Corporate Social Responsibility: Issues & Development

Corporate Social Responsibility: Issues & Development

Amendment to the CSR Rules

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : CSR, SSR

The Corporate Affairs Ministry has amended the rules for Corporate Social Responsibility (CSR) expenditure to allow companies to undertake multi-year projects, and also require that all CSR implementing agencies be registered with the government.

Q.What do you mean by CSR? Discuss the role of CSR activities in social transformation.

What is Corporate Social Responsibility (CSR)?

  • CSR is a type of business self-regulation that aims to contribute to the societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically-oriented practices.
  • It rests on the ideology of “give and take” i.e. to take scarce resources from the environment for running a business, and in turn to contribute towards economic, social, and environmental development.

CSR in India

  • India is the first country in the world to make corporate social responsibility (CSR) mandatory, following an amendment to the Companies Act, 2013 in April 2014.
  • Businesses can invest their profits in areas such as education, poverty, gender equality, and hunger as part of any CSR compliance.

All companies with a net worth of Rs 500 crore or more, a turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more, are required to spend 2 per cent of their average profits of the previous three years on CSR activities every year.

What are the new amendments?

  • The amended CSR rules allow companies to set off CSR expenditure above the required 2 percent expenditure in any fiscal year against required expenditure for up to three financial years.
  • There lies an ambiguity whether the rule would apply for expenditure undertaken prior to the amendment.
  • The government is thus allowing corporates that have in good faith incurred excess CSR expenditure in the past to set it off against future CSR expenditure requirements.

Other key changes

  • The amended rules require that any corporation with a CSR obligation of Rs 10 crore or more for the three preceding financial years would be required to hire an independent agency to conduct an impact assessment of their entire project with outlays of Rs 1 crore or more.
  • Companies will be allowed to count 5 percent of the CSR expenditure for the year up to Rs 50 lakh on impact assessment towards CSR expenditure.

What are the changes required for implementing agencies?

  • The new amendment restricts companies from authorizing either a Section 8 company or a registered public charitable trust to conduct CSR projects on their behalf.
  • A Section 8 company is a company registered with the purpose of promoting charitable causes, applies profits to promoting its objectives, and is prohibited from distributing dividends to shareholders.
  • Further, all such entities will have to be registered with the government by April 1.

Impact of the move

  • The change would impact CSR programs of a number of large Indian companies that conduct projects through private trusts.
  • It would mean such private trusts would either have to be converted to registered public trusts or stop acting as CSR implementing agencies.

Corporate Social Responsibility: Issues & Development

Covid-19 donations to CM Relief Fund won’t qualify as CSR

Note4Students

From UPSC perspective, the following things are important :

Prelims level : CSR and its regulation

Mains level : CSR/SSR activities and their impacts on social transformation

The corporate affairs ministry has clarified that COVID-19 donations to CM Relief Fund won’t qualify as CSR contributions.

Contributions considered under CSR

  • According to the ministry, contributions made to the State Disaster Management Authority to combat COVID-19 would qualify as CSR expenditure.
  • The contributions by companies to PM-CARES Fund to tackle the pandemic would be considered as CSR.
  • Ex-gratia payments made to temporary, casual and daily wage workers by companies will be considered as CSR expenditure under the company’s law, provided that such payments are over and above disbursement of wages.
  • The contribution towards ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ would not be considered as spending towards CSR work.

Note: Please remember or make note of the various contributions complying for CSR.


Back2Basics: CSR in India

  • India is the first country in the world to make corporate social responsibility (CSR) mandatory, following an amendment to the Companies Act, 2013 in April 2014.
  • Prior to that, the CSR clause was voluntary for companies, though it was mandatory to disclose their CSR spending to shareholders.
  • Businesses can invest their profits in areas such as education, poverty, gender equality, and hunger as part of any CSR compliance.
  • Under the Companies Act, 2013, certain classes of profitable entities are required to spent at least 2 per cent of their three-year average annual net profit towards CSR activities.
  • Under Section 135 of the Companies Act, 2013, every company having net worth of at least ₹500 crore, turnover of ₹1,000 crore or more, or a minimum net profit of ₹5 crore during the immediately preceding financial year, has to make CSR expenditure.

