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Corporate Social Responsibility in India: Implications of Governmental

Intervention through the New Companies Bill of India

Prof. Dhirendra Vajpeyi & Dr. Sheila Rai

Abstract

The issue of corporate accountability has become a focus for critics of globalization

concerned about the imbalance between the rights that globalized and increasingly mobile

corporations have acquired and the lack of corresponding duties and obligations they

assume. In many instances, it reflects a conscious attempt to challenge the language of

responsibility and philanthropy which many companies have adopted in preference for

clearly defined and often legally enforceable obligations and duties that firms wield towards

society. Since the socio-economic ‘goods’ and 'bads' are largely produced, accumulated and

therefore regulated by the corporate sector, the justification of (in)action in this context is

also conferred on it. Needless to mention the cost of such (in)action can prove to be greater

than costs associated with timely effective action. Voluntary moves towards self-regulation

manifesting in the embrace of corporate social responsibility (CSR) despite its hyped

appreciation, produces a form of irresponsiveness through the "self-referential, self-

validating definitions of goals and results". There is obviously need for a shift in policy from

voluntary ad-hoc initiatives, towards a mandatory and compliance focused systematic

approach. The recent New Companies Bill of India is a significant governmental intervention

towards this purpose. This paper proposes to critically evaluate the impact of this bill on CSR

initiatives by companies in India and assess the implications thereof.An assessment would be

made of the accountability demands being made by government regarding process based on

transparency and disclosure, as well as substantive regulatory and compensatory

mechanisms.

Key Words: Corporate Social Responsibility, Companies Act of 2013, India, Corporate

Governance, Inclusive Growth, Accountability in CSR

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Philanthropy and corporate social responsibility (CSR) is not a novel concept for

Indian Companies. Imbued with India's ancient wisdom and values that define the nation’s

character for millennia Indian entrepreneurs and business enterprises have a long tradition of

working for the larger objective of the well-being of the society. In fact the history of CSR in

India has run parallel to the historical developments in the country and has therefore resulted

in different evolutionary stages beginning from charitable, graduating to promotional and

thereafter adopting the strategic approach and presently attempting to augment the

transformative CSR approach.

Charitable Phase: Tradition of Philanthropy

In the 19th

century and early 20th

century, charity and philanthropy were the main

drivers of CSR. Culture, religion, family values, tradition and industrialization had an

influential effect on CSR. In keeping with the Indian tradition it was an activity that was

more performed and less deliberated. As a result there is limited documentation on activities

related to this concept.

In the pre-industrialization period, which lasted till 1850, wealthy merchants shared a

part of their wealth with the wider society by way of setting up temples for a religious cause.

Additionally, these merchants helped the society in getting over phases of famine and

epidemics by providing food from their godowns and money thereby securing an integral

position in the society.

With the arrival of colonial rule in India from 1850 onwards, the approach towards

CSR underwent change. The industrial families of the 19th

century such as Tata, Godrej,

Bajaj, Modi, Birla, Singhania were strongly inclined towards economic as well as social

considerations. Through charity and donations their business organizations attempted to do

their part for the society. It has been observed that although their efforts towards social as

well as industrial development were driven by selfless and religious motives, there is

evidence that they were also influenced by caste groups and political objectivesi

Creational Phase: ‘Trusteeship’ Formula

During the time of the independence movement, there was increasing pressure on

Indian industrialists to demonstrate their dedication towards the progress of the society. This

was when Mahatma Gandhi introduced the notion of 'trusteeship', according to which the

industry leaders had to manage their wealth so as to benefit the common man. "I desire to end

capitalism almost, if not quite, as much as the most advanced socialist. But our methods

differ. My theory of trusteeship is no make-shift, certainly no camouflage. I am confident that

it will survive all other theories.ii"

These were Gandhi's words which highlight his argument

towards his concept of 'trusteeship'. Gandhi's influence put pressure on various industrialists

to act towards building the nation and its socio-economic development.iii

Under his influence

businesses established trusts for schools and colleges and also helped in setting up training

and scientific institutions. The operations of the trusts were largely in line with Gandhi's

reforms which sought to abolish untouchability, encourage empowerment of women and rural

development. What was clearly evident is that much of this had a national character

encapsulated within it, whether it was endowing institutions to actively participate in the

Indian freedom movement embedded in the idea of trusteeship.

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Transitional Phase: Public sector-Private sector dichotomy

The next phase of CSR (1960–80) was impacted by the element of "mixed economy",

emergence of Public Sector Undertakings (PSUs) and laws relating to labour and

environmental standards. During this period the private sector was forced to take a backseat.

