Corporate Social Responsobilities - Decoded

[Ketaan Mehta]

Decoding of Corporate Social Responsibility- Section 135 of Companies Act, 2013 - Legal Framework and Judicial Interpretations in India

Introduction

A business or a company is not a one man show, for the smooth sailing of a company there needs to be a genuine and personal relationship between the employees, employers,  shareholders and other behind the door workers. A business  shall not only entail monetary motive but also guided by the virtues of morality and ethics. Business ethics shall incorporate the impertinent standards of honesty, trust, integrity, transparency and respect.

The concept of CSR contributes to the business ethics by committing the companies to conduce to the social and environmental development, which soars above the profit motive principles of the companies. The activities of CSR can positively range from community services and philanthropy to environmental ethics. An ethical leader shall prioritise the initiatives of CSR as he beholds the impending consequences of his decision. Business ethics and CSR policies are intertwined with each other, complementing and reinforcing one another. The activities of the organisations towards a greater cause tends to greatly inspire the workers and raise their ethical responsibilities towards the society. The CSR activities of a company shall also amplify the trust and the reputation of such companies.

This article examines the legal framework governing CSR in India, its objectives, and the implications for businesses. The landmark introduction of CSR obligations via the Companies Act of 2013 represents a pivotal advancement in corporate governance and social responsibility, establishing a global benchmark for corporate accountability and societal engagement.

Definition: Section 135 CSR

135. Corporate Social Responsibility.

(1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

(2) The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

(3) The Corporate Social Responsibility Committee shall,

(a) 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;

(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and

(c) monitor the Corporate Social Responsibility Policy of the company from time to time.

(4) The Board of every company referred to in sub-section (1) shall,

(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and

(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

 Explanation.: For the purposes of this section ―average net profit‖ shall be calculated in accordance with the provisions of section 198

A company operates within the framework of society, which serves as its primary source of profit. The functionality of any organization is inherently linked to a well-structured societal environment. Consequently, societies can be viewed as valuable assets to a company. While tangible assets require regular maintenance, intangible assets, such as societal relationships, also necessitate specific obligations from the company. These obligations, commonly referred to as Corporate Social Responsibilities (CSR), must be addressed to reciprocate the support received from society. CSR initiatives can encompass a diverse array of activities, including social services and charitable contributions.

The responsibilities outlined contribute significantly to fostering a positive impact for the company by enhancing consumer trust, thereby reinforcing the company's reputation and commitment to creating a sustainable future. According to Section 135, any company with a net worth of Rs. 500 crore or more, a total turnover of Rs. 1000 crore or more, or a net profit of Rs. 500 crore or more in the immediately preceding financial year is required to establish a Corporate Social Responsibility (CSR) committee. This committee must consist of three or more directors, with at least one being designated as an independent director.

Historical Evolution of CSR:

The historical evolution of Corporate Social Responsibility (CSR) can be traced back to the late 1800s, a time when the work culture in factories and industries received insufficient attention. Business owners and investors were largely unaware of their obligations towards societal welfare. However, with the emergence of a philanthropic approach, businesses began to acknowledge the importance of CSR.

CSR significantly influences both business operations and societal well-being. The previously prevalent operational structures, characterized by long working hours and minimal employee benefits, gradually transformed. Companies restructured their production processes to enhance employee potential, while also improving factory conditions to prioritize worker safety.

In 1953, American economist Howard Bowen published 'Social Responsibilities of a Businessman,' which marked the first formal introduction of the term Corporate Social Responsibility. This seminal work highlighted the profound impact corporate organizations can have on societal welfare and development, compelling business leaders to fulfil their obligations for the greater good.

Capitalism to Socialism:

In the early 1900s, businesses were only meant to earn profits. Hence, the scope of CSR was quite narrow if compared to the modern age. Industrialists back in the day were only driven with the aim of earning profits. They did not perform any obligations towards the society, nor the society demanded anything from them. This was due to the lack of awareness among the people as they saw businesses as profit making bodies and not as charitable institutions. But as time passed by, people started demanding different rights that companies became bound to fulfil.

This includes reduction in working hours, prohibition of unfair trade practices etc. In the early 1960s, this notion of capitalism and profit making began to shift as companies started to recognize their obligations towards the society. With the emerging of modern problems for the modern society, companies also focused on various charitable doings and not just profit making. As CSR continue to develop, companies also designed new decision-making strategies, in which their decisions were not only meant for earning profits, but also featured practices that were meant to benefit the society and the people.

Therefore, companies started to view society as an asset. At this point of time, CSR mainly included notions such as protection of environment, waste management, labour laws etc. With the emergence of globalization in the 1990s, the scope of CSR became more prevalent as various Agreements involved companies to provide their consent. Agreements like the Kyoto Protocol forced the companies to adopt sustainable development by keeping environmental damage to a minimum. Multinational corporations became more focused on developing eco-friendly techniques of production and other possible green ways of conducting business.

