and sustainable manner while addressing the concerns of stakeholders.

4. Corporate Social Responsibility (CSR) has been recognized as a tool to incorporate social, environmental, and human development concerns into the entire value chain of corporate business. The provisions for CSR were initially introduced in the newly enacted ‘Companies Act, 2013’ under Section 135. These provisions are supported by the ‘Companies (CSR Policy) Rules, 2014’ and ‘Schedule-VII’. According to these regulations, every company meeting certain financial thresholds is required to constitute a CSR committee of the Board. The thresholds include a net worth of ₹ 500 crore or more, a turnover of ₹ 1000 crore or more, or a net profit of ₹ 5 crore or more during any financial year. The company is then obligated to ensure that it spends, in every financial year, at least 2% of the average net profits made during the three immediately preceding financial years, in alignment with its Corporate Social Responsibility Policy. This emphasizes the importance of companies engaging in responsible practices and making a positive impact on society through their CSR initiatives. Companies were allowed to undertake CSR activities on their own or through a registered trust/society or a company established by the company or its holding or subsidiary or associate company u/s 8 of the Act or otherwise. If such trust/society/company was not established by the company or its holding or subsidiary or associate company, it was required to have an established track record of 3 years in undertaking similar programs/projects. Activities includible for CSR were as follows: (i) eradicating extreme hunger and poverty; (ii) promotion of education;

5. (iii) promoting gender equality and empowering women; (iv) reducing child mortality and improving maternal health; (v) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; (vi) ensuring environmental sustainability; (vii) employment enhancing vocational skills; (viii) social business projects; (ix) 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 (x) such other matters as may be prescribed. Initially, the CSR Rules allowed companies to make corpus contributions for projects or programs related to CSR activities. This means that companies could contribute a fixed amount of funds towards specific CSR initiatives. Additionally, a brief report on CSR activities was required to be included as part of the Annual Board Report. This report provided an overview of the CSR initiatives undertaken by the company during the financial year.At that time, there were no penal provisions in place for companies that failed to spend the prescribed amount for CSR expenditure. Instead, companies were required to provide a mention of the reasons for not meeting the CSR expenditure requirement in the Board Report. This ensured transparency and accountability by encouraging companies to provide explanations for any deviations from the prescribed CSR spending. It is important to note that the specific provisions and requirements regarding CSR may have been subject to amendments or changes since the initial implementation, so it is advisable to refer to the latest regulations and guidelines for up-to-date information.

6. Major Shift in CSR Policies since 22nd January 2021 Since the inclusion of CSR provisions in the Companies Act 2013, there have been several amendments aimed at expanding the scope of activities covered under CSR and making minor clarifications or corrections to the provisions. However, a major shift in CSR policies and provisions occurred on January 22, 2021, with the enforcement of relevant provisions from the following statutes: Companies (Amendment) Act, 2019 Companies (Amendment) Act, 2020 Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 These amendments brought significant changes to the CSR framework. One of the key changes was the transformation of recommendatory or voluntary CSR activities into mandatory obligations for companies. This means that companies are now required to engage in CSR initiatives as specified under the law. Furthermore, there have been notable alterations in the spending and reporting requirements related to CSR. The amendments have introduced stricter guidelines and reporting obligations for companies to ensure better accountability and transparency in their CSR activities. Additionally, penal provisions have been introduced to enforce compliance with the CSR obligations. These provisions aim to hold companies accountable for any non-compliance or failure to meet the prescribed CSR requirements. It is important for companies to stay updated with the latest CSR regulations and comply with the revised provisions to fulfill their CSR obligations effectively and avoid any potential penalties.

7. Major changes effected from 22.01.2021 are as follows: The amendments made to the CSR provisions highlight the government’s intention to promote greater responsibility among corporate entities towards social objectives and their involvement in achieving sustainable development goals (SDGs). The key changes introduced through these amendments include: Mandatory spending of prescribed CSR expenditure: Companies are now required to spend the prescribed amount for CSR activities. Any unspent amount (except for ongoing projects) must be transferred to specified funds within a specific timeframe. Handling of unspent CSR funds: Unspent CSR funds related to ongoing projects are required to be transferred to a special ‘Unspent CSR Account’ within 30 days from the end of the financial year. These funds must be utilized within three financial years. If not utilized, they should be transferred to specified funds. Set-off of excess CSR expenditure: Companies are allowed to set off excess CSR expenditure in succeeding financial years, following the prescribed manner. Removal of corpus contributions: Contributions towards corpus for projects or programs related to CSR activities are no longer considered eligible CSR activities. Introduction of penal provisions: Penalties have been introduced for non-compliance with CSR expenditure requirements. Defaulting companies and officers in default may face penalties based on the prescribed amounts.

