CSR RULES AND THE COMPANIES ACT 2013

Research Paper

Law

E-ISSN No : 2454-9916 | Volume : 5 | Issue : 10 | Oct 2019

CSR RULES AND THE COMPANIES ACT 2013

Dr. Kinnaben Tribhovandas Chadokia Assistant Professor, Sheth M.N. Law College, Patan. Gujarat, India.

ABSTRACT In recent years, corporate social responsibility has received a lot of attention. CSR, or corporate citizenship, strives to awaken the corporate consciousness by requiring businesses to pay short-term costs that do not give a direct financial return but instead create positive social and environmental change. The New Companies Act of 2013 introduced the concept of required CSR, and it will replace the archaic Companies Act of 1956, which is nearly 60 years old. This article focuses on the Companies Act of 2013 and its requirements for mandated spending and disclosure of CSR initiatives. The article also goes over the significant flaws in the clause that could make it difficult to apply in practise.

KEYWORDS: Corporate Social Responsibility, Company Law, Corporation, India.

INTRODUCTION: When we talk about the evolution of CSR in India, we're referring to the changes through time in the cultural norms of companies that engage in CSR. Managed well, businesses have a positive impact on the communities, cultures and surroundings in which they operate, resulting in a win-win situation. For CSR to work, not just government, but also corporations must be accountable enough to solve societal problems. Businesses are tasked with addressing issues that are largely handled by governments.

When it comes to corporate social responsibility (CSR), firms integrate social and environmental issues into their company operations and contacts with stakeholders. Commonly understood as the means by which companies balance economic, environmental, and social imperatives while also meeting the expectations of their shareholders and stakeholders. Company social responsibility (CSR) is defined as any activity that has a positive impact on society.

CSR is a crucial part of development since companies, especially those operating in rural regions, have a responsibility to their communities. As a result of their operations, businesses may have an impact on CSR's environmental element. For many firms, CSR is motivated by real concern for their environment and society, which will provide them with human capital and raw resources that they need to survive. Others will see it as a way to win public acceptance for their operations.

As a mining and oil and gas company, I can attest that this is true. These corporations are frequently confronted by the local indigenous populations, and they must coexist with them. It is also important for businesses to view CSR as a voluntary effort rather than something that is heavily regulated. We do it because it's in the company's best interest, and not because it's required by law. But companies should not be required to engage in CSR as a mandated action, because again, the development players aren't limited to corporations. Government, civil society and the community are also included.

LEGAL FRAMEWORK FOR CSR: Clause 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014 are the two most important documents providing legal framework for CSR. A) Clause 135, Companies Act, 2013: Corporate Social Responsibility (CSR) committees are mandated under section 135 (1) for companies with a net worth over Rs. 500 crore (US$600 million) or a turnover over Rs. 1 billion (US$1 billion) or a net profit over Rs. 5 billion (US$5 million) in any financial year. En vertu of Section 135 (2), a company's annual report must provide information about the composition of its Corporate Social Responsibility Committee.

Under 135 (3), the Corporate Social Responsibility Committee should formulate and recommend to the Board a Corporate Social Responsibility Policy which shall outline the activities to be performed by the company as indicated in Schedule VII.

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Promoting gender equality and empowering women

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Reducing child mortality and improving maternal health

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Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases

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Ensuring environmental sustainability

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Enhancing vocational skills

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Promoting social business projects

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Contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women, etc.

Under 135 (3), the Corporate Social Responsibility Committee should also recommend the amount of expenditure to be incurred on the activities and monitor the Corporate Social Responsibility Policy of the company from time to time.

Under 135 (4), the Board of every company referred to in sub-section (1) should 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. The Board should also ensure that the activities mentioned in the Corporate Social Responsibility Policy of the company are undertaken.

Most importantly, under 135 (5), the Board of every company referred to in sub-section (1), should ensure that the company spend at least two percent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy: B) Companies (CSR Policy) Rules, 2014: Regulations for Companies (Corporate Social Responsibility Policy) of 2014 came into effect on April 1, 2014. If a company's board of directors undertakes a project or programme that is covered by Schedule Vll of this Act, it is considered CSR. Section 135(l) of the Corporations Rules, 2014 includes all companies that have a branch office or project office in India to carry out CSR. According to it, the companies must form a CSR committee and comply with the law.

According to sub-section (l) of section 135, the CSR committee of every firm that meets the given criteria is required to register a foundation/institution to carry out CSR operations, either under the Trust Act, Societies Act, or Companies Act.

The list of activities is as follows: Some of the highlights of the rules are as follows: Ÿ

Eradicating extreme hunger and poverty

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Promoting education

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Programs benefitting only the company employees are not considered as CSR activities. Hence the companies must be careful is choosing

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Research Paper

E-ISSN No : 2454-9916 | Volume : 5 | Issue : 10 | Oct 2019

programs or activities according to the schedule VII. Ÿ

Monies spent on capacity building of staff under the CSR banner cannot exceed 5% of the expenditure

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CSR expenditure shall include all expenditure including contribution to corpus, or projects related to CSR. But caution should be made to fall within the schedule VII purview.