Corporate Social Responsibility: Issues & Development

[op-ed snap] Reset the boardroom

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Corporate Governance : Tata Boards decision

Context

Three years after being abruptly unseated, the National Company Law Appellate Tribunal (NCLAT) ruled that the sacking of Cyrus Mistry in 2016 and the appointment of N Chandrasekaran was illegal.

Impact

  • It could have a destabilizing impact on not just the companies in the over $100 billion diversified group but also on markets and investors.

Decision

  • The manner in which Mistry was suddenly removed, the absence of any discussion at the board meeting and his subsequent removal as a director in group companies is prejudicial and oppressive action.
  • It has ordered that Mistry be reinstated as director of four Tata companies.
  • It has set aside the decision to convert the company from a public to a private firm. 
  • The tribunal’s verdict will become operational only after four weeks with a window to appeal to the Supreme Court.
  • Irrespective of the final verdict, there are some larger issues that need to be addressed by corporate India.

Corporate Governance

  • Issues related to corporate democracy or democratic behavior in listed corporate firms, either in promoter-driven companies or professionally managed companies need to be answered.
  • Appropriate governance structures including independent boards remain in question.
  • It is important in a public corporation to make a clear distinction between decisiveness and arbitrariness. 
  • Corporate governance in any country may be shaped by several factors, including the cultural backdrop, it should also be about ethical values, integrity standards and following the spirit of the law. 
  • At present, many Indian companies are struggling to manage their balance sheets. This ruling poses a deepening of the distrust of corporates by many investors hurt already by events in many firms over the past few years. 
  • That could be a dampener for long-term investment in India and for companies and entrepreneurs looking to bet on projects here. 

Conclusion

The Supreme Court should ensure an early closure to this corporate feud, and direct behavioral change in India’s boardrooms over the next few years.

Corporate Social Responsibility: Issues & Development

Scientific Social Responsibility (SSR) Policy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : SSR

Mains level : Need for SSR Policy

  • A draft of the new Scientific Social Responsibility (SSR) Policy has been made available by the Department of Science and Technology (DST) on its website for public comments.
  • India is going to be possibly the first country in the world to implement a SSR Policy on the lines of CSR.

Defining SSR

  • The draft defines SSR as “the ethical obligation of knowledge workers in all fields of science and technology to voluntarily contribute their knowledge and resources to the widest spectrum of stakeholders in society, in a spirit of service and conscious reciprocity”.

SSR Policy

  • The policy aims to harness latent potential of the scientific community for strengthening linkages between science and society, and for making S&T ecosystem vibrant.
  • This is in a move to encourage S&T institutions and individual scientists in the country to proactively engage in science outreach activities to connect science with the society.
  • It is aimed at developing a mechanism for ensuring access to scientific knowledge, transferring benefits of science to meet societal needs, promoting collaborations to identify problems and develop solutions.

Why such move?

  • When most research is being done by using taxpayers’ money, the scientific establishment has an ethical obligation of “giving back” to the society.
  • SSR is not only about scientific impact upon society but also about the social impact upon science.
  • SSR would therefore strengthen the knowledge ecosystem and bring efficiencies in harnessing science for the benefit of society,” says the draft policy.

Premise for the Policy

  • This draft policy builds upon traditions of earlier policies (Scientific Policy Resolution 1958, Technology Policy Statement 1983, S&T Policy 2003 and Sci-Tech and Innovation Policy 2013).
  • The new policy is proposing more pragmatic provisions to make institutions and individual scientists socially responsible.

Key propositions

  • Under the proposed policy, individual scientists or knowledge workers will be required to devote at least 10 person-days of SSR per year for exchanging scientific knowledge to society.
  • It also recognizes the need to provide incentives for outreach activities with necessary budgetary support.
  • It has also been proposed to give credit to knowledge workers/scientists for individual SSR activities in their annual performance appraisal and evaluation.
  • No institution would be allowed to outsource or sub-contract their SSR activities and projects.

Implementation

  • For implementation of the policy, a national portal will be developed up to capture societal needs requiring scientific interventions and as a platform for implementers and for reporting SSR activities.
  • A central agency will be established at DST to implement the SSR.
  • Other ministries would also be encouraged to make their own plans to implement SSR as per their mandate.