CSR in Present Day:

In the 21st Century, companies have started to include the CSR policies in their internal operations because businesses nowadays are inclined towards getting positive feedback from their consumers and thus have become more consumer friendly. Hence companies often engage in CSR activities in order to refine their goodwill in the market, as well as attract consumers. The scope of CSR has widened and companies nowadays allocate a separate amount of fund for CSR activities. CSR activities are not only beneficial for the society but also the business as well. As a matter of fact, CSR also helps the company to recruit talented human resources, as employees these days often tend to find values in the organization they are working.

This creates an upper hand for the company as well as the individuals attached to it. The course of Industrialization has cherished as well as caused numerous side effects to the society. But in order to evolve as developed nations, industrialization is also necessary. Hence, the aim is to strike an ecological balance by keeping environmental harm to a minimum.

Nowadays, every multinational corporation has an inhouse Committee/Council which is aimed at developing and recommending CSR policies. These Committees are responsible for allocating and providing advisory reports to the Board of Directors, for the fulfilment of CSR activities. The BOD examines and verifies the reports and provides consent to execute such CSR activity. Recommendations and contents of the CSR policy may vary from company to company depending on its size and volume of operations carried.

Global Framework of CSR:

CSR has become an important element when it comes to global business practices and designing strategies. International Organizations like the United Nations is also involved in the surveillance for whether a company or an organization which fits the parameters of falling under the purview of CSR is performing its activities or not. Hence, the United Nations acts as a watchdog over the companies, forcing them to carry out their obligations towards the society.

The United Nations Committee on Human Rights restricts the companies to engage in unfair and unlawful trade practices which might harm consumer interests. Moreover, the OECD guidelines also prohibit the companies to get involved in corruptions, respect the validity of Labor Laws, to curtail activities that pose threat to the environment and may cause pollution etc. These guidelines are often comprehensive and businesses and corporations might have to interpret them accordingly.

The International Labor Organization (ILO) is also a governing body for businesses and organizations. Their focus is to supervise and interpret labour laws and ensure that companies are following them accordingly and the interests of the workmen are taken care of. These generally includes relief from long working hours, provision of minimum wages, safe and secure working conditions, elimination of child labour etc. According to it, workmen should be considered as assets of the company as they are responsible for all the lower and middle level management tasks. In other words, they are the 'powerhouse' of the company and hence the company must meet its obligations towards them.

CSR in UK:

CSR in UK is driven by a strict legal framework, in which companies must publish reports regarding their environmental and social impact of conducting business. This law is specifically governed by the Companies Act 2006, which encourages the companies to practice CSR and develop its policies accordingly. Apart from it, companies have to undergo a rigorous risk assessment procedure in order to calculate the potential risks that particular project might pose towards the environment. An equitable working environment, mental wellbeing of the employees, assigning mentors to every team etc., are also covered under the CSR activities.

CSR in Asia:

Asia is mixture of different cultures and ethnicity. Different nations have different approaches to CSR. Some are voluntary while some are involuntary. For instance, countries like India poses strict supervision upon the companies to practice CSR. On the other hand, CSR in Singapore is practiced voluntarily by the companies and sustainability reports are published accordingly.

Some companies are more inclined towards development of specific communities, while some are more focused on societal welfare. But the common subjects of CSR are mostly addressed by every company, which may include policies governing climate change, promoting the essence of education to backward communities, provision of proper healthcare facilities etc. Some of the Asian countries have highly benefitted from CSR activities. CSR in Asia has also resulted in a long-term growth of economies rather than just philanthropic services.

CSR In India

In India, Corporate Social Responsibility (CSR) aligns corporate activities with societal needs. Section 135 of the Companies Act, 2013 mandates that target companies allocate a percentage of their profits towards development programs. The subsequent paragraphs will provide a comprehensive review of the regulatory framework, implementation challenges, judicial perspectives, and the overall impact of CSR initiatives.

Corporate Social Responsibility (CSR) as stipulated by Section 135 of the Companies Act of 2013 requires eligible corporations to allocate a minimum of 2% of the average net profit from the preceding three financial years, as defined in Section 198, towards CSR initiatives. This mandate is strictly enforced for companies that meet specific eligibility criteria related to Net Worth, Turnover, or Net Profit. Furthermore, Rule 7 of the Companies (CSR Policy) Rules, 2014 addresses the utilization of surplus funds, ensuring that any surplus is exclusively directed towards CSR activities. Compliance with these requirements is monitored through the disclosure obligations outlined in MCA Form CSR-1 and CSR-2.

Corporate Social Responsibility (CSR) in India has experienced a substantial evolution, transitioning from a voluntary business practice to a legal obligation for certain companies. This shift signifies a pivotal movement towards fostering a more socially responsible corporate culture within the country. The legal framework governing this transformation is primarily outlined in Section 135 of the Companies Act, 2013, which represents the first comprehensive CSR mandate established for Indian corporations.