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Contribution made to any political parties cannot amount to CSR activity

As a result of the Companies Rules, 2014, more than two companies can work together to implement CSR programmes. The company's annual report for 2014 will contain a report on CSR. For overseas companies, the balance sheet must include an annexure on CSR.

CORPORATE SOCIAL RESPONSIBILITY IN INDIA- ITS SCOPE: CSR (Corporate Social Responsibility) is defined as a company's ongoing commitment to the economic and social development of the communities in which it operates. Since the pre-independence era in India, the concept of corporate social responsibility has had a prominent role in the larger national conversation on economic issues. Gandhi referred to huge corporations as "trusts" of the "people's riches," emphasising the greater social purpose that industrial wealth should serve in an independent India. Under the heavy influence of Nehruvian socialism in the early days of the post-independence period, the Indian state encouraged private industries to play an active role in the economic and social development of the backward sections of society, while simultaneously establishing a massive public sector to serve larger societal interests. As Nehru's gentle socialism gave way to Indira Gandhi's more radical policies of nationalisation and extensive state regulation, industrial groups desperate to avoid the draconian state policies and regulations in economic affairs resorted to large-scale corporate welfare programmes to demonstrate that private wealth played a significant role in poverty alleviation and the socio-economic development of the country.

A format for the annual report given in the rules is presented below: Ÿ

A brief outline of the company's CSR policy, including overview of projects or programs proposed to be undertaken and a reference to the web-link to the CSR policy and projects

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The Composition of the CSR Committee.

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Average net profit of the company for last three financial years

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Prescribed CSR Expenditure

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Details of money spent on CSR during the financial year.

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Amount unspent if any, reasons

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Manner in which the amount spent during the financial year

EFFECTS OF CSR: Contributing to society as a whole is what CSR is about, not just in one area.

It is about helping businesses and cultivating society over time. Any sector (education, health, environment, society's upliftment, etc.) that a company is interested in contributing to can be included under CSR.

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An oncoming economic catastrophe in India prompted the Rajiv Gandhi and Narashima Rao governments to abolish the "licence raj" and implement muchneeded economic reforms, marking the start of India's economic liberalisation and free market economy. The rising presence of transnational corporations in the country and the transformation of Indian businesses into giant global enterprises have been the most significant effects of these economic reforms. Both proponents and opponents of liberalisation in India are focusing more on the social significance of these private firms in this scenario1. On the ground, there has been a revolution in the execution of corporate social responsibility programmes.

CORPORATE SOCIAL RESPONSIBILITY - A NEED: While the interests of shareholders and the actions of managers of any business enterprise must be governed by economic laws, requiring an adequate financial return on investments, in reality, an enterprise's operations must be driven by a much broader set of objectives that are now being defined as CSR. The broad rationale for a new set of ethics for corporate decision-making, which clearly constructs and upholds a company's social responsibility, stems from the fact that a business enterprise derives several benefits from society, which necessitates the company to return those benefits to society as well. In a failing society, no business can succeed. As a result, the stakes of a corporate organisation in the health and well-being of the society in which it operates are clearly established. Customers of any product or service are unlikely to be content with buying from an organisation that is regarded to break the norms of what is deemed to be morally and socially acceptable behaviour in this age of global communication and increased emphasis on transparency. Organizations that pay true attention to the principles of socially responsible behaviour are progressively gaining favour with the general public and are the preferred choice for their goods and services.

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In order to achieve sustainable growth, corporations need to contribute to CSR in an effective and efficient manner. Since corporations are involved with a variety of stakeholders such as their customers and employees as well as suppliers, the government, creditors, and financial institutions, they have the responsibility to protect the interests of all of these parties.

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As a result, every firm must adopt CSR policies in order to make the world a better place to live.

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CSR initiatives can help companies stand out from their competitors.

The general population is unaware of CSR efforts.

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As a result, a company can use CSR as a growth and survival tool.

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Well-implemented corporate social responsibility can provide a number of competitive benefits, including improved access to finance and markets, increased sales and profits as well as operational cost savings as well as improved efficiency and quality.

The general public has little interest in engaging in and contributing to corporate social responsibility (CSR) activities. This is due to the fact that there is little or no understanding of CSR. A lack of communication between enterprises engaged in CSR and the general population at the grassroots exacerbates the situation.

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Central or state governments have no right to dictate how corporations spend money for the sake of society. How much money is spent on various CSR activities is up to the board.

LIMITATION OF CSR POLICY: If the corporation pays more than 2% of net profit, there is no incentive.