Corporate Social Responsibility: Issues & Development

[op-ed snap] Making CSR work: On Companies Act amendments

CONTEXT

Amendments to the Companies Act have made non-compliance with CSR norms a jailable offence for key officers of the company, apart from hefty fines up to ₹25 lakh on the company and ₹5 lakh on the officer in default.

Evolution of CSR

  1. It was first encouraged as a voluntary contribution by business
  2. 6 years ago it evolved into a co-option of the corporate sector to promote inclusiveness in society 
  3. Now it has become an imposition

Issues with amendments

  1. The committee headed by the Corporate Affairs Secretary has proposed that non-compliance be decriminalised and made a civil offence. CSR is a means to partner corporates for social development and such penal provisions are not in harmony with the spirit of CSR.
  2. CSR should not be treated as another tax on businesses.
  3. The government should not micromanage and tie-down businesses with rules and regulations that impose a heavy compliance burden.

Problems with CSR

  1. Filings with the Ministry of Corporate Affairs show that in 2017-18, only a little over half of those liable to spend on CSR have filed reports.
  2. The average CSR spend by private companies was just ₹95 lakh compared to ₹9.40 crore for public sector units.

Way ahead

  1. Compliance will improve as corporates imbibe CSR culture fully.
  2. The committee’s suggestion to offer a tax break for expenses on CSR may incentivise companies to spend.
  3. It has also recommended that unspent CSR funds be transferred to an escrow account within 30 days of the end of the financial year.

Conclusion

CSR is not the main business of a company they should rightly be focusing their energies on the business rather than on social spending.

Corporate Social Responsibility: Issues & Development

[op-ed snap] A case against punishing non-compliance of CSR guidelines

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Understand CSR regulations and Companies Act, 2013

Mains level : CSR

Context

To mandate that private firms donate a part of their revenues to charitable causes is to profoundly misunderstand both the social responsibility of corporations and the meaning of the word donation.

Arguments against punishing non-compliance

  1. The fundamental social responsibility of corporates is to generate wealth for shareholders in a law-abiding, ethical and sustainable way. 
  2. They generate surpluses for society, provide consumers with goods and services that they need, create employment, purpose and dignity among workers, and strengthen the nation. 
  3. A profitable, well-run corporation does more for India and its people than any charity could possibly do.
  4. Government, through taxation, has the duty of providing public goods like education, public health, safety, and environmental protection. The government should not indulge in wasteful expenditures through loss-making airlines, wrong subsidies, etc.,
  5. Philanthropy is a private matter—it is up to the individual to decide whether, how much and who to give to. The government can encourage this—through tax deductions, public acclamation, and moral suasion, but should not intervene.

Why CSR

  1. Allocate funds into activities that a government of a low-income democracy cannot.
  2. Faced with immense developmental challenges, our governments cannot easily justify allocations for world-class art galleries, museums, theatres, sports facilities, research institutions and so on.
  3. Individual philanthropy and CSR can support causes that democratic politics won’t allow the government to.

Problems with current CSR spending 

  1. The bulk of CSR spending is going into education, health, rural areas, environment and so on. Already the government is spending hundreds of lakhs of crores for the same purposes. 
  2. Corporate executives are unable to decide on the best social use of CSR funds because they are not equipped to do so.

Way ahead

  1. The right role and the right balance between corporate profits, government taxes, and individual charity promote social welfare.
  2. Do away with mandatory CSR, lower corporate taxes, and introduce tax deductions for certain activities that the government wishes to promote.

Corporate Social Responsibility: Issues & Development

The Companies (Amendment) Bill, 2019

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Read the attached story

  • Lok Sabha has passed The Companies (Amendment) Bill, 2019.

Highlights of the Amendment bill

Issue of dematerialized shares

  • Under the 2013 Act, certain classes of public companies can issue shares only in demat form.
  • The Bill states this may be prescribed for other classes of unlisted companies as well.

Re-categorization of Offences

  • Under the 2013 Act, there are 81 compoundable offences that carry punishments of a fine and/or prison terms. These offences are heard by courts.
  • The Bill makes 16 of these offences civil defaults, where government-appointed adjudicating officers may levy penalties.
  • Some of these offences are the issuance of shares at a discount, and the failure to file annual returns. The Bill also amends penalties for some other offences.

