Corporate Social Responsibility While passing the Companies Bill in the Lok Sabha, Corporate Affairs minister Sachin

Pilot had stated that the aim of this legislation is to protect the interests of employees and small investors while encouraging firms to undertake social welfare voluntarily instead of imposing that through inspector raj and make India an attractive and safe investment destination.* The Bill requires large companies (determined with reference to net worth, turnover or profit) to constitute a Corporate Social Responsibility Committee consisting of at least one independent director. The role of the committee is to formulate and recommend to the board a CSR policy for the company. Once the board approves the policy, it must be announced by placing it on the companys website. The CSR activities may comprise a number of activities listed in Schedule VII. The fairly general nature of the list in that Schedule does not provide assurance that the CSR spending may indeed always be directed to the achievement of the intended purposes. However, it is certainly the case that the more reputed and socially-oriented companies would be more focused in their approach in order to satisfy their social obligations, but then they would do so irrespective of any legal obligation (or persuasion) that serves no additional purpose. Companies must make every endeavour to ensure that they spend a minimum amount (2% of the average net profits for preceding 3 years) on activities pursuant to their CSR policy. Since a move to impose a mandatory requirement for CSR has come under severe criticism, the Ministry seems to have adopted a half-way house approach, short of making CSR mandatory. Ultimately, the nature of the obligation, if any, will boil down to semantics and interpretation of the expression every endeavour, and it is unlikely that such an obligation is capable of being enforced to any level of specificity. In case companies do not spend the requisite amounts on CSR activities, they must specify reasons in the boards report annually sent to shareholders. This incorporates the comply-or-explain approach typically adopted for corporate governance (e.g. under the Corporate Governance Code in the UK and the Voluntary Guidelines in India).

(Companies Bill, 2011: CSR, V Umakanth, Dec 2011, http://indiacorplaw.blogspot.in/2011/12/companies-bill-2011-csr.html)

By passing of this Bill, India would become the first country to mandate corporate social responsibility (CSR) through a statutory provision in its Company Laws. The Bill seeks to make CSR spending compulsory for companies that meet certain criteria. Clause 135 provides that remuneration of a director of a company should not be more Special Correspondent, New Companies Bill mandates CSR spending, The Hindu, December 2012, http://www.thehindu.com/todays-paper/tpbusiness/new-companies-bill-mandates-csr-spending/article4219638.ece
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than 5 per cent of the net profit. Under the new law, the CSR spending would be the responsibility of companies like their tax liabilities. Firms having Rs.5 crore or more profits in the last three years have to spend on CSR activities. One of the major proposals is that companies have to mandatorily spend 2 per cent of their average net profit for CSR activities. If companies are unable to meet the CSR norms, they will have to give explanations. In case, the companies are not able to do the same, they have to disclose reasons in their books. Otherwise, they would face action, including penalty. While the importance of CSR cannot be underestimated, questions continue to remain as to the manner in which it is proposed to be treated in law. Although it is a unique form of legislative provision, there does not seem to be a justification as to why it merits treatment at a statutory level. Arguably, such matters can be more appropriately dealt with through soft norms such as codes of conduct. The present approach may result in a tendency to treat CSR as another item to check the box. What is required is a greater understanding of the drivers and motives of corporations and their stakeholders that might engender a more socially responsible behaviour. Clause 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 make every endeavour to 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 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.

The Corporate Social Responsibility activities of the Company are directed in and around the area they operate The responsibility of Board to ensure spending towards CSR will be increased. Limiting the area of implementation of CSR will lead to failure of overall objective of introduction of this concept. Financial Express, Kaushik Dutta, The significance of a new Companies Bill, Dec 2011, http://www.financialexpress.com/news/the-significance-of-anew-companies-bill/892323/0 CSR Do contributions towards corporate social responsibility (CSR) need to be mandated? Indian companies usually do not differentiate between CSR and corporate philanthropy and hence no distinction is made between strategic spending and donations. A compulsory spend of 2% of profits by companies of a certain size for causes approved by the government also works against shareholders rights and entitlements as this spending is not aligned to the companys strategy and hence is not sustainable. The freedom of choice to determine how much and the manner to spend on CSR should be left to the company. From the point of view of the beneficiaries, how they get affected in a year of a loss or low profits is a matter of concern as the investments of earlier years may be lost if funding is not sustained over the life of a project.