8. Exceptions for small companies: Companies with an annual CSR liability below ₹50 lakh are exempted from constituting a CSR Committee. The board of directors themselves can discharge the necessary functions in such cases. Impact assessment and registration requirements: Companies with a minimum average CSR obligation of ₹10 crore or more in the preceding three financial years are required to undertake impact assessments for CSR projects. Additionally, implementing agencies need to be registered with the respective Registrar of Companies. Engagement with international organizations: Companies are allowed to engage international organizations for designing, monitoring, and evaluating CSR projects or programs, as well as for capacity building purposes. Collaboration with other companies: Companies are permitted to collaborate with other entities for undertaking CSR projects or activities. The CSR committees of respective companies should report separately on such collaborations. Allowance for capital asset expenditure: CSR expenditure for the creation or acquisition of capital assets is allowed, provided they are held by Section 8 companies, registered charitable trusts/societies with CSR registration, beneficiaries such as self-help groups (SHGs), or public authorities. Comprehensive reporting requirements: Reporting requirements for CSR activities have been made more comprehensive, ensuring transparent disclosure of CSR initiatives undertaken by companies.

9. These amendments reflect the government’s emphasis on encouraging corporate entities to actively contribute to social objectives and align their actions with sustainable development goals. By making CSR provisions more robust, the aim is to foster greater corporate responsibility and engagement in social and environmental initiatives. Trends in CSR Expenditure The education and healthcare sectors have emerged as the biggest beneficiaries of CSR initiatives over the years, accounting for approximately 49% of the total CSR expenditure. These sectors have received substantial funding to support various initiatives and projects aimed at improving education accessibility, healthcare infrastructure, and addressing healthcare challenges. Following education and healthcare, other significant beneficiaries of CSR include rural development projects, environmental sustainability efforts, and initiatives focused on poverty eradication, hunger, and malnutrition. These areas have received considerable attention and funding to address critical social and environmental challenges. It is worth noting that CSR expenditure has witnessed a significant increase since its introduction. In the fiscal year 2014-15, the total CSR spend amounted to ₹10,066 crore, which grew to ₹26,211 crore in FY 2020-21. These figures represent the period before CSR became mandatory under the provisions of the Companies Act, 2013. With CSR becoming mandatory and the increasing awareness and commitment towards corporate social responsibility, it can be reasonably assumed that CSR expenditure will continue to grow significantly in the coming years. This trend indicates a positive trajectory for corporate contributions towards social and environmental causes, leading to a greater impact on sustainable development goals and societal well-being.

10. Social Stock Exchange & CSR The emergence of the Social Stock Exchange (SSE) in India is expected to have a transformative impact on the utilization of CSR funds. The SSE will serve as a crucial facilitator of social financing, providing a dedicated platform for social enterprises (implementing agencies) and CSR contributors (corporates) to connect and collaborate. With the introduction of the SSE, the “Pay for Success” model is anticipated to gain popularity for CSR funding. This model aligns the funding with specific social outcomes, ensuring that the CSR funds are effectively utilized and generate measurable impact. Implementing agencies will be required to demonstrate discipline, transparency, and efficiency to attract CSR funds through the SSE, thereby fostering a culture of accountability and results-driven initiatives. One of the significant beneficiaries of the SSE and increased CSR funding is expected to be the achievement of the Social Development Goals (SDGs). The SDGs provide a comprehensive framework for addressing various social and environmental challenges, and the availability of dedicated CSR funds through the SSE will further support and accelerate progress towards these goals. Overall, the emergence of the SSE in India is likely to reshape the utilization of CSR funds by promoting greater efficiency, transparency, and impact-oriented initiatives. It holds the potential to channelize CSR contributions towards projects and programs that align with the SDGs, ultimately benefiting society at large.

11. Conclusion CSR is proving to be an important tool to achieve NitiAayog’s Sustainable Development Goals (SDGs) for the nation. CSR funds should not be considered as traditional donation. These funds should be directed towards long term objectives of the society and to serve the thematic areas which are neglected. Sources of Data: https://www.csr.gov.in/content/csr/global/master/home/home.html. https://www.intechopen.com/chapters/83098. https://thecsrjournal.in/what-is-csr-corporate-social-responsibility/. https://www.mca.gov.in/. Tags: Companies Act, Companies Act 2013, corporate social responsibility, CSRRead more at: https://taxguru.in/corporate-law/journey-csr.htmlCopyright © Taxguru.in