The public sector was seen as the prime mover of development. Because of the stringent legal

rules and regulations surrounding the activities of the private sector, the period was described

as an "era of command and control". The policy of industrial licensing, high taxes and

restrictions on the private sector led to corporate malpractices. This led to enactment of

legislation regarding corporate governance, labour and environmental issues. PSUs were set

up by the state to ensure suitable distribution of resources (wealth, food etc.) to the needy.

However the public sector was effective only to a certain limited extent. This led to shift of

expectation from the public to the private sector and their active involvement in the socio-

economic development of the country became absolutely necessary. In 1965 Indian

academicians, politicians and businessmen set up a national workshop on CSR aimed at

reconciliation. They emphasized upon transparency, social accountability and regular

stakeholder dialogues as imperatives for successful business and societal well-being. In spite

of such attempts the CSR failed to catch steam.

Transformative Phase: Impact of LPG (Liberalization, Privatization, Globalization)

In the recent past (1980 until the present) Indian companies started abandoning their

traditional engagement with CSR and integrated it into a sustainable business strategy.

Although remaining in the philanthropic space, the practice of CSR moved from institution

building (educational research and cultural) to community development. Thereafter, in the

1990s the first initiatives towards globalization and economic liberalization were undertaken.

Controls and licensing system were partly done away with which gave a boost to the

economy, the signs of which became correspondingly evident. Increased growth momentum

of the economy helped Indian companies to grow rapidly and this made them more willing to

and able to contribute towards social cause.iv

Their moves towards voluntary and self-

regulated embrace of ideas and practices of CSR during this period can be seen as an attempt

to re-claim some control over the content of accountability to which they were being

subjected.

CSR increasingly gained prominence in the Indian corporate scenario because

business organizations realized that "business cannot succeed in a society that fails" therefore

it is vital to move beyond charity and donations and build trustworthy and sustainable

relationships with community at large for the growth and success of their business.

It is pertinent to mention the tradition of CSR practices in the country was still

restricted to a small number of companies. The engagement of the Indian economy

concentrated mainly on a few old family owned companies and corporate giants such as the

Tata and Birla group of companies, which have led the way in making CSR an intrinsic part

of their business plans. These companies have been deeply involved with social development

initiatives in the communities surrounding their facilities. Jamshedpur, one of the prominent

cities in north-eastern state of Bihar in India, also known as Tata Nagar stands out as a

beacon for other companies to follow. Jamshedpur was carved out from the jungle a century

ago. TATA's CSR activities include the provision of full health and education expenses for

all employees and the management of schools and hospitals.

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Promotional Phase: Strategic CSR

The basic objective of CSR has gradually become maximization of the company's

overall impact on the society and stakeholders. CSR policies, practices and programs are

getting comprehensively integrated into business operations and processes in increasing

number of companies. A growing number of corporate have realized that CSR is not just

another form of indirect expense but is important for protecting the goodwill and reputation,

defending attacks and increasing business competitiveness.

More and more companies

started realizing the worthiness of CSR as a branding and promotional tool. While using

CSR as a marketing tool contradicts the underlying principle of philanthropy - where

companies were deriving business credits from their commitments towards the society - the

ubiquitous and conspicuous communication of various CSR initiatives by companies

nonetheless gave a boost to the adoption of CSR in the private sector. Consumers would do

business or buy products from a company that stands for something beyond profits; the talent

pool of today is looking for a higher purpose in life more than their day to day job; investors

associate themselves with companies which have both a social and a business reputation. All

of this is made possible by strategic CSR initiatives.

The focus of companies is on creating specialized CSR teams that formulate policies,

strategies and goals for their CSR programs and allocate budgets to fund them. These

programs are often determined by social philosophy which have clear objectives and are well

defined and are aligned with the mainstream business. The programs are put into practice by

the employees who are crucial to this process. A case in point would be the Tata Jagruti

campaign The CSR programs range from community development to development in

education, environment and healthcare etc.7

Corporations such as Bharat Petroleum Corporation Limited, Maruti Suzuki India Limited,

and Hindustan Unilever Limited have been known to adopt CSR as a comprehensive method

of development. The path breaking program “Project Shakti” of Hindustan Unilever Limited

(HUL) to penetrate and tap rural markets in India is a classic example of innovative business

strategy with societal concerns. The project works on the model of appointing

underprivileged rural women from Self Help Groups as selling agents of the FMCG giant’s

products in their villages. While Project Shakti resulted in empowerment of these women –

called ‘Shakti Ammas’ and helped to position HUL as a socially responsible organization, it

also gave the company much wider and deeper penetration in the rural markets for sales. This

is a paradigm shift from philanthropy; it is a business initiative which has far reaching social

benefits.