In a nation grappling with social inequalities, environmental degradation, and various community welfare challenges, Corporate Social Responsibility (CSR) legislation aims to ensure that businesses actively contribute to the socio-economic development of the country. Through legal mandates, corporations are held accountable for their roles in addressing these pressing issues, thereby compelling them to undertake initiatives that ultimately benefit society as a whole. While CSR practices have been in existence in India prior to the formal enactment of legislation, the legalization has established a comprehensive and structured framework that enables companies to align their operations with social and environmental objectives.

This article examines the legal framework governing CSR in India, its objectives, and the implications for businesses. The landmark introduction of CSR obligations via the Companies Act of 2013 represents a pivotal advancement in corporate governance and social responsibility, establishing a global benchmark for corporate accountability and societal engagement.

The key provisions of the Companies Act 2013 as regards to CSR is discussed herein below:

“135. Corporate Social Responsibility.

1. Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
2. The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
3. The Corporate Social Responsibility Committee shall,

1. 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. recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
3. monitor the Corporate Social Responsibility Policy of the company from time to time.

4.  The Board of every company referred to in sub-section (1) shall,

1. after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and
2. ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

5.  The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

 Explanation: For the purposes of this section, average net profit‖ shall be calculated in accordance with the provisions of section 198.”

• Applicability of CSR Provisions:

  ♥ 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 fulfils 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 it meets the specified criteria

Schedule VII of the Act constitutes CSR activities;

• Eradication of starvation and poverty;
• Promote education;
• Encourage gender equality and empowerment of women;
• Deduction in the child mortality rate and ameliorate maternity care and health;
• Combat against HIV, AIDS and other ailments;
• Ensuring the sustainable development of environment;
• Developing the vocational skills of the workers;
• Any social development projects;
• Contribution to any fund implemented by the central or the state government for the wellbeing of society and economy as well as for the welfare of the women and minorities;
• Contributions towards rural development plans;
• Contributions to disaster management activities;
• Other provided matters.

CSR Expenditure:

Different companies may have different approaches to preparing their CSR expenditure policies. But the rule says that the directors of the company must ensure and verify that the expenditure do not exceed 5% of the total funds sanctioned for CSR, in a given financial year.

If any surplus amount is left after the completion of the targeted CSR activities, then such amount must not be included in the net profits of the company, rather the following to be done:

1. Spent on another project.
2. An 'Unspent CSR Account' is to be created by the company for the surplus amount to be transferred.
3. Again, transferred to the CSR fund as specified in Schedule VII, within a period of 6 months after the expiry of the financial year.

Although, the company can spend the surplus amount of CSR for creation and acquisition purposes of various financial assets.

4. Expenditure: – Companies that qualify are mandated to spend 2% of their average net profits for the last three years on CSR activities. If companies have been operational for less than three years, then their average net profit of those operational years is considered.
5. Inclusions in net profit: According to Section 198, net profit does not include capital expenditure, receipt, and income tax and considers permissible variations as referred under Rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014.
6. Activities Allowed: – The Companies Act, 2013 Schedule VII provides what all CSR activities are permissible under the act, which comprises fighting hunger, enhancing access to education, and ensuring environmental protection.
7. Surplus utilization: – Any surplus from CSR activities shall be ploughed back into CSR projects. Under Rule 7(3), any such surplus could arise from earnings of CSR projects, interest on CSR funds, or income derived from sale of materials used for CSR activities. Any surplus generated in CSR expenditure shall only be carried forward from 22nd January 2021 for CSR expenses.
8. Monitoring Mechanism: – CSR is governed by the CSR Board of the company in its role with its CSR Committee. Companies must report CSR activities undertaken in their financial statements and file their details in the MCA21 registry through Forms CSR-1 and CSR-2.
9. Penalties for Non-Compliance: – Companies that do not utilize the mandatory CSR amount or transfer unused funds are liable to penalty up to ₹10 million or twice the unused amount, whichever is lower.
10. Penalties on Responsible Officers: – Responsible officers may also be liable for penalty up to ₹2 lakh or one-tenth of the unused amount.

CSR Committee: 

Every Company on 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 in 2 or more directors in the Committee.

• Consisting of 2 directors in case of a private company having only two directors on its Board.

•  Consisting of at least 2 persons in case of a foreign Company of which one person shall be its authorised person resident in India and another nominated by the foreign company

•  Companies are required to disclose their CSR expenditure in their annual reports, along with the reasons for not spending the required 2% if applicable.
   
•  A company that does not allocate the mandated CSR funds is required to provide a justification in its annual report. While penalties may include fines and potential imprisonment, the primary objective of the legislation is to promote transparency and accountability rather than to impose punitive measures. In 2020, the Ministry of Corporate Affairs introduced several amendments to Section 135, which included provisions for penalizing directors who fail to ensure compliance with CSR obligations. Additionally, the law allows companies to establish a CSR fund, enabling them to carry forward any unspent CSR amounts for future initiatives, provided these funds are utilized within the subsequent three financial years.