Shubhashis Gangopadhyay: Profiting from CSR, Jan 28, 2012, Business Standard, http://business-standard.com/india/news/shubhashis-gangopadhyayprofitingcsr/462964/ The parliamentary panel looking into the provisions of the Companies Bill wants to make it mandatory for the corporate sector to spend a portion of its profit on activities that are socially beneficial. From my reading of the discussions, the major areas of dispute are: (a) should it be one per cent or two per cent of profit; (b) what defines the corporate sector and socially beneficial expenditure by them; and (c) should the spending be mandatory or only its disclosure be mandatory. I find all of this very amusing. Let me explain why. First, I am surprised at why non-governmental organisations are not opposing this move at a time when they are up in arms against cash transfers of all kinds. Their argument against cash transfers is that it shows a certain degree of irresponsibility by the government; instead of physically transferring the exact resources and services that households need for a minimum quality of life, something that the government is duty-bound to provide, it is throwing cash at decision-making households and asking them to obtain these directly from the market. In other words, a government that believes in cash transfers (for instance, as substitutes for subsidised food and subsidised kerosene) is irresponsible because it is asking heads of households to take decisions on how much to spend on what. Indeed, the most common refrain is that if cash is made available to the poor, they will drink it up. By the same logic, a government that asks the corporate sector to spend its profits on socially responsible activities is also highly irresponsible. After all, citizens pay taxes for governments to spend on public goods and redistribute resources. A government that asks the corporate sector to chip in and carry out these activities should also be viewed as irresponsible. It is asking the corporate sector to do something that is fundamentally the responsibility of the government. However, those who support cash transfers can still oppose making it mandatory for corporations to undertake CSR activities. The reason for supporting cash transfers is that households are idiosyncratic, and they know better than any paternalistic third party how much of what they need. In other words, households have the knowledge and the incentives to do what is best for them they only need the opportunity to be able to do so. In a market-driven society, purchasing power or cash gives them that opportunity. Private corporations are supposed to make profits and return them to their investors. Investors, therefore, choose those projects that give them higher returns, and managers of these projects are expected to specialise in the ability to make profits. If one wants entities that specialise in social activities, investors themselves can decide how much to put directly into these activities. Why put in money for steel production because such producers make social investments? Is it not better to choose the most profit-making steel producer and then use the dividends, or the realised capital gains,

to directly fund social activities? This division of labour among steel producers and those that undertake social activities is what makes both efficient and transparent. Many would argue that CSR is good business practice. If that were so, one would have to assume that good managers know that. And, if they know, then to signal that they are good managers they would be undertaking CSR anyway, with or without the law. Indeed, they would choose a level of CSR that is in keeping with what maximises the returns from investment. For some companies that would be 5 per cent of their total expenditure, for others it could be 0.5 per cent. And, observe, I do not say of profit. If social activity produces an enabling environment, you want that to be more stable than profits ever are in a market society. If CSR expenditure is tied to fundamentally volatile profits, and running schools is a corporate activity, your child will have new textbooks one year and no textbooks another year! On the other hand, there are people who feel good investing in companies that work for society. Such investors want their investment to yield a return and be used for the greater good. They are unable to undertake socially good activities by themselves, for an obvious reason: social activities, like profit-making activities, require a minimum scale of operation to be efficient, or even feasible. Companies are aggregators of resources and they will do this well, especially if it is good for their business. And, if doing good CSR attracts more resources for their business, they will shout their intentions from available rooftops. Therefore, defining disclosure norms for CSR activities is the way to go. People must be confident that what businesses are claiming is true and regulatory institutions need to be able to monitor truth-telling by companies. Indeed, what mandatory CSR spend does is take away the ability of efficient companies to distance themselves from the inefficient ones. After all, if everyone is spending similar amounts, how will you distinguish among them? If it works for them, they should spend more than 1 per cent; if it does not, they should spend less. The thing that bothers me the most is that supporters of mandatory CSR by the corporate sector refer to pieces exhorting corporate CSR written by business-school professors abroad. While I am willing to grant that they are smarter than we can ever be, they are also not always right. 2008 is not yet a distant memory! So, why can we not try to think for ourselves instead of relying on others to do the thinking for us?