On the other hand, the CSR programs of corporations like GlaxoSmithKline

Pharmaceuticals’ primarily focus on the health aspect of the community aptly related to their

main line of business. Their initiatives range from rehabilitation of paraplegic and cancer

patients, setting up health camps in tribal villages which offer medical check-ups and

treatment and undertake health awareness programs. Some of the non-profit organizations

which carry out health and education programs in backward areas are to a certain extent

funded by such corporations.

Also corporates have increasingly joined hands with Non-governmental organizations

(NGOs) and utilize expertise in devising programs which address wider social problems. For

example, a lot of work was undertaken to rebuild the lives of the tsunami affected victims.

This was exclusively undertaken by SAP India in partnership with Hope Foundation, an NGO

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that focuses mainly on bringing about improvement in the lives of the poor and needy. The

SAP Labs Center of HOPE in Bangalore was started by this venture which looks after the

food, clothing, shelter and medical care of street children.

It is evident from the above discussion that CSR has gone through many phases in

India. Apart from internal drivers such as values and ethos, global influences and increasingly

active and demanding communities have given rise to a discernible trend, wherein CSR while

remaining largely restricted to community development, is getting more strategic in nature

i.e. getting linked with business rather than remaining merely philanthropic, and a large

number of companies are reporting the activities they are undertaking in this space in their

official websites, annual reports, sustainability reports and even publishing CSR reports.

The advent of globalization across the developing countries has witnessed the

increasing role of the private sector in governance through engagement in a range of public,

private or any other hybrid 'regime' arrangements. This evolution reflects perceived shifts in

claims for rights, responsibilities and accountability. The answerability of key actors for their

actions as well as enforceability where these actors fail to deliver on their obligations have

assumed a central place in debates about governance and development.

To put it succinctly, the ‘discretionary choice’ of CSR engagements is challenged by

‘discretionary expectations’ the society may have at a given point in time.v

Voluntary regulation produces a form of unresponsiveness through the 'self-

referential, self-validating definitions of goals and evaluation of results. Voluntary

arrangements take for granted the autonomy of economic and technical choices from public

scrutiny... the self specification of what is to be accounted for and how, acts as a means of

preventing any substantial empowerment of the relevant stakeholders to the extent that their

questions and concerns remain unexpressed and unaccounted for.vi

Accountability: Inadequacy of self-referential validation

Accountability is composed of two key dimensions; answerability and enforceability.

The first element assumes both the right to accountability and to demand a justification for

(in)action on the part of an institution exercising power and the expectation on the part of an

accountability "provider" that it has to provide an account of its (in)actions in the public

name. The second refers to the means to secure accountability; the ability to realize

accountability claims and the capacity to penalize non-responsive behavior with sanctions of

one form or another.vii

Contrary to many treatments of the term, accountability is not a static

concept nor is it an end in itself. Rather it is a fluid and dynamic concept and a means to an

end and requires, therefore, that the end be specified. This is important for considering which

accountability strategy will serve whom and when.

In many instances, it reflects a conscious attempt to challenge the language of responsibility

and philanthropy which many companies have adopted in preference for clearly defined and

often legally enforceable obligations and duties that firms wield towards society. Since the

socio-economic 'goods' and 'bads' are largely produced, accumulated and therefore regulated

by the corporate sector, the justification of (in)action in this context is also conferred on it.

Needless to mention the cost of such (in) action can prove to be greater than costs associated

with timely effective action.

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Moreover, the corporate being a social entity and not merely the property of

shareholders it is obvious therefore, that the managerial powers are held in trust for the entire

community and not just for shareholders. This is what is known as the "communitarian"

concept of the firm in which the corporation has a clear purpose, operating as a legal

construct through a charter approved by government which entitles it to carry out welfare-

enhancing activities that benefit society.viii

Understandably, an India that aspires to take everyone forward, and leaves no one

behind has to be economically prosperous, socially inclusive and cohesive. All this and more

requires large public spending and it is obvious that the government alone cannot go it alone.

We are living in an age in which companies equivalent in wealth to entire countries, call the

shots and control much of the earth's resources. It is but obvious that this most populous

heterogeneous democracy with collaboration and cooperation of the private sector and civil

society would be able to create a caring society where the poor, weak, vulnerable and

marginalized are protected and solutions are found to major problems like water desalination,

purification, harvesting renewable clean and efficient energy and food security etc. needless

to mention comprehensive, focused and sustained support by the private sector would help to

galvanize the country's scientific, innovative and technological temper and spirit.

