After the passing of the Companies Bill 2012, it has become mandatory for corporates to adopt Corporate Social Responsibility (CSR). What was once voluntary has become law.
A company with a net worth of Rs 500 crore or more, a turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore or more in a financial year shall constitute a corporate social responsibility (CSR) committee of the board, consisting of three or more directors, of which at least one shall be an independent director.
Before the Companies Bill was passed, CSR was in the nature of voluntary actions that businesses could take. It was like going the extra mile. But the provisions of the Bill, particularly Section 135, read with Schedule VII, show that the Government has adopted an inclusive growth strategy to implement CSR through corporates.
While mandating CSR spends for the corporates, the Government has also ensured that such spending is monitored in the form of reporting and disclosure.
BUSINESS RESPONSIBILITY
The Minister of State for Corporate Affairs, Sachin Pilot, who pushed the issue in Parliament after the Bill was finalised by the Cabinet and approved way back in 2009, has said that the provisions of corporate governance and CSR in the Companies Bill are based on UN principles and cover human rights, labour standards, environment and even corruption.
The intention of the Bill is to eradicate extreme hunger and poverty, promote education, enhance vocational skills and empower women.
The new Bill says larger corporates should contribute to society, especially the communities in which they operate, by setting aside 2 per cent of their net profit towards CSR. Since CSR spending will be tax-free, there is an opportunity for Indian corporates to embrace a few large consensual projects that could make social commitments visible to all.
The need for CSR has its roots in the fundamental moral thought — “what and how much has been given back over and above what you have taken from society.”
Improved bottomline
CSR is often referred to as “business responsibility” — in other words, an organisation’s action on environmental, ethical, social and economic issues. It was soon realised that promoting a responsible way of doing business actually improved the bottomline. Now, demonstrating a wider sense of responsibility has come to be expected when bidding for major contracts.
Section 135 of the Companies Bill provides that “the functions of the CSR committee shall be to formulate and recommend a CSR Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII of the Bill.
The CSR committee shall also deliberate on the amount to be incurred on activities mentioned in the CSR Policy. It shall also monitor the CSR Policy from time to time.
The company’s board, after receiving the panel’s recommendations, will adopt a CSR Policy and ensure that the activities it mandates are undertaken.
The board must ensure that the company should spend for CSR, every financial year, at least 2 per cent of the firm’s average net profits recorded in the three immediately preceding financial years. The company is expected to give preference to the areas around which it operates in spending the amount earmarked for CSR activities.
If the company fails to spend such an amount, the Board shall, in its report specify the reasons for not doing so.
The company shall not select a project that earns profit for the company, but rather take on work that benefits society.
The new company law has made it mandatory for all companies, listed or unlisted, to have independent directors forming one-third of the board.
INDEPENDENT DIRECTORS
These independent, or non-executive, directors are those who have no material or pecuniary relationship with the company or related persons, except for sitting fees.
In the US, independent directors make up 66 per cent of all boards. In India .the expression ‘independent directors’ means directors who, apart from receiving director's remuneration, have no other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the board, may affect the independent judgment of the directors.
A large number of people working in NGOs or running an NGO will be benefited when these companies appoint them as independent directors to run their CSR initiatives.
Socially responsible business houses, such as the Tatas and Birlas have, for decades, contributed immensely through their various charitable and welfare Trusts.
Such Trusts have been the guiding lights for smaller entrepreneurs who fund various small social causes in their areas of operation or in their home towns and villages.
For some, the interface between CSR and the law might seem like a contradiction. Compliance could seem forced, as if the expenditure is an additional cost of being in business.
Yet, there is an opportunity for responsible and concerned boards to improve relationship, enhance a reputation and build a corporate brand. A synergy between CSR and the law will eventually help.
(The author is a senior journalist and adviser to Jaipur-based Bhagwan Mahaveer Viklang Sahayata Samiti.)