CSR in responsible business practices across the globe and, in India, is legally binding for certain industries. It is an obligation unto a company to allocate a certain percentage of its profit back into society for the development of the community, environment, and societal welfare. This concept is now prominent because business operations no longer only answer to shareholders, but they also answer to society at large.
With the enactment of the Companies Act, 2013, India becomes the first country to have CSR as a mandate. Section 135 of the Act provides a framework of CSR obligations under which companies are supposed to be bound for corporate responsibility and contribution toward social good. This article delves into the meaning of CSR, applicability, covered types of companies, advantages, challenges, and best practices.
Are you interested in pursuing a career in Law? The Legal School in collaboration with IndusLaw has created unique programs for a Certification in Mergers & Acquisitions, Private Equity and Venture Capital Laws & Certification in Mergers & Acquisitions for fresh law graduates as well as professionals looking to advance in their careers! Enquire now for details!
Meaning of Corporate Social Responsibility (CSR)
Corporate social responsibility is termed the ethical mandate that binds companies to render support towards economic, social, and environmental development. A company's interest in its commitment towards ethical practice by supporting sustainable business processes not only for societal development but also for the environment. These generally involve activities concerning the education and health sectors, conservation of the environment, and female empowerment, among other similar issues. Thus, it can be considered as engaging the company itself with actions towards a positive contribution towards societal impact while still adhering to the agenda set under sustainable development. CSR law in India, therefore, is a blend of corporate responsibility and legal obligation.
CSR in India is not merely voluntary corporate philanthropy. The Companies Act has since 2014 provided a framework wherein specific companies have to carry out CSR activities as an integral part of their business responsibility.
Applicability of CSR in India
The applicability of CSR in India applies only to companies that meet the criteria of a certain minimum level of financial performance. The CSR applicability in India, as laid down in Section 135 of the Companies Act, is dependent on the following criteria:
Net Worth: The companies whose net worth exceeds ₹500 crores have to make some expenses on CSR.
Turnover: The companies that have an annual turnover of above ₹1000 crores are also CSR obliged.
Net Profit: The companies that possess a net profit of more than ₹5 crores need to perform CSR activities.
Companies in the categories mentioned above are bound to set aside at least 2% of their average net profits for the past three years for CSR endeavors.
Know what corporate governance issues are.
Key Components of CSR Policy
Every company to which CSR applies must prepare a policy that guides the CSR efforts. The key components include:
CSR Committee: Companies are required to constitute a CSR committee which shall prepare and implement CSR policies and programs.
CSR Budget Allocation: There has to be at least 2% expenditure in CSR activities over the average net profit of the three years preceding it.
CSR Reporting: The companies will have to put in place a CSR policy, annual expenses towards CSR, and steps in the annual report itself.
CSR Activities and Areas
There are certain heads of expenditures that under CSR companies can incur, such as Schedule VII of the Companies Act, wherein the Companies can include, inter-alia,
Some of those areas:
Education: Scholarships, skill development programs, and promotion of educational institutions.
Health and Hygiene: Public Health, Medical Institutions, Disease Prevention.
Environmental Sustainability: Conservation, Renewable Energy programmes, Waste Management, afforestation.
Poverty Alleviation and Social Welfare Schemes: Housing schemes, provision of food, employment generation for the deprived section in society.
Also, read the Companies Act 1956.
Advantages of CSR
CSR brings many benefits to businesses, such as branding, engaging employees, attracting investors, and being beneficial to the community. In this manner, businesses appear as responsible organizations that care about something more than the bottom line.
Improved Brand Image: Companies that engage in CSR are perceived better by the consumers, improving brand loyalty and trust.
Employee Engagement: CSR activities help the employees feel proud, raise retention, and also enable the company to attract the talent that is needed and share a value proposition.
Investor Attractiveness: Today, investors look to invest in companies that practice responsibility toward sustainable and ethical practices.