CSR through legislative enactment: The Companies Act of 2013

The passage of the companies Act 2013 by the Parliament of India which received the

assent of the President of India on 29th

August 2013 primarily aims to fulfill these onerous

tasks by bringing more companies into the fold of CSR. The 2013 Act introduces altogether

significant changes in the provisions related to governance, e-management, compliance and

enforcement, disclosure norms, auditions and mergers and acquisitions. Also new concepts

such as one person company, small companies, dormant company, class action suits

registered values and corporate social responsibility have been put forth in the Act. This Act

formally introduces to the dashboard of the Boards of Indian Companies the 'mandate' for

CSR. The inclusion of CSR mandate is viewed as an attempt to supplement the government’s

efforts of equitably delivering the benefits of growth and to engage the corporate world with

the country's development agenda.

This Act has replaced the existing Companies Act of 1956 which has been in need of

a substantial revamp for quite some time, to make it more contemporary and relevant to

corporate, regulators and other stakeholders in the present day India. Apart from the many

important changes, a key differentiator is the stated provisions for CSR which were

completely missing in the 195 Act. The new Companies Act 2013 has provisions which

would significantly have far reaching consequences. Besides the intention of improving

corporate governance, and strengthening regulations for corporate and auditing firms the Act

under Clause 135 highlights 'mandatory’ spending for CSR by companies that have a net

worth of Rs. 500 crore (USD 90 Mn) or more, or turnover of Rs. 1,000 crore (USD 180 Mn)

or more or a net profit of Rs. 5 crore (USD 0.9 Mn) or more during a financial year. The

specified companies will have to necessarily spend towards CSR, 2% of their average net

profits made in the immediately preceding three financial years, and any surplus arising out

of CSR activities will need to be reinvested into CSR initiatives, which will be over and

above the 2% figure The new rules will be applicable from the fiscal year 2014-15 onwards.

The Act also lists the activities which will be considered under CSR, in the Schedule VII of

the Act, suggesting communities to be the focal point. On the other hand, by discussing a

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company's relationship to its stakeholder and integrating CSR into its core operations, the

rules in the Act suggest that CSR needs to go beyond the concept of philanthropy.

At this juncture when the country is at cross roads between developmental growth and

welfare based development this Act presents a unique opportunity to the government, as well

as the business world to stand up to the challenge and strike a balance between the two. It is

more than likely that due to the new Act the total CSR spends will increase and the quest for

equitable, inclusive and sustainable growth would become a collective endeavour. According

to Indian Institute of Corporate Affairs, a minimum of 6,000 Indian companies will be

required to undertake CSR projects in order to comply with the provisions of the companies

Act 2013, with many of them undertaking these initiatives for the first time. According to a

report published in Forbes Magazine (March 2013) the top 100 companies by annual net sales

in 2012 will spend Rs. 5,611 (USD 935 Mn) crore on CSR activities compared to the Rs.

1,765 crore (USD 290 Mn) that they are spending now. Government owned companies

account for a significant portion of current CSR spending. Some estimates indicate that CSR

commitments from companies can amount to as much as Rs. 20,000 crore (USD 3333 Mn)ix

.

By requiring companies with a minimum profit of Rs. 5 crore (USD 0.83 Mn) to spend on

CSR activities micro enterprise would not qualify, but the Companies Act 2013 is likely to

bring in many Small and Medium Enterprises (SMEs) into the CSR fold.

SMEs contribute significantly towards India's economic growth. These serve

independently, and also as ancillary to larger units and help generate employment and

industrialize the rural and backward regions of India. They employee nearly 40% of India's

workforce and contribute around 45% to India's manufacturing output.xTheir business

activities are performed in proximity to the locals. This enables them to be aware of

community needs, manage expectations and develop CSR programmes appropriately. Since

generally the activities of SMEs are driven by the personal interests of promoters who hold a

significant financial stake in the business, and also tend to be in clusters engaged in similar

business activities, CSR spending would be convenient when they pool resources because

individual quantum of revenue would be small.

Till date, it has been very difficult to analyze the spending of CSR by various firms

and private companies and neither is such information maintained at the government level.

Even among the top 100 firms (by revenue) there are many who do not report their CSR

spends nor declare the social causes they support, that is because they are not required to do

so by law and no provisions for CSR exists in the Companies Act 1956. Therefore currently

the Ministry for Corporate Affairs does not maintain such details. But all this will now

hopefully change with the implementation of the new Companies Act 2013.