• In 2020, the Ministry of Corporate Affairs (MCA) introduced the Companies (Corporate Social Responsibility Policy) Amendment Rules, mandating that companies provide comprehensive details about their Corporate Social Responsibility (CSR) activities in their annual reports.

• Companies have the option to execute CSR initiatives either directly or through a registered public trust, society, or non-governmental organization (NGO). The chosen implementing agency must adhere to specific criteria to ensure accountability and transparency in its operations.

Functions of CSR Committee [Sec 135 (3)]:

Any company whether Indian or Foreign may fall under the purview of CSR provisions given the net worth of the said company. Hence such a company according to the provisions of the Company Act 2013, must formulate a CSR committee which shall regulate and supervise matters related to the Company's fulfilment of its obligations towards the society or the CSR activities in which the company tends to involve. Hence, to do so, such committee must prepare a policy in which it shall include various recommendations related to the subjects specified under Schedule VII of the Act. This generally includes the project or projects in which the company shall invest in. Such as:

1. Environmental Protection: A company may sanction its investment related to the protection of the environment, conduction of business activities without damaging the environment, optimization of resources, emphasizing more on green techniques of production, management of fossil fuels, etc.

2. Societal Development: Contributing for a better and cleaner society with relation to societal welfare and development, creating more jobs and framing a non-exploitative work culture.

3. Ethical Business Tactics: Ethical business tactics with a transparent approach of providing services to the society without indulging in any sort of unfair trade practices like black marketing or dumping of products to jeopardize another country's market. The CSR policy must aim to abolish such practices if they exist.

4. Consumer Rights: Improvising on providing services to their consumers by developing an efficient customer care cell, designing grievance redressal authorities for handling consumer grievances and solving them efficiently and providing relief to the aggrieved parties in connection to the problem.
    
5. Human Rights and Accountability: CSR policies often cherish human rights which also hold the company accountable in case it voluntarily or involuntarily involves itself in some wrongdoings or misleading practices which might pose harm to the consumers. It also maintains transparency in relation to the internal operations of the company and hence insists the company publish regular reports related to its financial health. This upholds the shareholder rights and makes it easier for the investors to make an informed decision.

The above includes some general examples but CSR may range from a wide range of activities from different topics related to the functioning of a company and how it shall fulfil its obligations towards its consumers, the environment, and the society on an overall basis. Hence, the CSR committee must include only those recommendations in its policy which shall pose a concern and is of utmost importance for the company to address. The CSR Committee then shall submit its report to the management of the company which includes the Board of Directors.

Such report shall be verified and supervised by the management and then be sanctioned for its execution. Such recommendations of the policy must be posted and regularly maintained by the company in its official website and hence it must disclose all necessary information related to the policy. Investors and anyone with a specific vested interest in the company's undertakings and operations may refer to the official website of the company for any sort of information.
 
Challenges to CSR:

• lack or absence of proper legal framework : One of the main challenges that is faced by CSR is the lack or absence of proper legal framework. The Companies Act 2016, guides the CSR activities to some extent, but the supervision is limited. Companies engage in different types of activities, namely finance, sales, production, marketing etc. Hence, in order to validate and measure the impact of CSR, there exists no such well-defined metrics. Therefore, companies are given the task of developing their own measuring models, which can track the growth and implementation of CSR activities. Developing these models can be quite time consuming and requires lot of funds to be sanctioned.

• lack of transparency: Another dominating challenge for CSR is the lack of transparency and organizations are reluctant to publish clear reports for CSR activities. For instance, a company might be evasive to admit the environmental harm that is caused by one of its projects and might hide the negative impacts. Disclosing such information may result in serious allegations against the company, for damaging the environment. Due to the lack of specific legal frameworks companies often manage to escape from these situations.
   
• Rapid economic growth: Rapid economic growth and increase in commercial services can also pose as a challenge to companies for meeting CSR requirements. For example, companies engaged with sales and marketing must regularly fulfil their targets within a given period. This creates a constant pressure upon the companies and hence, it gets difficult for them to involve in CSR activities. On the other hand, companies have other obligations like generating regular returns for the shareholders to keep them satisfied. These obligations tend to hold more importance for the company as they are directly proportional to business development and raising capital, which makes CSR a secondary objective.
• Greenwashing: CSR is often viewed as a strategic technique of greenwashing that is used by the companies. Greenwashing is a method which is used by companies to distract public from the negative doings or practices in which it is involved. For instance, a company may involve in unfair trade practices and simultaneously promote CSR activities in order to create a good public image and hide its wrongdoings.
• Inadequacy: CSR activities are often unable to redress certain issues such as income inequality, global warming, preservation of human rights etc. Hence, some people argue that CSR is not capable of redressing the major issues of the society.

CSR:  companies (mis)use funds

• The 2013 CSR ruling is generally considered to be a right step towards a more equal society (with the occasional grumblings of some senior corporate officials and   self-styled pundits) but the vagueness of certain aspects of this law has made it ripe for cleverly designed abuses. There has been a steady stream of reports regarding misuse of CSR funds by certain companies both in the public and private sectors. Of course, this phenomenon was prevalent even before this ruling came into effect. Space and time doesn’t really matter when it comes to unethical dealings with money.