Community Impact: The community directly gets benefits in terms of education, poverty, health, and environment through CSR activities.
Compliance with Legal: CSR follows regulations that enable the company to keep compliance, but at the same time, it helps the company to establish its reputation as responsible and ethical.
Challenges in Implementing CSR
Despite all the values CSR holds, its implementation causes problems. Companies generally do not have resources, are unaware, and cannot measure impact properly. They also find it hard to line up initiatives correctly with business goals, which are the major obstacles to creating effective CSR efforts. Though it has its advantages, the implementation of CSR does not come without challenges as follows:
Lack of Awareness: Many companies do not know about CSR policies or how to structure good programs.
Resource allocation: Small and medium-sized enterprises may face problems allocating resources to effectively manage CSR.
Implementation gap: It is difficult to translate the policies of CSR into active programs, especially for firms that do not have specialized teams for CSR.
Impact assessment: CSR is hard to measure; impact and effectiveness require some kind of specific expertise and resource.
CSR Best Practices
Strategic practices are adopted by companies to get the most out of CSR, and CSR goals must align with business values, communities, and NGOs, with regular review of impact and transparent reporting so that it helps to bring meaningful change and good stakeholder engagement.
Strategic Alignment: The core values and the long-term vision of the company must be aligned with CSR goals.
Community Engagement: CSR must involve the local community to know their needs in order for CSR initiatives to become relevant and impactful.
NGO Partnerships: Companies can partner with NGOs and non-profits to leverage expertise for increased CSR reach.
Regular Impact Measurement: Periodic assessment of CSR programs will measure impact and course correction accordingly.
Transparency and Reporting: A transparent report of CSR activities builds credibility and allows tracking of contributions made by the company to its stakeholders.
Check out the list of the top 11 biggest law firms in India.
CSR and Sustainable Development Goals (SDGs)
The CSR activities are aligned with the United Nations' Sustainable Development Goals (SDGs) aimed at eradicating global challenges by 2030. CSR activities on clean water, renewable energy, education, and poverty alleviation all contribute to achieving the SDGs. Companies can strengthen their impact and support efforts toward global sustainability by embedding SDG goals in CSR policies.
Conclusion
This makes a huge step in corporate accountability and sustainable development, as India has formulated a framework requiring companies to contribute to societal welfare, hence ensuring that businesses are not solely profitability-driven but also sustainable for society. CSR constitutes a legal compulsion but also an opportunity to build trust, enhance reputation, and generate long-term value for stakeholders.
More CSR practices among companies contribute toward creating a better and more sustainable society. From education and health care to environmental programs and alleviation of poverty, CSR offers a strong impetus to India's socio-economic shift and the establishment of a responsible business environment.
CSR Applicability FAQs
1. What is CSR?
Corporate social responsibility (CSR) is an enterprise practice where the firms make a commitment to benefit society through social, environmental, and economic growth that is beyond profit-making objectives.
2. What types of companies are compelled to undertake CSR activities in India?
Any Indian company with any of the following is mandatorily required to engage in CSR: net worth of ₹500 crores or more, an annual turnover of ₹1000 crores or more, or a net profit of ₹5 crores or more.
3. How much do companies need to spend on CSR?
Organizations undertaking CSR are compulsorily required to reserve 2% of the average net profits for three consecutive financial years for CSR activity.
4. In which fields is CSR typically carried out?
CSR typically encompasses the areas of education, health, environmental concerns, poverty eradication, women's empowerment, skill development, and sustainable development.
5. Are CSR funds available for political contributions?
No, CSR funds cannot be made to political contributions. Expenditure on CSR can be incurred only on items of Schedule VII of the Companies Act, which will exclude political contributions.
6. What happens if the company fails to spend on CSR?
If a company does not spend the specified CSR amount, it will need to give reasons for it in its annual report. In addition, penal consequences are also likely when such defaulting companies persistently remain non-compliant with the provisions of CSR.
