CSR and the Companies Act 2013

Has it really achieved the objectives or are we still far from achieving a strict compliance with the CSR policies

Sandeep Menon Nandakumar, Assistant Professor (Sr.), VIT Law School, Chennai

It is an undisputed fact that multinational corporations wield more power and wealth than many of the nations across the world1. Due to the very same reason, they are capable of doing more harm than any other private economic institutions as their activities surpass national boundaries thereby going beyond the control of national jurisdictions in many cases. Multinational corporations do a great deal of service to the society by paying huge taxes, providing employment, contributing to charitable causes and so on. However, at the same time they are also prone to corruption, accused of providing poor and inadequate workplace conditions, causing human rights abuses, consumer disputes and violating environmental values. It is not quite sure whether it is the latter part that the Corporate Social Responsibility (CSR) tries to control but it is surely a mechanism, which balances the latter with that of the former. Corporate social responsibility is based on the premise that most of the companies derive resources from the society and they are expected to return it back. CSR has been defined thus:

“Corporate Social Responsibility is a term used to express that an organization is taking responsibility for the impact of its activities upon its employees, customers, community and the environment. It is usually used in the context of voluntary improvement commitments and performance reporting. Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the honouring of a triple bottom line- People, Planet and Profit. CSR involves a commitment to behave ethically and contribute to economic development, while improving the quality of life of the workforce and their families as well as the local community at large2.

This paper primarily endeavours to find whether above-mentioned concept of CSR is reflected in the Companies Act 2013. The first part of the paper focuses on the requirement of the mandatory CSR policies at the national level. In this part, the extent of responsibility of the states for the activities of corporations is also analysed and some changes have been suggested in this regard. The second part of this paper is on the provisions relating to CSR in the new Companies Act 2013 including its VII Schedule. It also examines whether the UN Global Compact principles are given due recognition in the provisions relating to CSR in the Companies Act. Final part deals with an analysis of Chhattisgarh Corporate Social Responsibility Policy, 2013. Its pros and cons and how it differs from the CSR objectives mentioned in the 2013 Act. This article ends with raising some concerns about the concept of CSR enshrined in the 2013 Act, and that if given proper attention can add new momentum towards the goal of achieving the objectives of CSR.

Inadequacy of State Responsibility: Requirement of mandatory CSR policies at the national level

As one author puts it, “a corporation can recognizably become involved in violations of human rights law either directly as a private actor; as an actor coloured by a connection with a state, state entity, or other public actor; or as a participant in a joint venture or complicitous relation with another human rights violator3.” In both international as well as national law, the states are responsible only for the acts of their organs and are generally not made responsible in case of private corporate wrongs. In order to make the state responsible, the legal system looks into whether the acts of the corporations were ‘on behalf of the state’ or ‘under the control of’ the state. However, in most of the cases the situation is different. The corporations are complicit in violating human rights along with the state or vice versa and it should have been a point to include the factor of complicity along with acts ‘on behalf of the state’ or ‘under the control of’ the state.

The Draft Articles on Responsibility of States for Internationally Wrongful Acts, 20014attributes the conduct of any organ of the state to the act of state but an organ of the state has been defined to include any person or entity which has that status in accordance with the internal law of the State5. The 2001 Draft Articles has expanded the ambit of the term organs of the state under articles 5 and 8. According to Article 5, the acts of any organ, which is empowered by the law of that State to exercise elements of the governmental authority, shall be considered an act of the State under international law. The commentary to the Draft Articles state that “since corporate entities, although owned by and in that sense subject to the control of the State, are considered to be separate, prima facie their conduct in carrying out their activities is not attributable to the State unless they are exercising elements of governmental authority within the meaning of article 5”.

The major change should have been brought to article 8, which in its original form states thus:

“The conduct of a person or group of persons shall be considered an act of a State under international law if the person or group of persons is in fact acting on the instructions or under the direction or control of, that State in carrying out the conduct.”

The acts of non-state actors such as TNCs in which the state becomes complicit are not given due attention in the above article. The Draft Articles on responsibility of States for internationally wrongful acts is incapable to fix responsibility on the states involved in human rights abuses carried out by the TNCs6.