• Here, we have unearthed some interesting ways in which CSR money has been diverted towards pursuits of happiness by individuals and entities who you wouldn’t exactly qualify as underprivileged or oppressed.

• One of the more creative methods is to use charitable trusts. Much like Uber, these trusts can be hired to comply with the mandatory CSR spending on paper. While these funds receive a cut of the funds, the money that is supposedly spent on CSR activities is funnelled back into the company. A neat trick to fool the authorities, especially when there’s no mechanism to audit these spends. It helps that the CSR reporting form called AOC-4 isn’t required to be verified by external auditors, which is compulsory for other financial statements. The central government had earlier clarified that without a specific written complaint there was little they were willing to do on misuse of these funds, which ensures malpractice as usual for these companies.

• While corporates using CSR for tangible returns is not wrong per se, the line where this becomes a business dealing rather than a social responsibility is rather thin and prone to frequent redrawing’s. Often, CSR funds are directed at ventures that are directly beneficial to the company, either in terms of increased profits (branding exercises, creating false goodwill among the public, etc.) or an exchange of favours – a quid pro quo exercise. There are reports where large Indian companies have given scholarships to children of bureaucrats, who no doubt wield immense power in public policy and law enforcement. Then there are those who simply refuse to engage in CSR projects unless there’s a very clear benefit to the company. Using CSR for crony capitalism and rent seeking negates everything that it stands for.

• Government officials and senior staff in PSUs have been known to launder CSR money for their own benefits. This practice has been well documented before the ruling came into effect. Justifiably, a lot of people were concerned that with the additional funds this kind of corruption would become even more rife, especially when senior management in these PSUs are beholden to their political bosses and have to resort to all kinds of measures to please them, willingly or otherwise. CSR funds then become an easy prey since there’s little oversight on its spending and projects can be redesigned to make them seem extremely CSR-friendly. A few famous examples are the NALCO case in 2012 wherein crores of money were endowed on a private university, allegations against former Steel Minister Beni Prasad Verma of misusing SAIL’s CSR funds, and the 2011 CAG report on SAIL (again) which stated, amongst others, that most of its CSR money was spent on hiring choppers for ministers and PR activities. A more interesting variation of this is funds from PSUs being used in private sports tournaments that are ostensibly for the players and the development of the sport. In reality, the money serves to fatten the coffers of the governing bodies and their management. Financial disclosures by these organisations are a rare occurrence, much like the Olympic gold medal.

• A good example of funds being misdirected “rather than misused” are donations to the PM relief fund (and similar such central govt funds) which happen to be considered as part of CSR. While prima facie there is little to object about this, for many companies unwilling to devote the necessary time and investment in taking up actual CSR projects of their own, this is an easy loophole through which they can be on the right side of regulations (no shortage of crisis or disasters in this country) without internalising or exercising the true meaning of CSR.

• There have been plenty of discussions regarding the underutilisation of CSR funds by most companies. But with the expected growth in these numbers, misuse of this money is poised to become an even bigger issue for a landmark ruling like the 2013 Companies Act. The government will be well advised to make audits and full financial disclosure mandatory, much like the famous two percent metric. However, one should not discount the ability of these companies to creatively navigate these regulations as well.

• Corruption in CSR Sector: A Threat to Social Development and Trust: There are allegations and evidences of corruption and malpractices in the CSR sector, where some companies, NGOs, and intermediaries misuse or misappropriate CSR funds for their personal gains

• In the pursuit of corporate social responsibility (CSR), many businesses strive to contribute to the welfare of the community. Yet, some areas within this sector have unfortunately been plagued by corruption. Discussions with several CSR leaders reveal that certain officials and agencies, tasked with implementing CSR initiatives, often fall prey to malpractices, especially within large corporate and public sector undertakings where substantial CSR funds are accessible.

How corruption and malpractices occur in the CSR sector :

