FROM PROFIT TO PURPOSE: THE EVOLUTION OF CORPORATE SOCIAL RESPONSIBILITY IN INDIA

ABSTRACT

This Article traces the evolution of Corporate Social Responsibility (CSR) in India, examining its historical progression and contemporary significance. Through case studies of leading companies like Tata Group and Reliance Industries Limited, it demonstrates the shift from philanthropy to comprehensive societal engagement. The regulatory framework, notably the Companies Act of 2013, is analyzed for its role in mandating CSR and shaping corporate behaviour. Despite challenges, CSR has become integral to business strategy, offering benefits like enhanced brand reputation and stakeholder relations. The article also highlights judicial interventions, holding corporations accountable for environmental damages.

KEYWORDS

Responsibility, Companies, Philanthropy, Sustainability, Communities.

INTRODUCTION
“Like humans, companies rely on society for survival and development. This mutual dependence is evident in the continuous exchange of resources and support. Through this symbiotic relationship, companies contribute to societal progress, whether by providing customized products or investing in community initiatives.””Corporate Social Responsibility (CSR) entails companies taking action for societal welfare and sustainable development. This includes infrastructure development, philanthropy, ethical labor practices, and environmental sustainability. Adopting CSR leads to benefits such as increased sales, enhanced brand reputation, and improved stakeholder relationships. Society benefits from improved infrastructure, education, healthcare, culture, and a cleaner environment, driving socio-economic growth. Engaging in CSR demonstrates a company’s commitment to ethical behavior, fostering trust and mutual prosperity with stakeholders. Upholding ethical standards safeguards the social license to operate, ensuring actions benefit stakeholders and society. CSR also mitigates business risks by fostering strong alliances with stakeholders, encouraging innovation and growth.”

HISTORICAL PERSPECTIVE

Before the twentieth century, CSR in India can be traced back to principles like ‘daan, seva, zakat’, which played a crucial role in providing support to those in need.Even before the term CSR, Indian businessmen supported society through infrastructure like mosques, temples, hospitals, and educational institutes. Earlier the aspect of CSR was only associated with charity and donations but in this modern era, it is more than a mere donation. CSR progressed through phases like community participation, ethical sourcing production, and fair treatment of workers, depending on these the history can be divided into further four phases.

In the initial phase of CSR, philanthropic leaders spearheaded efforts to support society, reshaping the influence of business-oriented families with their distinct values and customs. Prior to 1850, affluent families extended aid to the impoverished by establishing food warehouses during famines or founding temples and spiritual centers. Following independence, a second phase of CSR emerged, posing challenges for industrialists as they faced increased pressure to showcase their commitment to societal welfare.

During the third phase of CSR, spanning from 1960 to 1980, the landscape was influenced by the rise of public sector undertakings aimed at ensuring equitable resource distribution. Government regulations, including strict industrial licensing, increased taxation, and stringent controls on the private sector, led to corporate malpractices such as corruption, labor exploitation, and environmental degradation. Despite governmental efforts to address corporate governance, labor rights, and environmental concerns, these policies often fell short of effectively promoting CSR. Consequently, societal expectations shifted towards the private sector for driving socio-economic development.

From 1980 onwards, CSR entered its fourth phase, marked by businesses integrating CSR as a strategic component. The advent of globalization and economic liberalization in the 1990s led to a relaxation of licensing restrictions, encouraging businesses to actively engage in social responsibility endeavors.

CHANGING PARADIGMS

Initially centred on philanthropy, CSR has broadened to include social, environmental, and economic dimensions. Led by manufacturing units, early CSR efforts focused on community welfare and environmental projects, overseen by HR departments in partnership with trusts.

The Companies Act of 2013 marked a significant turning point for CSR in India, compelling companies to adopt more comprehensive strategies. Tata Group, a prominent Indian conglomerate, has long been committed to community development through its CSR initiatives. Initially focusing on education and healthcare institutions like the Indian Institute of Science and Tata Memorial Hospital, managed by Tata Trusts, it later expanded to address broader societal and environmental concerns. Examples include the Tata Nano project, which made car ownership more accessible, and the introduction of electric vehicles to combat environmental challenges. Additionally, Tata Group’s employee welfare policies, which provide housing, education, and healthcare, highlight its commitment to sustainable business practices and a better future for society.