Thus, it is stated that where the state responsibility is highly inadequate to combat the activities of corporations and there is in fact none to be responsible for the activities of the corporation, it is better to have a concrete national policy on corporate responsibilities.

Corporate Social Responsibility under Companies Act 2013

The Companies Act, 2013 has ushered a wave of change by making far-reaching consequences on all companies in India. The talk of the nation, amongst all the new changes brought out by the new legislation, has been the incorporation of provisions relating to Corporate Social Responsibility. The mandate of CSR has been provided under Section 135 of the 2013 Act which ensures that in every financial year, a 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 spends at least two per cent of its average net profits made during the three immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy7.

The trend that has been seen in India over the years is that most of the companies set up their establishments in an area which results in violating the environmental standards or forced displacement or disturbing the societal set up in that local area. Then they establish cancer research centres or other concerns in an entirely different area that qualify them as companies observing CSR practices. Tata group is one of the best examples. The instance in Singur (popularly known as Tata Nano Singur controversy), where they set up a car manufacturing unit violated several human rights and caused large-scale displacements. This was done without any regard to the land laws of the state. However, they are known to have undertaken many philanthropic activities and have established institutions of higher learning, promoted art and culture of the country and funded scientific research. POSCO steel plant in Odisha is another example, which boasts of initiating educational programmes and scholarships but has caused displacement of several inhabitants and environmental hazards in the local area8. The current Companies Act of 2013 has taken care of this situation by adding a proviso to section 135, which states 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.

The Companies Act of 2013 has given due care to the interests of the community and environment and not just in business/profit affairs of the company. As per Section 166 of 2013 Act, the director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. This is in tune with the provisions of similar legislation in UK. Section 172 of the UK Companies Act 2006 states that the director of a company must act in good faith to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to the impact of the company’s operations on the community and the environment9.

The amendments made to Schedule VII of the Companies Act, 2013 has in fact widened the scope of CSR activities10and the much criticized clause (x) in Schedule VII before the amendment that stated “such other matters as may be prescribed” has been removed in the newly framed version. At the same time, the new amendment has made the list exhaustive and it has to be seen whether all the essential CSR activities have come under the schedule11. It would have been better if the ten fundamental principles of UN Global Compact were given more attention in the VII Schedule and in the overall framework of the provisions relating to CSR in the Companies Act 2013.

UN Global Compact and the 2013 CSR mandate

The UN Global Compact was launched in July 2000 as a framework for the companies worldwide for responsible business practices. The UN Global Compact consists of principles set for the companies to follow in their activities in the areas of human rights, environment, labour standards and anti corruption. These principles enjoy universal consensus and has been derived from UDHR, ILO’s Declaration on Fundamental Principles and Rights at Work, Rio Declaration on Environment and Development and the United Nations Convention against Corruption12. The UN Global Compact also ensures that the companies undertake due diligence to comply with its national laws and work to identify any violations of human rights and prevent it. It is doubtful whether Schedule VII encompasses all the human rights principles that were thought about in the Global Compact. Moreover it seems that the Companies Act of 2013 has given a lot more preference to CSR polices by remaining silent on ethical business practices or in other words called ‘responsible business practices’13. For example, the first principle of UN Global Compact states, “businesses should support and respect the protection of internationally proclaimed human rights.” This principle reiterates the fact that like the government, individuals and other organisations, companies also do have a responsibility in ensuring protection of human rights. By ensuring protection of human rights it should be understood that the business community should not infringe human rights. This has been stressed by the UN Human Rights Council that the corporate responsibility to respect human rights is a requirement of business everywhere14. This principle encompasses within its ambit promotion of rule of law, addressing consumer concerns, increase in worker production and retention and building good community relationships. Schedule VII only deals with the steps that the companies have to undertake towards CSR policies. Due regard has to be given to respect the human rights and not to violate them during set up of the company’s activities as well.  For example, the activities of the corporations such as POSCO in Odisha and Tata Nano in Singur have created massive violations of human rights, land and environmental laws15. It is better not to forget the corporate human right abuses that have taken place at the national and international level too. Activities of Barclay’s Bank, in South Africa, Wal-Mart in failing to discontinue dealers from committing labor misuses16, TNCs as well as Coca Cola in Sudan, the incident of release of toxic gas from Trafigura in Abidjan affecting more than a lakh of people, the environmental degradation and poisoning caused by operations of Rio Tinto in Papua New Guinea, Texaco in Ecuado, Shell in Ogoniland, Nigeria, Union Carbide in Bhopal, issues in Bano v. Union Carbide Corporation17, Exxon’s Valdez oil-spills off Alaska are all examples of environment and human rights abuses by multinationals. Asking the multinationals to invest on CSR after violating human rights and environmental standards by not following ethical/responsible business practices seems to be unrewarding.