Under the new Act companies would require to spend money on structured activities

rather than religious and other like causes. The new law in effect tries to define welfare

enhancing activities to be undertaken by companies. It reflects a conscious effort to challenge

the imbalance between the rights that increasingly mobile globalized corporations have

acquired and the shortfall of corresponding duties and obligations they assume. The language

of philanthropy and responsibility adopted by companies has been substituted by clearly

defined enforceable duties and obligations to be performed by companies towards society.

CSR and sustainable development have been clubbed together under the rubric of the new

Act. The 2013 Act suggests that the company shall give preference to the local area and areas

around it where it operates.

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List of activities under Schedule VII of the Act

There are certain activities, which may have been hitherto considered under CSR by corporate

but, under the new Act they will clearly not come under the definition of CSR. For example, any

contribution directly or indirectly to political parties (even if the funds are eventually utilized for

social causes) will not be counted as CSR expenditure, it will be treated as political funding. Any

activity or project that benefits only the employees of a company and their families will not count as

CSR. The Act also clearly states that CSR activities should exclude normal business activities of the

company. All these clauses bring many existing initiatives taken up by big corporate players under

careful scrutiny.

In order to assist business to adopt responsible governance practices, the Ministry of

Corporate Affairs had issued a set of voluntary guidelines in 2009 which indicate some of the

core elements that the corporate sector (private companies) need to focus on while

conducting their affairs. Similarly in 2010 the Department of Public Enterprises issued

guidelines on Corporate social Responsibility for Central Public Sector Enterprises (CPSEs).

The fundamental principle of the two sets of guidelines being that each business entity should

formulate a CSR policy to guide its strategic planning and provide a roadmap for its CSR

initiatives, which should be an integral part of its overall business policy and aligned with its

business goals.

Although in the major provisions of the two sets of guideline issued earlier have been

incorporated in the new Companies Act 2013 but there are a few departures from the earlier

issued guidelines (2009, 2010). According to the earlier guidelines the spend on welfare of its

employees as well as expenses on other routine operations and activities were included in the

ambit of CSR expenditure, whereas, in the new Act these internal activities are not to be

included in the CSR, instead accountability activities related to external stakeholders are

emphasized.

Eradicating extreme

hunger and poverty

Combating HIV, AIDS, malaria and

other diseases

Contribution to the Prime Minister’s National Relief Fund or any other by the Central or state govts for

socioeconomic development, or welfare of the SC/SCT/OBC, minorities and

Reducing child

mortality and

improving maternal

health

Ensuring environmental sustainability

Employment-enhancing vocational

skills

Social business projects

Promoting education

Promoting gender equality

and Women’s empower

ment

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For effective implementation of the Act by the companies, modalities of governance

and reporting have been laid down in the Act which will add the much needed dimension of

transparency and accountability of CSR.

As per the Act CSR committee needs to be formed by all liable companies which will

be responsible for planning, executing and monitoring of all CSR activities complying to the

tenets of the Act. The Act requires that the board approve the CSR policy for the company as

recommended by the CSR committee and disclose its contents in their report and also publish

the details on the company’s official website, if any, in such manner as may be prescribed. If

the company fails to spend the prescribed amount, the board, in its report, shall specify the

reasons.

The independent auditors also known as ‘statutory auditors’ are an integral part of the

corporate governance framework. From their traditional role as experts who provide comfort

on the truth and fairness of the financial information generated by a company, the

expectations of the stakeholders from the contemporary auditors to contribute more in terms

of bolstering transparency, ethics and discipline in the corporates. It is but natural that the

New Act notifies comprehensive provisions relating to appointment, qualifications, powers,

duties and responsibilities, etc of the auditors. With the aim to enhance audit effectiveness

and accountability of the auditors, the 2013 Act introduces the concept of rotation of auditors

(every five years) as well as audit firms (every ten years). The Act also prescribes additional

list of disqualifications which includes relatives and debtors of the company.

Auditor independence is fundamental to public confidence on the reliability of

auditors’ report. This concept adds credibility to the published financial information and

value to investors, creditors, companies, employees as well as other stakeholders. Reporting

Role of the Board

• Form a CSR commiittee

• Approve the CSR policy

• Ensure implementation of the activties under CSR

• Ensure 2% spend

• Disclose reasons for not spending the amount (if applicable)

CSR Committee

• Three or more directors with at least one independent director

• Formulate and recommend a CSR policy to the board

• Recommend activities and the amount of expenditure to be incurred

• Monitor the CSR policy from time to time

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and communication closes the loop between intent and achievement and is hence a crucial

element of the CSR process. The primary responsibility of the auditor is to express an opinion

on the ‘true and fair view’ of the financial statements of the company. The auditor is also

required to report whether the company has an adequate internal financial control system in

place and also the operating effectiveness of such controls.xi

This new scheme of ‘mandatory’ CSR complying to the guidelines would entail an

increasing scope for CSR consulting. There are limited CSR consultancies (3-4) presently but

the prospects of growth of more of the kind are considerably high. But the flip side is that the

mobility of NGOs towards corporate CSR would drain the sector (NGO) for engaging in non

CSR activities.