1. 1. Corruption and malpractices in the CSR sector can occur at various stages and levels of CSR implementation. Some of the common ways and examples are:
   2. Falsifying or inflating CSR expenditure or impact reports : Some companies may report higher or lower amounts of CSR expenditure or impact than the actual figures, to evade taxes, avoid penalties, or gain goodwill. For instance, a study by KPMG found that 52% of the top 100 listed companies in India did not spend the mandated 2% on CSR in FY19.
   3. Diverting or siphoning off CSR funds for non-CSR purposes : Some companies may divert or siphon off CSR funds for non-CSR purposes such as personal expenses, political donations, bribes, or illegal activities. For instance, a CBI investigation found that Hindustan Steelworks Construction Ltd (HSCL) had allegedly misused Rs 2.9 crore of CSR funds for renovating a bungalow owned by a former minister.
   4. Colluding or favouring certain NGOs or intermediaries for CSR projects: Some companies may collude or favour certain NGOs or intermediaries for CSR projects based on personal or professional relationships, kickbacks, commissions, or other benefits.
   5. Manipulating or exploiting beneficiaries or communities for CSR projects: Some NGOs or intermediaries may manipulate or exploit beneficiaries or communities for CSR projects by coercing them to participate, misinforming them about their rights and entitlements, withholding their benefits or payments, or violating their dignity or privacy.
   6. CSR Scam: Police uncover a CSR funding scam in May 2019. Accused promised NGOs over Rs. 100 crores in name of IT firm Hexaware Technologies. Turbhe MIDC police began searching for unknown individuals accused of fraudulently posing as Hexaware Technologies. These individuals reportedly forged the company’s documents, offering over Rs. 100 crores in CSR funds to various charities and NGOs across India. The scam came to light in the previous November 2018 when an email was received by Gunjan Methi, a secretary at Hexaware, from Kanta Sengal Memorial Charitable Trust in Gurugram, reporting a dubious pledge of CSR funding from Rs. 100 to Rs. 240 crore, allegedly from Hexaware Technologies.

Why corruption and malpractices in CSR are harmful and unacceptable

Corruption and malpractices in the CSR sector are harmful and unacceptable for various reasons. Some of them are:

• • • They undermine the purpose and spirit of CSR
    • Corruption and malpractices in the CSR sector undermine the purpose and spirit of CSR, which is to contribute to social good and well-being. They also violate the ethical values and principles of CSR, such as integrity, responsibility, accountability, and transparency.
    • They deprive the beneficiaries and communities of their rightful benefits
    • Corruption and malpractices in the CSR sector deprive the beneficiaries and communities of their rightful benefits from CSR projects. They also deny them their voice, participation, empowerment, and dignity.
    • They damage the reputation and credibility of the companies and NGOs involved
    • Corruption and malpractices in the CSR sector damage the reputation and credibility of the companies and NGOs involved. They also erode the trust and confidence of the stakeholders, such as the government, the regulators, the investors, the customers, and the public.
    • They hamper the social and environmental development
    • Corruption and malpractices in the CSR sector hamper the social and environmental development of the country. They also hinder the achievement of the Sustainable Development Goals (SDGs), which are the global agenda for social, economic, and environmental progress.

How corruption and malpractices in CSR can be prevented and tackled

Corruption and malpractices in the CSR sector can be prevented and tackled by various measures and actions. Some of them are:

• Strengthening the legal and regulatory Framework for CSR
• The legal and regulatory framework for CSR needs to be strengthened to ensure compliance, monitoring, evaluation, and reporting of CSR activities. The MCA should issue clear and consistent guidelines and clarifications on various aspects of CSR implementation, such as eligible activities, expenditure, impact, disclosure, audit, etc. The MCA should also enforce strict penalties and sanctions for non-compliance or violation of CSR norms.
• Enhancing the governance and ethics of the companies and NGOs involved in CSR
• The governance and ethics of the companies and NGOs involved in CSR need to be enhanced to ensure accountability, transparency, and integrity in CSR activities. Companies and NGOs should adopt and implement robust policies and procedures for CSR planning, execution, monitoring, evaluation, reporting, and audit. Companies and NGOs should also establish and follow a code of conduct and ethics for CSR activities, which should include zero tolerance for corruption and malpractices.
• Promoting the participation and empowerment of the beneficiaries and communities in CSR
• The participation and empowerment of the beneficiaries and communities in CSR need to be promoted to ensure their involvement, ownership, feedback, and satisfaction in CSR activities. The companies and NGOs should consult and engage with the beneficiaries and communities in identifying, designing, implementing, monitoring, evaluating, and reporting of CSR projects. Companies and NGOs should also respect and protect the rights and interests of the beneficiaries and communities in CSR activities.
• Building the capacity and awareness of the stakeholders involved in CSR
• The capacity and awareness of the stakeholders involved in CSR need to be built to ensure their knowledge, skills, attitude, and behaviour in CSR activities. The companies and NGOs should conduct regular training and awareness programs for their employees, partners, intermediaries, beneficiaries, communities, regulators, etc. on various aspects of CSR implementation, such as legal norms, ethical values, best practices, success stories, challenges, and opportunities.

• Fostering collaboration and partnership among the stakeholders involved in CSR

The collaboration and partnership among the stakeholders involved in CSR need to be fostered to ensure their coordination, cooperation, and co-creation in CSR activities. The companies and NGOs should network and communicate with each other and with other stakeholders, such as government agencies, civil society organisations, academic institutions, media outlets, etc. on various aspects of CSR implementation, such as sharing information, resources, experiences, lessons learned, challenges faced, and solutions found.

Emerging Trends of CSR:

Long-term sustainability has become an integral part of the society nowadays. The society as well as the consumers are more focused towards the future. This also increases their expectations and demands. Consumers are not only bounded by the products that a company has to offer but are also looking forward to create a long-term relationship with the company. Hence, it is the duty of the company to create shared values for its consumers.