The VII Schedule has incorporated the labour and the environmental principles/activities in a comprehensive manner and this is something, which is commendable. On the other hand it seems to have missed the anti corruption principle of the UN Global Compact. Principle no.10 of the UN Global Compact states, “Businesses should work against corruption in all its forms, including extortion and bribery.”

However, the effectiveness of UN Global Compact has always been in question as they are purely voluntary commitments. The companies or the participants are required to communicate their progress in implementing the ten principles annually to all the stakeholders and if they don’t they will be listed as “non-communicating” on the website and the company will be delisted after the expiration of one year from the initial deadline. Though the company has to follow the Global Compact principles once it becomes a part of the commitment, the basic issue is whether a company voluntarily joins the commitment and strives to protect human rights and other related rights. It is true that the companies like Royal Dutch Shell, Novo Nordisk, and BP Amoco have publicly proclaimed their cooperation with the UN to safeguard human rights, but it is still to be seen whether they will be really following what they have proclaimed in the light of future events. If the facts alleged in the recent case of Esther Kiobel v. Royal Dutch Petroleum Co.18are assumed to be true, it can be concluded that nothing has changed much even after the advent of the UN Global Compact and that it is not a very effective step towards making companies follow responsible business practices.

The proviso to Section 135 clearly stipulates the requirement of specifying the reasons for not spending the required CSR amount but it is unclear about the penal consequences that the particular company need to face for not spending the amount towards CSR. The after effect of not mentioning the reasons for not spending the amount is also unclear from the said provisions. It is in this regard that the Chhattisgarh Corporate Social Responsibility Policy 2013 assumes significance.

Chhattisgarh Corporate Social Responsibility Policy 2013

Chhattisgarh Corporate Social Responsibility Policy 2013, published in the Gazette of Chhattisgarh on May 3, 2013, mandates that public and private companies with net profits in the previous year of less than Rs 500 crore will contribute 3% of their annual profits towards CSR to the Chief Minister Community Development Fund, and those with net profits above Rs. 500 crore will contribute 2% of their annual profits towards CSR with a minimum threshold of Rs. 15 crore.

This 2013 state policy goes against the central legislation in many respects and may be held to be invalid as it is doubtful whether the state can assume such kind of power when the central legislation is in force. Moreover, the fact that the amount has to go to the CM’s community development fund may act as a hindrance for companies from earning the goodwill of the local area/community through developmental projects as part of CSR. Nevertheless, the state policy has to be appreciated for reasons manifold. Firstly, the cut off of a net profit of Rs. 500 crore for CSR initiatives fixed by Companies Act 2013 has been removed. As per this policy, even companies whose net profits in the previous year is less than Rs 500 crore have to contribute 3% of their annual profits towards CSR to the Chief Minister Community Development Fund. This is one important aspect, which has been completely missed out in the Companies Act 2013.

The 2013 state policy also provides for punishment for non-compliance. According to the policy, industrial units that are obtaining facilities or grant from various departments of State of Chhattisgarh or according to the prevailing industrial policy will have to mandatorily deposit the money for CSR initiatives in the Chief Minister Community Development Fund. Non-compliance of this will result in taking back of grant or facilities that have been provided by the administration. The state government cannot be blamed for taking such a bold step in this regard, as many of the huge corporate houses like Jindal Steel Power Limited, JSW Steel Ltd, Bhushan Power & Steel, Vandana Group, DB Power Ltd etc are in Chhattisgarh.