Highlights of the Act

The purported wide ranging changes brought in through the Companies Act 2013 and the

Rules made thereunder, indicate the proactiveness of the Government of India towards

protecting the interests of various stakeholders, by means of provisions aimed at ensuring

greater discipline, ethics and accountability in the working of the various components in the

framework of corporate governance of a company.

The focus of development welfare programmes in India is the disadvantaged, marginalized

and excluded. Marginalization in India is primarily on the basis of gender, disability,

ethnicity and location which lead to social and physical exclusion of such groups from all

kinds of development. The governments have realized that without an increase in business

sector engagement, sustainability of developmental goals cannot be reached. The 2013 Act is

a manifestation of such realization and endeavour for fair and equitable social development.

A very remarkable feature of the New Company Act 2013 is the requirement

to have at least one woman on the boards of companies. This single tenet of

the Act will have far reaching impact on the gender diversity in the corporate

world in the years to come.

It also introduces the concept of an independent director. The Act specifically

delineates that for every listed company at least one third of the directors

should be independent.

In contradistinction to the 1956 companies Act the new law also caps the

tenure of a company auditor to maximum period of 10 years.

e-voting is made mandatory for listed companies and other companies having

not less than 1000 shareholders. this could potentially enhance the level of

participation by minority shareholders, specifically the institutional investors.

The new Act amongst other things, promotes the 'Creating Shared

Value'(CSV) approach. The shared value model is based on the idea that

corporate success and social welfare are interdependent. The underpinning is

business needs a healthy, educated workforce, sustainable resources and adept

government to compete effectively CSV focuses on the opportunities for

competitive advantage from building a ‘social value proposition’ into a

‘business strategy’.

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Challenges/Problems

Language and literacy variances, information asymmetry, infrastructure constraints,

geographical challenges and cultural barriers make it very difficult to engage the

marginalized and implement CSR. The 'mandatory' directions as well as other suggestions

regarding activities and areas could have a stifling effect on the hitherto 'voluntary, free

choice' kind of CSR.

The companies Act, 2013 encourages companies to target their CSR interventions in

their local region while this is an obvious choice for companies that are in manufacturing,

those in the services sector (like banking and telecom) with a wider footprint would have no

concentrated local region. It would be difficult for such companies to identify areas for

intervention towards CSR.

Many experts have raised concerns and criticized the ‘spend or explain’ approach taken in

the Act for CSR. Although companies have been asked to spend at least 2% of their average

net profits of the preceding three years on CSR, the law does not stipulate penalties for non-

compliance. The companies are required to merely justify any shortcoming in this regard

which is a significant caveat in the Act. The Act itself does not list the acceptable reasons for

non-compliance, a loophole for unscrupulous companies to take advantage of.

The CSR provisions would allegedly have a 'cascading’ impact on Philanthropy and

could also prove to be a mixed blessing. CSR has been so narrowly defined within the

companies, that what they did till now with their profits after tax was left entirely to them.

Thus they were free to innovate and pursue something interesting. But under the new Act

they will have to follow the letter of the law.xii

The new regulations suffer from paucity of guidelines on personal Philanthropy. At

times individuals have for greater amount of wealth to contribute towards CSR than the

corporates e.g. Bill Gates has done more with his personal wealth than what Microsoft has

done. Rohini Nilakani raised Rs. 1.64 crore for Philanthropic activities by selling some of her

shares in Infosys (the firm has mentioned this in it's BSE filing on 3rd

August 2013).

But it is pertinent to note that CSRs’ cutting edge can be controversial, especially

among those stakeholders whose interests are not considered primary by decision makers.

The top-down form of accountability is the format perceived in the new companies Act 2013.

The mechanism for claiming accountability by 'accountability seekers' from the

'accountability providers’ is considerably weak. The role of the former i.e. the

communities/citizens etc. is nonexistent under the Companies Law 2013. Withholding the

purchasing power of buyers and consumers provides leverage to make and extract

accountability demands. Corporations are in realty then subjected to a variety of

accountability sanctions that go beyond the strict public regulation of their activities. But

unlike the west consumer awareness is at a negligible low in India. Although new forms of

activism, citizens campaigns are graining visibility on environment related issues yet the

metamorphosis of the 'Consumer-citizens into the 'citizen-consumer' is in a nascent stage.

