Corporate Social Responsibility an Opportunity or Quibble ALL about CSR

INTRODUCTION
The Term Corporate Social Responsibility (CSR), if read in literal sense, means responsibility (duties) of Corporates (Judicial persons) towards Society (the public).
CSR has been in existence for a long time and is almost as old as civilization. CSR is extremely important for sustainable development of all stakeholders (all the people, on whom the business has an impact, including the society at large). Proponents of CSR argue that companies make more long-term profits by operating with a perspective, while critics argue that CSR distracts from the economic role of businesses. Nevertheless, the importance of CSR cannot be undermined. Corporate social responsibilityis also calledcorporate conscience, corporate citizenship,social performance, orsustainable business. Itis a form ofcorporateself-regulationintegrated into abusiness model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and internationalnorms.

Is it an Opportunity or Quibble

Corporates, whose real intension is to do business, is now indulged into also focusing into where the amount to be spent to comply with various laws with respect to their social responsibility.
Corporates, who earn from the society by serving its clients are also made liable to serve the society at large.
Is it only because they earn from the society or use the resources generally made available
NO!
They are required to the serve the society at large not because they earn from it, but because due to their commercial use of the resources, it is declining and adversely affecting the environment, and the Corporates are only into the position to make good such loss.
Opportunity- the first legislation in the world

• The new Companies Act 2013, which lays down that 2% of profits earned by a certain class of companies must be spent on corporate social responsibility activities, would mean an estimated Rs. 27,000 crore (estimates) will flow into grassroots development and social enterprise sectors every year.
• According to the Indian Institute of Corporate Affairs, of the 1.3 million companies in India, about 6,000-7,000 companies are covered under the new CSR rule.

CSR Legislation-Quibble

• In terms of fiction, aquibbleis aplot device, used to fulfill the exact verbal conditions of an agreement in order to avoid the intended meaning. Typically quibbles are used in legal bargains and, in fantasy, magically enforced ones.
• In one of the best known examples,William Shakespeareused a quibble inThe Merchant of Venice.PortiasavesAntonioin a court of law by pointing out that the agreement called for a pound of flesh, but no blood, and thereforeShylockcan collect only if he sheds no blood.

Development Growth vs. Welfare Based Growth

India is a country of myriad contradictions. On the one hand, it has grown to be one of the largest economies in the world, and an increasingly important player in the emerging global order, on the other hand, it is still home to the largest number of people living in absolute poverty (even if the proportion of poor people has decreased ) and the largest number of undernourished children. What emerges is a picture of uneven distribution of the benefits of growth which many believe, is the root cause of social unrest.

Definition And Operationalization Of Corporate Social Responsibility:

• CSR is the responsibility of enterprises for their impacts on society. To meet their social responsibility, enterprises have a process to integrate social, environmental, ethical human rights and consumers into their business operations in collaboration with its stakeholders.

• Traditionally, Corporate Social Responsibility in India was seen as a Philanthropic Activity Philanthropic activity means an effort which individual or organization undertakes based on altruistic desire to improve human welfare. This activity was performed and was not deliberated which led to limited documentation on specific activities.

• CSR activity shall be undertaken by the company as per CSR policy, projects, programmes or activities of the company.

• A company may collaborate with other companies for undertaking projects or programmes on CSR activities in such a manner that CSR committees of respective companies are in a position to report separately on such projects or programmes with these rules.

Need For Corporate Social Responsibility:

1. Better Public Image:

Each firm must enhance its public image to secure more customers, better employeesand higher profit. Acceptance of social responsibility goals lead to improve public image.

2. Conversion of Resistances into Resources:

If the innovative capability of the business is turned to social problems, many resistances can be transformed into resources and the functional capacity of resources can be increased many times.

3. Long term Business Interest:

A better society would produce a better environment in which the business may gain long term maximization of profit. A firm which cater to the community needs would in its own self interest like to have a better community to conduct its business.

4. Avoiding Government Intervention:

Failure of businessmen to assume social responsibilities invites government to intervene and regulate or control their activities. The business should understand its powers and the manner to use it carefully and responsibly thereby avoiding government intervention.

Social Audit:

• On perusal to Section 135 of Companies Act 2013 we can find the intension of the legislature in indirectly enforcing the social audit. It lays stress on formation of Corporate Social Responsibility committee.
• Considering the huge amount of spending on various social activities by corporate sector, social audit becomes necessary to track and report the progress.
• Social Audit is a transparent process to measure and report the social objectives of the CSR projects. It identifies inconsistencies between the agreed objectives and final implementation of the CSR project. It is a mechanism to track and report progress of social development programme mentioned under Schedule VII of the Act.