Shareholders are not only concerned with the financial returns, but they are more willing to invest in companies that demonstrates long term benefits in terms of financial returns accompanied with good ethical standards. This has resulted a shift in perspective of companies nowadays, and their methods of operating have also changed substantially. Government and local authorities have also contributed to this change as they act as watchdogs, governing the companies to implement regular CSR activities in their policies.

Hence, companies are also worried, that evading CSR activities may result in degradation of their goodwill and public image. Businesses have realized that addressing societal challenges and creating values not only develops costumer relationship, but also contributes to long-term business success and prosperity.

Future of CSR:

In the current scenario, CSR is limited to the urban areas, where there exists a trend of multinational corporations. These areas serve as main headquarters of these corporations, where every single business decision is taken and implemented, different policies are formulated and funds are sanctioned. In contrary to this, rural areas are often deprived of CSR activities and companies are seen to reluctant to push their CSR policies to the rural parts of the country, where the essence of CSR is actually needed let alone the urban regions of the nation. Hence, companies must design their CSR policies for the benefit of the rural society in the future leading to an overall development.

Another important aspect is the integration of technology with CSR activities. For instance, there exists no proper metrics to guide the implementation of CSR policies nor there lies any technique to determine the benefits derived from implementing a particular CSR activity, at a given region. Technological developments in CSR can deal with these problems by providing real time data and measure the specific impact on the society. Moreover, technological developments in CSR can help the companies to structure their policies, develop networks throughout the globe, provide accurate statistical measure as to which region can benefit from the CSR activities so that companies can allocate resources accordingly.

  Some Important case law on CSR :

1. Charan Singh Meena v. Union of India, this case was adjudicated by the Madhya Pradesh High Court on February 7, 2018. 

In a PIL filed by Charan Singh Meena that the company was not fulfilling the obligations of CSR that are mentioned in Section 135 of the Companies Act 2013.
the High Court of Madhya Pradesh observed that though Section 135 of the CSR created a binding for the companies to engage in CSR activities, there existed no real time metrics or mechanism, from which the government could gather specific data regarding the engagement of companies in CSR activities. In other words, the Government was unable to track the implementation of CSR by the companies. The Court also expressed its thoughts that without proper monitoring techniques, CSR cannot be implemented properly and most of its policies will only be confined to mere paperwork.

Although, the Court took measures to supervise the CSR activities more efficiently by serving the demographic region and maintaining a record as to which companies shall fall under the purview of Section 135 of the Companies Act, 2013 and if it was found that companies were reluctant and evasive of implementing CSR activities, then it shall impose strict legal action upon them. The Court also prescribed that although companies framed various CSR policies, such policies must be implemented on ground rather than being limited to just paperwork and theory.

2.  State of Gujarat v. V. B. Desai Financial Services Ltd. (1993)
   Although not a CSR case per se, this case is very frequently referred to in the literature relating to corporate governance and responsibility. It deals with the overarching responsibility of a company towards its stakeholders, employees, shareholders, and society as a whole. The court of its own accord stated that the companies cannot operate in the sole interest of profits; they must also think of the social implications arising from their operations. This formed the basis of later formulations of CSR in India.

3. Tata Power Company Ltd. v. State of Maharashtra (2007)
   This case is important as it explains the role of companies towards the welfare of their local community. Tata Power had initiated many social welfare programs as a part of CSR initiatives taken by it around its power plants. The court also appreciated the significance of CSR in modern corporate life even though, at that time, CSR was not made mandatory by law.

Although this case did not directly involve CSR regulations, it established a precedent by emphasizing the corporate duty to positively contribute to society, especially where they operate.

4. MCA’s Clarification on CSR Expenditure and CSR Activities (2019)

This is not a court case, but an important development from the Ministry of Corporate Affairs (MCA) clarified the scope and applicability of CSR regulations. In its notification issued in 2019, the MCA laid down guidelines with the intent of making CSR activities more transparent, accountable, and their implementation effective. The guidelines further clarified that CSR funds could not be used for political or religious activities, which, if challenged, may even have legal implications in the future.

5. “Foseco India Ltd. v. Union of India” (2014): In this scenario, the Delhi High Court observed that CSR funds must not be utilized for the benefit of the directors and employees of the company to reap their personal benefits in line with the intent of the CSR provisions. It was observed in this case that CSR contributions need to be focused on public welfare and social causes and not for individual gain.
    
6. Parikh Enterprises Private Ltd.:  Between the financial year 2013 and 2014, the company profited Rs. 5,35,44,880/-  which automatically made the company eligible to contribute towards the CSR activities and constitute a CSR committee as provided under section 135 of the Companies Act, 2013. However the company made no such initiative and also failed in furnishing the report stating the reason for such failure in the board meeting as constituted under section 134(3) of the Companies Act,2013. Owing to this failure, two of the managing directors of the company filed a complaint against the violation. Where the court ordered the company to immediately constitute the CSR committee as it was well eligible to make CSR contributions as per the section 135 of the Act.