One major criticism to the Chhattisgarh CSR policy would be that the amount deposited in the CM Community Development Fund could be used for many purposes other than CSR objectives and there are no adequate safeguards against the same. However, a perusal of Schedule VII of the Companies Act 2013 shows that one of the CSR activities stipulated under it is “contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women”. If the corporate can be asked to contribute to the PM’s National Relief Fund or any other Central Government, then requiring them to contribute to the CM’s fund should not provoke much criticism. It is also to be noted that as per the 2009 decision of the Central Information Commission in Shri A. K. Goel v. Prime Minister’s Office,19although the Prime Minister’s National Relief Fund can be treated as public authority, it cannot be treated as a government Department and for the same reason, information on both those making contribution to this fund and those receiving benefits from it is to be treated as personal information held in confidence by the Prime Minister’s National Relief Fund and therefore exempt from disclosure u/s 8(1) (j) of the Right to Information Act20.

This policy may seem to be a compelling measure by the government on the companies and against the concept of CSR as envisaged under the Companies Act 2013 whereby corporate are entitled to perform welfare schemes in their neighbourhood for the benefit of the society. But, it should be admitted that the 2013 state policy has taken care of one major situation. CSR, if left entirely to corporates, will become an extremely distrustful activity in the future due to lack of adequate monitoring/verification by the state.

Conclusion

By incorporating the provisions relating to CSR and CSR reporting procedures, the new Companies Act of 2013 has in fact corrected a historic wrong of making CSR a matter of discretion of companies. It is certainly a new step towards transforming the voluntary CSR initiatives to binding principles but there is still a long way to go for achieving a strict compliance with the CSR policies. In the subsequent amendments, it is worthwhile if the following concerns are given adequate focus.

Main Concern: The definition of Corporate Social Responsibility in the present Indian scenario could be seen from the Companies (Corporate Social Responsibility Policy) Rules 2014 where it has been defined thus,

“Corporate Social Responsibility (CSR) means and includes but is not limited to (i) Projects or programs relating to activities specified in Schedule VII to the Act; or
(ii) Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.”

Other concernsIt is true that the concept of CSR is not limited to the activities laid down under Schedule VII of the 2013 Act. However, keeping in mind the meaning and the essence of the concept of CSR (as mentioned in the introduction), it is quite doubtful whether the essence of CSR is reflected in the definition. Moreover, if the true meaning of CSR was embedded in the definition, then there is no reason why discrimination has been shown between companies whose net profit is above Rs. 500 crore and others for CSR initiatives. The essential elements of CSR as enunciated in the above definition which includes responsibility for the impact of its activities upon the company’s employees, customers, community and the environment; voluntary improvement commitments and performance reporting, the deliberate inclusion of public interest into corporate decision-making, honouring of a triple bottom line- People, Planet and Profit are equally applicable to all companies irrespective of their net profit or annual turnover. In the alternative, the 2013 legislation could have at least opted for a bottom down approach (employee-centered CSR approach) for companies with less net profits or annual turnover than top down approach mentioned for companies coming under the ambit of Section 13521. The employee-centered approach is where CSR initiatives come from the part of the bottom level employees. The famous story of one of the largest fashion retailers, Nordstrom that refunded the customer’s money who tried to return a set of tires despite the fact that Nordstrom does not sell tires is a great example of high level of customer service and employee-centered CSR approach.

1)      The uncertainty when companies do not give preference to local area where it operates. Are we talking about a legal framework that does not completely prohibit the corporate/multinationals to disturb environmental safety, promote forced displacement and upset the societal set up in the local area where the company is situated but satisfies the mandate of CSR by setting up a cancer research institute or like establishments in an entirely different area?

2)      The after effects/sanctions meted out to those corporations who fail to comply with Section 135 of the 2013 Act are not clear despite the introduction of mandatory CSR

3)      It is yet to ascertain what would be the so called “social responsibilities” of companies whose net profits fall below Rs. 500 Crore or who do not satisfy the criteria laid down under Section 135(1) of the Companies Act 2013.

4)      The effectiveness of the CSR activities when it comes to its implementation due to lack of adequate verification/monitoring by the state.