Initiatives of State

• PMs Ten Point Social Charter
• Voluntary Guidelines on CSR, 2009
• From the year 2010-11, the Department of Public Enterprises, India has substantially incentivised Sustainable Development & CSR for Public Sector Enterprises (PSEs);
• National Voluntary Guidelines on Social, Environmental and Economic Responsibilities 2011 (NVGs: the revised, elaborated version of 2009 CSR Guidelines )
• Planning Commission and Task Force on Business Regulation

Companies Act of 2013, which has already been notified partially, gives the concept of CSR the importance it deserves. Section 135 of Companies Act, 2013 contains provisions exclusively dealing with Corporate Social Responsibility. Schedule VII contains a list of the activities which a company can undertake as part of its CSR in initiatives.

PROVISIONS OF COMPANIES ACT 2013 ON CSR

Applicability Following companies to constitute CSR committee:
CSR rules shall come into force on the date of their publication in the official gazette and shall be applicable from the financial year 2014-15.
CSR Committee
CSR Committee should consist of atleast 3 directors out of which atleast 1 director should be independent director. Some companies many not be mandatorily required to appoint independent directors as per provisions of Companies Act 2013 but CSR applicability may be there for those companies. How will this criteria of independent director be met in case of those companies need to be clarified.
Boards Report to disclose composition of CSR Committee
Functions of CSR Committee:

1. 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 of the Act.
2. Recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and Monitor the Corporate Social Responsibility Policy of the company from time to time.
3. Prepare a transparent monitoring mechanism for ensuring implementation of the projects / programmes / activities proposed to be undertaken by the company.

Responsibility of the Board of Directors
To ensure that atleast 2% of average net profit of last 3 preceding years is spent on CSR activities every year.
Net Profit shall mean, net profit before tax as per books of accounts and shall not include profits arising from branches outside India.
2% CSR spending would be computed as 2% of the average net profits made by the company during every block of three years.
For the purpose of First CSR reporting the Net Profit shall mean average of the annual net profit of the preceding three financial years ending on or before 31 March 2014.
To approve the CSR Policy after considering recommendations of CSR Committee.
To disclose CSR policy and initiatives in Boards report and Companys website.
To ensure that activities reflected in CSR policy are actually undertaken by company.
If the company does not spend 2% of net profits as required, then Board to report the reasons in the Boards report.
Contents of CSR Policy
CSR policy of the company should reflect the following:
Projects and programmes that are to be undertaken by the company in pursuit of CSR.
List of CSR projects/programmes which a company plans to undertake during the implementation year, specifying modalities of execution in the areas/sectors chosen and implementation schedules for the same.
A statement that surplus arising out of the CSR activity will not be part of business profits of a company.
A statement that the corpus would include the following:

1. 2% of the average net profits,
2. any income arising therefrom
3. surplus arising out of CSR activities.

Activities which may be included by companies in their Corporate Social Responsibility Policies
Activities relating to:

• Eradicating extreme hunger and poverty;
• Promotion of education;
• Promoting gender equality and empowering women;
• Reducing child mortality and improving maternal health;
• Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
• Ensuring environmental sustainability;
• Employment enhancing vocational skills;
• Social business projects;
• 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; and
• Such other matters as may be prescribed.

Other important points relating to CSR
Tax treatment of CSR spend will be in accordance with the IT Act as may be notified by CBDT.
A Company may set up an organization which is registered as a Trust or Section 8 Company, or Society or Foundation or any other form of entity operating within India to facilitate implementation of its CSR activities in accordance with its stated CSR Policy.
A company may also conduct/implement its CSR programmes through Trusts, Societies, or Section 8 companies operating in India, which are not set up by the company itself.
Companies may collaborate or pool resources with other companies to undertake CSR activities and any expenditure incurred on such collaborative efforts would qualify for computing the CSR spending.
Only such CSR activities will be taken into consideration as are undertaken within India.
Only activities which are not exclusively for the benefit of employees of the company or their family members shall be considered as CSR activity.
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.
Format of annual report on CSR initiatives to be included in the board report by qualifying companies has been prescribed under draft Rules.

Corporate Social Responsibility- A Responsibility Often Neglected.!