Corporate Social Responsibility

  • As of now, companies that are required to budget for CSR must disclose in their annual reports the reasons why they were unable to fully spend these funds.
  • Now, any unspent annual CSR funds must be transferred to one of the funds under Schedule 7 of the Act (for example, the Prime Minister’s Relief Fund) within six months of the financial year.

Debarring auditors

  • Under the Act, the National Financial Reporting Authority can debar a member or firm from practicing as a Chartered Accountant for six months to 10 years in case of proven misconduct.
  • The Bill amends this punishment to provide for debarment from appointment as an auditor or internal auditor of a company, or performing a company’s valuation, for the same period.

Registration of charges

  • Under the Act, companies must register charges (mortgages, etc.) on their property within 30 days of creation of the charge, extendable up to 300 days with permission from the Registrar of Companies.
  • The Bill changes the deadline to 60 days (extendable by 60 days).

Change in approving authority

  • Under the Act, change in period of financial year for a company associated with a foreign company, has to be approved by the National Company Law Tribunal (NCLT).
  • Any alteration in the incorporation document of a public company which has the effect of converting it to a private company, too, has to be approved by the NCLT.
  • Under the Bill, these powers have been transferred to the central government.

Compounding

  • Under the 2013 Act, a regional director can compound (settle) offences with a penalty of up to Rs 5 lakh.
  • This ceiling has been raised to Rs 25 lakh in the amendment.

Bar on holding office

  • Under the existing Act, the central government or certain shareholders can apply to the NCLT for relief against mismanagement of the affairs of the company.
  • The Bill states that in such a complaint, the government may also make a case against an officer of the company on the ground that he is not fit to hold office in the company, for reasons such as fraud or negligence.
  • If the NCLT passes an order against the officer, he will not be eligible to hold office in any company for five years.

Corporate Social Responsibility: Issues & Development

[op-ed snap] Boardroom rot

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : There is a need of overhauling corporate governance in India.

CONTEXT

Recent incidents of corporate misconduct raise questions about governance standards in India’s premium companies.

Background

  • Many of India’s listed firms have a ready template on how they conform to the highest standards of corporate governance.
  • That is increasingly becoming unconvincing as the corporate misconduct in some of the country’s top companies show and reflected lately in a series of ongoing stories on ICICI Bank on a “culture” of doing a deal “at any cost”, mistakes “made knowingly” and “suppressing” facts during the tenure of Chanda Kochhar as the bank’s managing director and CEO.

1.The past few months and 2018 were marked by governance failures or shortcomings in some of India’s top listed private banks, leading to the exit of CEOs in Axis Bank and ICICI, of course, and in firms such as Ranbaxy and IL&FS, besides the National Stock Exchange.

2. Professional Managers at the front of misconduct – Unlike earlier such episodes, a common thread, and a worrying one at that, in this new wave of misconduct is that almost all of them feature professional managers, and boards that allowed themselves to be overrun by powerful managements.

3. Opposed to earlier scams –

  • That’s in sharp contrast to the scenario over a decade and a half ago, when a string of corporate scams, including the accounting fudge at the erstwhile software services firm, Satyam, led to a shift in favour of professionally managed companies with attractive salaries and monetary incentives and a more diversified shareholding base.
  • This model, it was argued then, could better align all interests which could lead to maximisation of shareholder value.
  • Sadly, it is that belief which is now open to question as also the larger issue of ethical conduct and integrity underlying corporate governance in the country, both public and corporate.

Comparison with other countries

It is true that India is not an outlier when it comes to corporate scandals, looking around at what keeps unfolding in the US, Japan and some other countries.

1.Regulatory oversight is seen as deterrents – But unlike in India, huge fines or penalties, class-action suits, shareholder activism and regulatory oversight are often seen as deterrents in those countries.

2. Proactiveness on part of regulators – What’s encouraging, however, is the growing recourse by India’s regulators to claw back bonuses or stock options of executives found guilty of wrongdoing and easing them out.

Way forward

1. Tighter supervision and regulation –

  • That should be accompanied by tighter supervision and regulation and far greater oversight by boards of companies and drawing clear lines on their accountability.
  • The fact that just a handful of companies command a governance premium is a poor reflection of standards.

2. Improving Governance – India needs a huge leg-up on the governance front, not just for companies to raise capital, soak savings and boost the real economy, but also to dispel the unease about growing inequality and ensure that capitalism doesn’t get a bad name.

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