5)      The reflection of UN Global Compact principles in the Schedule VII and generally in the CSR provisions in the 2013 legislation.

6)      The failure to give importance to the concept of ethical/responsible business practices in the scheme of the Act.

  1. For example, the annual sales of the Royal Dutch/Shell Group Oil Company are twice New Zealand’s gross domestic product; See Dr. Clarence J. Dias, ‘Corporate Human Rights Accountability and the Human Right to Development: The Relevance and Role of Corporate Social Responsibility’ 4 NUJS L. Rev. 495 (2011). []
  2. Dr. Clarence J. Dias, ‘Corporate Human Rights Accountability and the Human Right to Development: The Relevance and Role of Corporate Social Responsibility’ 4 NUJS L. Rev. 505 (2011). []
  3. Jordan J. Paust, ‘Human Rights Responsibilities of Private Corporations’ 35 Vanderbilt Journal of Transnational Law 801 (2002). []
  4. Report of the International Law Commission on the work of its fifty-third session in 2001 []
  5. Article 4 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (2001). []
  6. Daniele Amoroso, ‘Moving Towards Complicity as a Criterion of attribution of private conducts: Imputation to states of corporate abuses in the US Case Law’, 2011 LJIL 989 []
  7. Section 135 of the Indian Companies Act, 2013: 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. []
  8. Jaya Srivastava, ‘Social Movements, CSR and Industrial Growth: An Indian Experience, 11 The IUP Journal of Corporate Governance 60 (2012). []
  9. Section 172 of the UK Companies Act, 2006: Duty to promote the success of the company: (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company. []
  10. In Schedule VII, for items (i) to (x) and the entries relating thereto, the following items and entries shall be substitutes, namely:-“(i) eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;(ii) promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and differently abled and livelihood enhancements projects;(iii) promoting gender equality, empowering women, setting up homes, and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources, and maintaining quality of soil, air and water;(v) protection of national heritage, art and culture including restoration of buildings and sites for historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;(vi) measures for the benefit of armed forces veterans, war widows and their dependants;(vii) training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports;(viii) contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;(ix) contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government; (x) rural development projects []
  11. It has been mentioned in the Companies (Corporate Social Responsibility Policy) Rules 2014 that “Corporate Social Responsibility (CSR) means and includes but is not limited to (i) Projects or programs relating to activities specified in Schedule VII to the Act”, but it is silent as to what all the other activities could be []
  12. Available at http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html last accessed on July 24, 2014 at 7:59 AM []
  13. Available at http://www.nfi.org.in/sites/default/files/nfi_files/Comments%20on%20draft%20CSR%20rules.pdf Last accessed on July 24, 2014 at 8:01 AM []
  14. Available at http://www.unglobalcompact.org/AboutTheGC/TheTenPrinciples/index.html Last accessed on July 24, 2014 at 8:11 AM []
  15. Tata Nano project in Singur (West Bengal) had caused severe displacement of farmers and deprived many of land and homes due to the takeover of 997 acres of farmland by the State Government for Tata to build its factory.Though the law authorized the takeover only for public improvement projects, the project was in blatant violation of this []
  16. Doug Cassel, ‘Corporate Aiding and Abetting of Human Rights Violations: Confusion in the Courts’ (2007) 6 Nw. U. J. Int’l Hum. Rts. 304 []
  17. 273 F.3d 120 (2d Cir 2001). []
  18. 133 S.Ct. 1659 (2013). []
  19. Available at  http://indiankanoon.org/doc/1459130/ last accessed on July 25, 2014 at 01:07 AM []
  20. Section 8(1) (j) of the RTI Act: Exemption from disclosure of information. – Notwithstanding anything contained in this Act, there shall be no obligation to give any citizen,— information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual unless the Central Public Information Officer or the State Public Information Officer or the appellate authority, as the case may be, is satisfied that the larger public interest justifies the disclosure of such information []
  21. For more information, See Walter R. Nord & Sally Riggs Fuller, ‘Increasing Corporate Social Responsibility Through an Employee-centered Approach’ 21 Employ Respons Rights J 279 (2009). []

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