“It is in India where the company’s abuse of water resource has been challenged ferociously, and communities across India living around Coca-Cola’s bottling plants have organized in large numbers to demand an end to the mismanagement of water. In response to the growing Indian campaigns against Coca-Cola, the company has decided to promote rainwater harvesting a traditional Indian practice in and around its bottling plants in India. Touting rainwater harvesting initiatives is now central to Coca-Cola’s public relations strategy in India.
Introduction
On February 18, 2008, leading beverage company in India, The Hindustan Coca-Cola Beverages Pvt. Ltd (Coca-Cola India), was awarded the Golden Peacock awardfor Corporate Social Responsibility (CSR) for the several community initiatives it had taken and its efforts toward conservation of water. The award recognizes companies for their commitment toward business, their employees, local communities, and the society. Atul Singh (Singh), CEO, Coca-Cola India, said, “Coca-Cola India has always placed high value on good citizenship and has undertaken several initiatives for community development and inclusive growth.
We are gratified to receive this global award and are humbled at being recognized for the little contributions that we have been able to make to preserve and protect the environment and toward community development.”
Coca-Cola India was established as the Indian subsidiary of the US-based Coca-Cola Company (Coca-Cola) in 1993. As of 2008, Coca-Cola India had 24 bottling operations of its own and 25 bottling operations owned by its franchisees.In addition to beverage brands like Coke, Fanta, Sprite, etc., Coca-Cola India had a strong local cola brand Thums Up, the Kinley brand of mineral water, energy drinks, and powdered concentrates.
Keeping in mind the fact that it was one of the largest beverage companies in India, Coca-Cola India said it had made CSR an integral part of its corporate agenda.
According to the company, it was aware of the environmental, social, and economic impact caused by a business of its scale and therefore it had taken up a wide range of initiatives to improve the quality of life of its customers, the workforce, and society at large.
Since the company used large amounts of water and energy in its beverage production and tons of packaging material for its products, it had taken up several initiatives to act as a responsible company and reduce its environmental impact, it said. In addition to water, energy, and sustainable packaging, Coca-Cola India also focused on several community initiatives in India as part of its social responsibility initiatives.

How Organizations make decisions and NGOs Suggested Plan

1. Developing a CSR Strategy and Policy

The Companies Act, 2013 requires every company to put out its CSR policy in the public domain. The guidance provided in the Act and the draft rules on what constitutes a CSR policy are that it should:

• exclude normal business activities of the company
• contain a list of the CSR projects or programmes which the company plans to undertake during the implementation year.

An effective CSR strategy should articulate:

• who it wishes to address that is the target group
• where it wishes to work that is the geography
• what sectors or issues it wishes to address

2. Operationalising the institutional mechanism

In order for a corporate to gain the greatest leverage and a strategic advantage through the investment of intellectual and financial resources, they are required to select their implementation mechanism.
It must be noted that whatever implementation mechanism the company chooses, it must have a basic CSR department in place to support the CSR committee. The role and structure of the department will be determined by the CSR committee.

3. Due diligence of the implementation partner

Due diligence refers to the process a company undertakes to determine the risks as well as the benefits of working with a potential implementation partner. This process has to be sufficiently robust to ensure that a companys implementation partners have the reputation, competence and integrity to deliver effective programmes on the ground.
The due diligence process consists of five primary areas for investigation:

• competence of the implementation partner
• identity
• management
• accountability
• transparency and financial capability

4. Project development

The CSR strategy of a company will be implemented through a series of projects which will have definite beginnings, ends, expected outputs and outcomes as well as budgets associated with it. These projects may be of a short duration (a few months) or multi-year.
A company may choose to implement projects through its in-house teams or in partnership with other agencies or a combination of both. Whatever path it takes, it is important for the project to be developed clearly with distinct baselines, defined activities, monitorable targets and budgets. In the case of multi-year projects, it is important to include a provision to undertake annual reviews which can form the basis to revise the project.

5. Project approval

Every project, whether developed by the in-house team or an external agency, must be formally examined and approved. This is to ensure that each project is in line with the CSR strategy and policy, the monitoring indicators are clearly defined and relevant and there is an adequate budget available. Projects that go on for longer durations or demand a larger amount of resources must be scrutinised more carefully than the others.
The CSR committee is ultimately the one responsible for every project. It can, however, choose to delegate authority to a project approval committee consisting of company staff and outside experts with clearly defined roles and responsibilities.