CHALLENGES OF CSR: There are number of challenges to the implementation of CSR. They are enumerated below:

Local capacities must be developed: There is a critical need to enhance the capacity of local nongovernmental organisations, as there is a severe shortage of trained and efficient organisations that can successfully contribute to companies' ongoing CSR initiatives. This jeopardises the expansion of CSR initiatives and, as a result, limits the scope of such activities.

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Carry forward of such a contribution that is not covered by the CSR provisions. It means that if a corporation is unable to spend 2% of its average profit in a given financial year, the spending will not be carried forward to the following year.

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If the company does not have sufficient earnings or is unable to spend the requisite amount on CSR initiatives, the directors must provide appropriate disclosure/reasons in their annual report to the shareholders.

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It is unclear if CSR would apply to Section 25 enterprises or charity organisations established by them.

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Activities relating to eradicating extreme hunger and poverty; promoting education, gender equality, and women's empowerment; reducing child mortality and improving maternal health; combating HIV-AIDS, malaria, and other diseases; ensuring environmental sustainability, employment, and vocational skill enhancement; and contribution to the Prime Minister's National Relieve Fund are all included in the proposed rules.

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Transparency issues: One of the major obstacles for businesses is a lack of openness on the side of small businesses, who do not make sufficient efforts to share information on their programmes, audit issues, effect assessment, and fund utilisation. This has a negative impact on the process of creating trust between businesses, which is critical to the success of any CSR programme.

Non-existence of well-organized non-governmental organisations (NGOs) In remote and rural areas, there is a lack of well-organized nongovernmental organisations that can assess and identify real community needs and collaborate with businesses to ensure successful CSR implementation.

Factor of visibility: The media's role in exposing successful CSR projects is welcomed since it distributes positive news and educates the public about various companies' continuing CSR initiatives. This apparent influence of acquiring awareness and branding causes many non-governmental organisations to engage in event-based programmes, often missing out on substantial grassroots interventions in the process.

International Education & Research Journal [IERJ]

Research Paper

E-ISSN No : 2454-9916 | Volume : 5 | Issue : 10 | Oct 2019

CSR projects have a negative image: Non-governmental organisations and government agencies typically have a limited perspective on corporate social responsibility programmes, viewing them as primarily donor-driven. As a result, businesses are having difficulty deciding whether or not to participate in such activities in the medium and long term.

There are no explicit CSR norms available: There are no specific legislation requirements or policy directions that provide firms a clear direction in their CSR operations. The breadth and scope of a company's CSR operations should be determined by its size and profile. To put it another way, the larger the firm, the bigger the CSR programme.

There is a lack of consensus on how to implement CSR problems.

In terms of CSR projects, there is a lack of agreement among implementing agencies. This lack of consensus frequently leads to corporate houses duplicating actions in areas where they intervene. Instead of developing collaborative approaches to difficulties, this leads in a competitive atmosphere among implementing agencies. This constrains the company's ability to conduct periodic impact assessments of its efforts.

CONCLUSION: It is concluded that successful companies in India value social responsibility and ethics in marketing, and it is a viable option for companies to become social entrepreneurs in the future because the majority of the corporate population believes that corporate social responsibility is a reality, which is voluntary, and which helps in enhancing the reputation and brand name of the corporations, thus increasing their profitability. Thus, firms' charitable contributions unquestionably alter the way they do business. At the same time, a minority populace believes that corporate social responsibility is imposed on firms and that it is only a "website" declaration on each company's website, and thus it does not appear to be a worldwide practised work ethic.

Considering the majority opinion, it is possible to conclude that the situation in the private sector appears to be satisfactory; however, there is fierce debate on the social role of the Indian public sector in the post-liberalization phase, particularly in light of the twin processes of privatisation and the dismantling of monopoly/quota regimes. To solve the issues raised by this subject, significant study, particularly in the form of empirical studies, is required.

Despite the fact that businesses are making genuine attempts to achieve longterm development, some detractors continue to cast doubt on the concept of CSR. Some argue that Corporate Social Responsibility is motivated by ulterior interests, while others dismiss it as a hoax. The reality is that CSR is not a brandbuilding strategy; but, it does generate an internal brand among its employees.

Indulging in activities that benefit society in some way only adds to a company's goodwill. Corporate Social Responsibility is the responsibility of everyone, including business corporations, governments, and individuals, for the following reasons: income is earned only from society and thus should be returned; wealth is meant for use by self and the public; the basic motive behind all types of business is to quench the hunger of humanity as a whole; the fundamental goal of all bu CSR cannot be an afterthought; it must be integrated into the core of any business's ethics and treatment of employees and consumers. As a result, CSR is becoming a rapidly evolving and increasingly competitive profession. The case for demonstrating corporate responsibility is becoming more compelling as expectations among key opinion formers, customers, and the general public rise.

Being a good corporate citizen is becoming increasingly important for economic success, and the key rests in matching public expectations and priorities, as well as publicly and effectively conveying involvement and results.

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