Reliance Industries Limited (RIL), a leading Indian conglomerate, has significantly expanded its CSR efforts over time. Initially engaging in basic philanthropy, RIL’s initiatives have evolved to encompass a wide range of activities aimed at promoting rural development, healthcare, education, environmental sustainability, and disaster relief. Notable among these initiatives is Project Drishti, which focuses on rural upliftment through clean water, sanitation, healthcare, and livelihood programs. During crises such as the COVID-19 pandemic, RIL provided essential medical supplies like oxygen tanks, ventilators, and relief support to affected communities across India. Similarly, during the earthquake in Gujarat in 2001, RIL played a crucial role in providing humanitarian assistance such as rescue teams, medical aid, and relief supplies to affected areas. Through its diverse CSR initiatives, RIL demonstrates its commitment to social responsibility and sustainable development, making a positive impact on society and the environment.

Tata Group and RIL transitioned from philanthropy to comprehensive CSR post-2013. Their initiatives in education, healthcare, the environment, and disaster relief reflect a commitment to social responsibility and sustainable development, benefiting society.

REGULATORY LANDSCAPE:

While adapting the 1991 reforms, some Indian leaders who were of the socialist mindset had to keep this notion aside. But does the thought they let go of interfere with the working of the economy as it is going now?

Let us dive in. A large portion of GDP comes from the company’s operations and their huge profits. To make up for the income disparity, the government came up with a touch of a socialist mindset by making an amendment to the Companies Act, asking the companies to give 2% of their average net profits to corporate social responsibility

Is giving 2% to CSR a compulsion or a voluntary action by the company?

The Company Act, 2013, which repealed the earlier Act of 1956, which did not have any provision for CSR, However, the government made it a compulsion by introducing the Companies Bill of 2011.

Does every company have to engage in CSR activities?

Again, a question arises about whether every company has to engage in CSR activities. The answer lies in the negative. No, there is an application for it. Companies falling under the following criteria:

  • Having a turnover 1000 crore or more;
  • Or with Net worth 500 crore or exceeding;
  • Or net profit of Rs 5 crore or excess.

Are obliged under Section 135[i] to allocate at least 2% of their average profits from the immediately preceding three financial years to CSR activities.

Any company who has been out of the limits of CSR for three consecutive years then the provisions of CSR would not be applicable to them. But if the company fulfils the criteria even for a year, then it has to take part in corporate social responsibility activities, as per Rule 3 of the Companies Rules, 2014.

According to Section 135[ii], the CSR Committee is constituted of three directors or more, of whom one has to be an independent director. If a company does not have an independent director, they don’t need to appoint one; under Section 149[iii], the company can put together a CSR committee with two or more directors. In another case, if the company is private and has only two directors on board, it can form a committee with them. Further, if it is a foreign company, then one of the CSR committee members has to be a resident of India and the other has to be nominated by a foreign company. Functional property of the committee as per Section 135[iv] to keep up the transparency of the funds for CSR activities, we also decide where to efficiently allocate them.

Does every company need to construct a CSR committee?

The answer to this also lies in the negative; hence, companies exceeding the CSR amount of more than 50 lakhs need to construct a CSR committee. Otherwise, there is no need for a committee; the BOD can make decisions for CSR amounts less than Rs. 50,000.

The CSR Activities Rules, 2014, state:

CSR funds can be allocated in any

  1. A trust, registered society, or company established under Section 8 of the Act  by the same company or another
  2. Or trust, registered society, or Section 8 company of the central or state government
  3. Or a trust, registered society, or section 8 company of private bodies that have a record of the past three years.

Also, companies can collaborate with one another to undertake projects or CSR activities. The fund should be used for India and not for any foreign expenditures. The activities are defined in Schedule VII of the Act, which focuses on the sectors of education, eradicating hunger and poverty, Swachh Bharat, women empowerment, promoting art and heritage, rural development, CPMF, CAPF, IITs, etc.

IMPACT MEASUREMENT:

With time, investors have started to look into not only the debt-to-equity ratio but also the CSR activities carried on by the company, which result in maintaining their goodwill. For this, pragmatic accounts of CSR activities are requisite.

There are severe challenges faced in maintaining records: the company is bound to select a suitable agency, connecting the CSR activities with their value chain, and employees not participating much (they should have CSR activities in such a way that they create recreation for employees) pressure-from-investors.

Can the impact of CSR activities be measured?

It is quite difficult as CSR is an ambiguous term and there is no standard measurement system,but there are certain strategies made to keep a check.

(1) plan activities in such a way that they relate to the company’s core operations;

(2) understand their stakeholder’s needs,

(3) enlarging their mindset for the long term.

Under Section 198[v], the process of computation of the CSR amount is stated to maintain the standard of calculation.