The tradition of CSR has been prevalent in India but the focus has generally been on

what is done with profits 'after' they are made. But the new lingua franca of CSR is concerned

about factoring the social and environmental impacts of conducting business, i.e. 'how' profits

are made.

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Implications of the Act: A critical assessment

Although the industry has welcomed the new legislation commending the government

for prioritizing its commitment to usher in the new era of corporate regulation, there are

others who feel that the law has fallen short of expectations.

Some argue that CSR is merely window-dressing, a form of capitalist legitimacy.

Such critics point out that what began as a social movement against inhibited corporate power

has been co-opted and transformed by corporations into a 'business model' and a 'risk

management' device, often with questionable results.xiii

The

The concept of 'shared value' blurs the boundary between pure business activities and

CSR activitiesxiv

. The definition and boundaries of CSR as per the Act also make many major

initiatives being run as CSR by companies debatable. For example, the extremely popular and

propagated project Shakti by HUL has the empowerment of rural women at its core, but these

women are enablers of the company’s day to day business, since they act as a rural sales

channel for the company. So while HUL touts it as its biggest social project, whether the

expenditure made on capability building of these SHGs and rural women will be accepted in

the 2% norm of the Companies Act is yet to be seen. And if it does get included as part of

CSR, then will HUL then need to reinvest all the revenue generated from sales through the

Shakti Ammas in their CSR is another debate. Another example is from the 'agarbatti'

(incense sticks) business of ITC started to provide livelihood support to retired employees

and then it was extended to other members of the community located around ITC's

manufacturing facilities. Similarly, many companies, especially in the manufacturing sector

build hospitals and schools near their premises for employees and they are also open to use

by the local communities. The Act may leave such expenditures out of the scope of CSR

since these may be taken as employee welfare activities as the main objective, while in reality

they cater to the society at large.

Another conundrum arises from the accounting of employees’ time contribution

towards their company’s CSR activities. Many organizations have adopted volunteerism in a

big way, where employees are an integral part of the company’s CSR initiatives. Thus human

capital, especially in the service industry where costs are calculated on the amount of time

spent by employees on each activity, is spent to execute the CSR strategy of the company.

While service based organizations are putting forth this debate, inclusion of employee costs

in CSR will lead to increased fudging of numbers in the reports.

The above issues may distract or discourage companies who are adopting CSR in a

more strategic and holistic way rather than the pure philanthropic tone that the Act seems to

set. Many companies may prefer to shell out money through NGOs or any such agency

working towards the activities listed in the clause rather than investing in innovative and

strategic CSR which actually drives sustainability.

The lack of coercive regulation could provide a leverage to transnational corporations

operating in the developing countries. They are seen to employ 'regulatory arbitrage' by

threatening to relocate their production facilities to favorable regimesxv

. In the competition to

attract FDI, the probability of regulation towards CSR becoming a casualty is relatively high.

Successful implementation of the Act will need a hand holding approach from the

government for several hundreds of companies who will engage in CSR in a policy based

13

strategic manner for the first time. The government should adopt a consultative approach and

in the initial years appoint a team of experts for this purpose.

While expenditure on CSR is good to start with, it is not a measure of impact on the

society. Metrics to assess the impact of CSR initiatives taken up by companies need to be

defined and monitored for deriving greater benefit. Additionally, a government appointed

monitoring/ auditing body may be required to ensure compliance. However monitoring of

thousands of companies which fall under the ambit of the Act by any single body will be a

humungous challenge in itself.

Conclusion

It is beyond doubt that to ensure a robust economy, inertia needs to be abandoned and

a strategic and proactive policy is the need of the hour. The key concepts being a revisioning

of India which would necessarily involve repairing of what is degraded and broken, creating

anew, a reinvention. Assuring universal access to essential quality services such as health,

education, energy, water, housing and sanitation. Gender equality and empowerment of

women is another area where commitment needs to be effectively realized. Much needs to be

done towards agriculture and green manufacturing as well.

The problems and issues that confront society today are too large and complex to be

solved by government and NGOs alone, sustainable solutions to the problems afflicting

society can be found through the collaboration and involvement of all who are part of it.