7. Technicolor India  (P) Ltd. v. Registrar of Companies: The company fell under the eligibility ambit to contribute towards CSR activities as provided under section 135 of the Companies Act, 2013. Accordingly, the company set up a CSR committee and also made contributions towards the CSR activities. However, the budget allocated and spent for the CSR activities by the company was marginally lower than the standard mentioned under section 135(5) of the Act during the financial year of 2017 to 2018. Nevertheless the company submitted the report stating the reasons in their board meeting as per section 134(3) of the Act. But, later on it was asserted that the expenses of CSR activities and the details of the same was incorrectly quoted and so the company submitted the application to the NCLT in Bangalore. The tribunal permitted the company to submit a revised report as soon as possible.

8. Alps Remedies Pvt Ltd. In this case the company made a suo moto application to the Registrar of Companies on the grounds of violation of section 134(3) of the Act which was then forwarded to the court. The company in this case claimed that they do not fall under the ambit of section 135(1) of the Act and so they are not obligated to make contributions specified under section 135(5) of the Act as a response to the notice sent to the company. Later on the company claimed to be unaware of the clarification made regarding the term financial year, to calculate the CSR eligibility. The company then paid Rs. 3,50,000/- as a fine to the “Ministry of Corporate Affairs.”

9. Indian Petrochemicals Corporation Ltd. v. MC Mehta
   The said case established the principle of the polluter pays. The judgment holds corporations accountable for the degradation of the environment. It underlines the fact that businesses must reduce their cause of harm to the communities affected by their very operations.

10. Union Carbide Corporation v. Union of India (Bhopal Gas Tragedy)
    
    This judgment was the landmark case of corporate accountability, whereby companies were responsible for compensation and disaster relief due to negligence in such incidents.

Some Important and relevant FAQS

1.  What is Corporate Social Responsibility?
   Corporate Social Responsibility, briefly known as CSR, is commitment by a business entity towards societal welfare through socially, economically and environmentally aligned activities. In India, CSR activities are legally stipulated under the Companies Act 2013. Section 135 of the act applies to the following eligible companies.
    
2. Which companies do CSR activities need to be followed?
   As per Companies Act, 2013 CSR provisions apply if any of these conditions is fulfilled by a company in the immediate preceding financial year
   Net worth of ₹ 500 crores or more.
   Turnover of ₹1,000 crores or more.
   Net profit of ₹5 crores or more.

3. What does an eligible company have to incur on CSR expenditure?
   Eligible companies will have to expend at least 2% of their average net profits of immediate three preceding financial years for undertaking CSR initiatives.

4. Can unused CSR amount be carried forward?
   Surplus generated from CSR can be carried forward for CSR expenses for the subsequent years. This has been made effective from January 22, 2021.

5. What are Forms CSR-1 and CSR-2?

Form CSR-1: Entities that are conducting CSR activities need to file it with the MCA.
Form CSR-2: Annual CSR activities and expenditures need to be filed along with the annual return.

6. Is it mandatory for all the companies to carry out CSR activities? No, only the companies that falls under the ambit of section 135(1) of the Companies Act, 2013 shall be eligible to carry out the CSR activities.
7. When happens when the eligible company refuses to set up the CSR committee? The Companies that spend below Rs. 50,00,000 in CSR activities are not mandated to set up CSR committee. However, if a company spending more than that refuses to set up the committee, then it shall be held liable to pay fine and other penalties provided under section 134(8) of the Act.
8. How to determine the net profit in a financial year of a company?

The  net profit of the company is determined as per the  provisions of section 198 of the Companies Act, 2013.

9. What is section 134(3)(o) of the Companies Act, 2013?

Section 134(3)(o) of the Act provides that the company should furnish the detailed report on the expenditures of the plans and projects implemented on CSR activities for that financial year in the board of directors’ report.

Conclusion:

The dynamic growth of today's society has set clear benchmarks on how companies must operate with continuous improvisation of their products and services. The growth in business opportunities has also contributed to the fact that companies nowadays view society with a different perspective, rather than harnessing the last bit of profits from it. Consumer awareness has also increased significantly, forcing companies to deliver quality certified products.

The Companies Act, 2013 has imposed clear guidelines on how organizations must meet certain obligations towards the society in the form of CSR activities. This requires the companies to formulate their own CSR policies that can prove to be beneficial for the society. Companies nowadays are not only driven by profits, but they are also worried towards environmental sustainability before sanctioning a project.

This trend has been set by CSR which forces the companies to take responsibilities for their actions and hold them liable for any damage caused by their deeds. The expectations of the society have also increased nor are their demands limited to the mere utilization of goods and services provided by a company. This has led to a global change, making companies to re-design their operational dilemma, reconsider environmental sustainability and practice optimization of resources so that their business sustains long-term growth.

Written & Compiled By :

Ketaan Mehta

Certified Independent Director &

Tax Consultant (Mehta Tax Advisory Services)