 LEGISLATIVE FRAMEWORK:

With the advent of digital India, MCA made the implementing agency upload the annual CSR report to the board report on the website, along with the reasons: if it was not able to spend or used extra funds, then it needed to set off for the upcoming year. Many amendments were made to fix the loopholes of the Companies Act, 2013, like enhancing transparency, accountability, corporate friendliness, and setting a 5-year tenure for independent directors. Companies strive to save their profits from taxes and societal benefits. Hence, the GOI has done a good job making provisions mandating CSR activities. Even after this, if a company fails its CSR obligation, then under Sections 137 and 135(5)  of the Companies Rules 2014, it can be made liable to pay the amount not less than 50,000 and can go up to 25 lakh. Vis-à-vis officers who default will be charged either for term imprisonment, which can extend up to 3 years, or a fine of $50,000–$25,000, or both.

Companies can spend funds on any COVID-19-related awareness or research work on vaccines but cannot engage in one-off events. Section 182[vi], no CSR-funds spending on political parties. The surplus from the CSR project needs to be used for the project itself, not otherwise. An impact assessment, where an independent agency is appointed to undertake the impact study if the company’s average CSR equates to or exceeds 10 crore, should be followed by two conditions:

(1) CSR project more than or equal to 1 crore.

(2) The project has been completed for not more than 1 year.

Provisions of unspent CSR:

Contingent upon an ongoing CSR project, the company needs to transfer the unspent amount to a specific fund A/C within 30 days of ending FY; on the contrary, transfer funds to a specific fund A/C under 6 months from FY ending. If not done in a done in a timely manner, you will be charged a penalty of twice the reserve amount or one crore, whichever is less. Vis-à-vis officers, a default 10% of the amount will be charged as a fine or two crore, whichever is less.

In the case of Indian Council For Enviro-Legal Action v. Union of India[vii], following the precedent set by M.C. Mehta v. Union of India, the Supreme Court imposed absolute liability on enterprises engaged in hazardous activities. The case arose from environmental pollution in Bichhri village and adjacent areas due to the production of ‘H’ acid and discharge from a sulphuric acid plant.

A writ petition was filed under Article 32 of the Constitution for social action litigation on behalf of the affected villages, citing infringement of their right to life under Article 21. The petition targeted the Central and State Governments and the State Pollution Control Board to compel them to fulfill their statutory duties.

The Supreme Court deemed the writ petition maintainable to safeguard citizens’ rights, asserting its power and duty to intervene. It directed the Central Government to recover the cost of remedial measures from the private companies, with the amount determined to be utilized by the Ministry of Environment and Forests for restoring the affected area’s environment.

In response to the industries’ persistent violations of law and their detrimental impact on the villagers and environment, the Court labeled them as “rogue industries” and ordered the attachment of their assets for funding the restoration efforts.

CONCLUSION

The development of CSR in India illustrates a progression from mere philanthropy to a comprehensive commitment to societal well-being, influenced by regulatory frameworks and societal demands. Companies such as Tata Group and Reliance Industries Limited have shifted from simplistic acts of charity to embracing holistic CSR initiatives, encompassing various social, environmental, and economic aspects.

The regulatory environment, notably the Act of 2013, has mandated CSR involvement, highlighting the pivotal role of businesses in fostering sustainable development. While CSR has become obligatory for specific companies meeting certain criteria, it also serves as a tool for enhancing brand image, nurturing stakeholder relations, and ensuring long-term business viability. Despite challenges in gauging the impact of CSR endeavors, companies are increasingly acknowledging their responsibility towards societal progress and environmental preservation. Judicial interventions, as seen in cases like Indian Council For Enviro-Legal Action v. Union of India, emphasize the significance of corporate accountability in addressing environmental issues and safeguarding citizen rights.

REFRENCES

Books:

Dr. Ashok K. Jain, Company Law, 395-400, Ascent Publications, (2023).

Dr. R.K. Bangia, 336, Allahabad Law Agency, (2013).

Article:

Sidharth Kaushik and Stuti Bhatnagar, “Corporate Social Responsibility” in the New Companies Act: A Critical Analysis, 4 CNLU LJ, 182, 183-188 (2014).

Website:

Nandini Deo, A brief history of Indian CSR, Gateway House (18th April 2024, 8:00 P.M.), https://www.gatewayhouse.in/a-brief-history-of-indian-csr/.

[i]  The Companies Act, 2013, § 135, No. 18, Acts of Parliament, 2013 (India).

[ii]  The Companies Act, 2013, § 135 (1), No. 18, Acts of Parliament, 2013 (India).

[iii]  The Companies Act, 2013, § 149 (4), No. 18, Acts of Parliament, 2013 (India).

[iv]  The Companies Act, 2013, § 149 (4), No. 18, Acts of Parliament, 2013 (India).

[v]  The Companies Act, 2013, § 195, No. 18, Acts of Parliament, 2013 (India).

[vi] The Companies Act, 2013, § 182, No. 18, Acts of Parliament, 2013 (India).

[vii]  A.I.R. 1987 S.C. 1086.

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