Companies have tremendous strengths; they have extremely capable people,

technology, access to money, the potential for geographical reach etc. Many companies

worldwide and now even in India are more powerful than governments and even countries,

and therefore corporates are important stake-holders in society. Although the business

community recognizes the essential imperative to deliver economic growth, spread the fruits

of the global economy and contribute to fair and equitable social development the requisite

impetus can be provided by mandatory legislative enactments. Despite the apparent spirit of

innovation of companies, their programmes have been found to focus on symptoms rather

than addressing root causes.xvi

The new Companies Act 2013 substitutes the language of responsibility and

philanthropy which many companies have adopted, by clearly defined legally enforceable

duties and obligations that firms need to perform towards society.

It should be borne in mind that businesses operate against an ever changing

background of what is considered socially responsible. These ever changing standards are

further compounded with social and cultural variances. Worse still, they keep evolving over

time. Faced with a kaleidoscopic background of evolving standards, it becomes imperative

that business decision makers take into consideration a variety of factors before implementing

CSR.

Although, informal and incapable, the acquisition of 'social license' i.e. the approval

or acceptance of the local community is an essential pre-requisite for any project of CSR. A

company with its 'ear to the ground' through regular stakeholder dialogue, ethical and

responsible behaviour would enhance the creation and maintenance of 'social capital'. In a

14

poverty stricken country like India, the poverty reduction impact of business activities should

be included as a specific criterion in the assessment of company performance.

CSR ratings by Government would be effective in setting bench marks of CSR for

companies to follow and would also help in exploring and comprehending the roles that

corporates are playing and can play in finding meaningful solutions to the problems facing

the country and society at large. Benchmarking involves reviewing competitor CSR

initiatives, as well as measuring and evaluating the impact that those policies have on society

and the environment, and how customers perceive their CSR strategy.

CSR is no longer a cliché but has acquired the connotation of popular benevolent

thinking in action. Thus concepts like ‘inclusive growth’, ‘responsible business enterprise’,

and to cap it all ‘good corporate governance’ practices are deeply intertwined with it. CSR

activities have permeated almost every sphere of life, from manufacturing to services,

education, hospitality, environment and even spirituality. But it is equally true that a lot more

is still required to be done at the ground level at large, particularly in rural India.

i Chahoud, Dr. Tatjana; Johannes Emmerling; Dorothea Kolb; Iris Kubina; Gordon Repinski;

Catarina Schlager (2007) Corporate Social and Environmental Responsibility in India-

Assessing the UN Global Compact’s Role ii Gandhi’s quote

iii Understanding and Encouraging Corporate Responsibility in South Asia:

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Gajare, R.S., 2014 A conceptual study of CSR development in India. In D.B. Patil & D.D.

Bhakkad, Redefining Management Practices and Marketing in Modern Age Dhule, India:

Atharva Publications (p. 152-154) v Archie B. Carrol, A Three Dimensional Conceptual Model of Corporate Performance,

Academy of Management Review, Vol 4, No 4, 1979, p-500 vi Pellizzoni, Lingi 2004. Responsibility and Environmental Governance: Environmental

Politics 13(3), p-558. vii Heald and Koenig-Archibugi, 2005. Held and Koenig-Archibugi 2005, Saurin 2001, 80.

Fox and Brown 1998, Wilkinson 2002; and O'Brien et al. 2000. Cornwall and Schatten

Coelho 2006. Schedler, A Diamond, and M Platner (1999) The Self Restraining State: Power

and Accountability in New Democracies, Boulder, CO: Lynne Reinner viii Dhir Aaron, 2006. Realizing the Corporate Building Blocks: Shareholder Proposal as a

Vehicle for Achieving Corporate social and Human Rights Accountability. 'American

Business Law Journal' 43(2): 365-412 ix Handbook on Corporate Social Responsibility in India' developed by Pw (India for

Confederation of Indian Industry (CII) (2013) x The Economic Times, 9

th June 2013

xi CA, Abhijit Bandhopadhyay, ‘Impact of the Companies Act 2013- Independent Auditors’

Role and Responsibilities’, The Chartered Accountant Journal, Vol 62, No 11, May 2014

xii Rohini Nilekan, Chairperson and founder of non-profit Arghyam xiii

Shamir, Rowen (2011) socially Responsible Private Regulation : World Culture or World-

Capitalism? Law and Society Review, 45, 2, 313-336. xiv

CSR issues continue to remain unresolved, Business Standard, Friday, July 4, 2014 xv

P. Dicken, Global Shift, Fourth Edition, London, Sage 2004, p-27

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xvi Saeed Khan 'Corporate social performance of Indian FMCG Companies in Issues in social

and Environmental Accounting Vol. 3 No. 2 Dec. 2009/Jan. 2010 p.185.