6. Finalising the arrangement with the implementing agency

While working with an external agency, it is very important to enter into a formal arrangement which is referred to here as a Memorandum of Understanding or MoU. It defines the roles, responsibilities, deliverables, commitments and consequences in case of any breach. This is essentially a formal acknowledgement that all the partners have voluntarily consented to work together to achieve an agreed outcome that requires each one to play their respective roles.

7. Progress monitoring and reporting

Routine progress monitoring serves the following three important purposes:

• It highlights any slippages and helps to determine a corrective action that must be taken if need be.
• It provides an excellent opportunity for learning: what worked and what did not. This can then be immediately applied to other projects.
• This is an essential part of the directors report as per the CSR clause of the Companies Act, 2013

8. Impact measurement

Impacts of the development projects typically take a while to manifest.
There are several tools and frameworks for measuring impact. Each has its pros and cons depending upon the nature of interventions, time and budgets available for the study and the availability of people. Thus, selecting the impact measurement methodology is important.
Thus, impact studies have to be carefully planned in terms of team composition, timing and methodology. The process must be driven by the CSR committee which can delegate the day-to-day management of the process to an appropriate structure within the company.

9. Report Consolidation and Communication

Reporting and communication closes the loop between intent and achievement and is hence a crucial element of the CSR process. In the context of the Companies Act, 2013 this is also a mandatory requirement as it provides crucial inputs to preparing the directors report.
Project-level reporting forms the base and hence getting it right is critical. Project reports have to be consolidated in programme related reports, aligned with the CSR policy stated by the company as a requirement under the Companies Act, 2013. The report has to conform to the requirements of CSR rules under the Companies Act, 2013 in terms of form and content as non-compliance attracts penalties. This report will also form a key input into the companys SEBI Business Responsibility Report and sustainability report. The CSR committee may choose to go beyond the requirements of the Companies Act, 2013 and issue a stand-alone CSR report.
Clarifications given on issues raised

• Surplus arising out of CSR activities will have to be reinvested into CSR initiatives or corpus, and this will be over and above the 2% figure.
• The company can implement its CSR activities through the following methods:
• Through its own non-profit foundation set- up so as to facilitate this initiative
• Through independently registered non-profit organizations that have a record of at least three years in similar such related activities
• Collaborating or pooling their resources with other companies
• Only CSR activities undertaken in India will be taken into consideration
• Activities meant exclusively for employees and their families will not qualify
• A format for the board report on CSR has been provided which includes amongst others, activity-wise , reasons for spends under 2% of the average net profits of the previous three years and a responsibility statement that the CSR policy, implementation and monitoring process is in compliance with the CSR objectives, in letter and in spirit. This has to be signed by either the CEO, or the MD or a director of the company

Clarity is needed and some thoughts

• There is a debate as to whether any penal consequences will emanate on failure to spend, or an explanation in the directors report. “serious offence says Sachin Pilot.
• There may be reluctance in compliance for loss making companies.
• It is not clear what all constitutes CSR activities as the list specified under Schedule VII of the Act seems is an inclusive list and not exhaustive. It is narrow. But it cannot be so broad for practical reasons.

Wrapping up
Companies Act, 2013 has introduced the concept of CSR in the Act itself and even though the Act advocates it strongly but it has still prescribed a comply or explain approach only. This means as per the norms, the two percent spending on CSR is not mandatory but reporting about it is mandatory. In case, a company is unable to spend the required amount, then it has to give an explanation for the same.
References
Comments and Information

• Handbook on Corporate Social Responsibility in India (pwc.in)
• http://www.safrg.org/uploads/getready4csr.pdf
• http://ec.europa.eu/enterprise/policies/sustainable-business/corporate-social-responsibility/index_ en.html
• http://www.unido.org/en/what-we-do/trade/csr/what-is-csr.html
• http://soulace.in/blog/
• pwc.in
• http://the4thwheel.com/Blog/companiesbill2011/
• http://www.treasury.qld.gov.au/office/knowledge/docs/financial-accountability-handbook/1-3-principles-based-legislation.pdf
• http://www.indiacsr.in/en/
• Research on NGOshttp://www.indiacsr.in/en/ Perception (http://samhita.org/voices-from-the-field-social-sectors-feedback-and-preparedness-on-section-135/)
• Sanjay Kumar Sharma(2013),A 360 degree analysis of Corporate Social Responsibility (CSR) Mandate of the New Companies Act, 2013
• Global Compact
• http://www.unglobalcompact.org/

Author is CS Yogesh Gupta & Can be reached at [email protected] or 7742681270

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