Authors: Snigdha Shandilya and Pritish Kumar Pattnaik
Designation: 5th year, KIIT School of Law, Bhubaneswar
Contact : +91-79784*****; 94393*****
Recently, there have been various opinions and views shared concerning the company's Corporate Social Responsibility activity, which has emerged as a vital part of the company's responsibility towards society. Therefore, to analyse CSR's impact upon the brand value, financial performance, sales revenue, and advertising expenses of a company. There has been a variation created in the provisions of the Companies Act, 2013, under section 135, which states that a company with a certain profit threshold shall invest 2% on Corporate Social Responsibility. It also requires a company above the threshold shall incorporate a Corporate Social Responsibility (CSR) Committee, which shall be responsible for the formulation of CSR policies in the firm.
When the new companies' Act was enacted and came into force during the 2015 fiscal year, there had been many discussions and debates before the final enactment. In late 2009, the first discussion was made on the company's voluntary encouragement to undertake CSR of a company. Later, it mandated complying with the CSR policy above the threshold on 6th August 2010.
Initial Experience in Implementing CSR Law in India
Earlier, the CSR was considered a voluntary activity formulated by the company with the stakeholders' interest. With time, CSR has been acquiring a legal status through the formation of CSR obligations. Many countries have started CSR in the fundamental business law to satisfy the obligations towards the non- shareholders' part.
During the legislative process of enacting the new companies Act, an intense debate was started as to whether CSR's expenditure must be made voluntarily or mandatory. Still, due to a compromise, the legislation adopts a "comply-or-explain" approach. Where the companies have been mandated to spend a certain amount of profit out of threshold or else to explain the reason for non-compliance, with this approach and the implementation of the CSR policy in India, the experience shows that there is more utility than limitation. Meanwhile, there are many empirical studies and reports relating to the CSR activity before and after the enactment of the Companies Act, 2013, which indicates that the Indian companies' expenditure for the CSR activity has gradually increased over the years after the implementation of the CSR policy. Therefore, it suggests that the provision has a positive impact in motivating firms to have CSR.
On the other hand, other companies have not complied with the CSR approach. Most of the companies couldn't disclose or explain the reason behind the non-compliance of CSR provision under section 135 of the Companies Act, 2013. The common sense for the non-compliance of CSR suggested that the companies have failed to operate in the manner of the comply-or-explain rule as prescribed under the legislation.
There are other factors for the failure of the approach i.e. elaboration in disclosure norms and the type of disclosure submitted by the company for the non-compliance—moreover, lack of vigorous enforcement through third-party verification, which resulted in it with the unlikely CSR spending requirement.
While the policy has created a cause for spreading welfare to society before the enactment, it has failed to achieve the legislation's desirable goal.
Why the CSR law is not a success
According to the report by the prime database, Indian companies spend approx. Rs. 163 Cr. on CSR activities during 2015-16, which exceeds the amount required by the law and Rs. 703 Cr. more than the previous financial year. Therefore the media has set a positive report and declared it as a success in the country.
On the other hand, it creates problems relating to the companies' over-expenditure of different CSR activities. There is no clarity concerning the CSR increase due to the lack of information on CSR spending before the law. Although some evidence of a company that was spending less than 2% having to increase the companies subsequently paying more than 2%, they have reduced their expenditure on CSR activities, leading to profit maximization, goodwill, and good public relation. There has been a subsequent growth in social activities, the spending has not been determined in all the social priorities.
There has been an immense rise in socially beneficial activities. The companies are more emphasizing on their preference rather than spending by democratically determined priorities. In India, approx. 50% of children are suffering from malnutrition due to extreme poverty, and the above reflects the democratic will of People in India for the allocation of resources. The government is overburdened with the ideology of taking care of society's high-priority needs while targeting these areas with public expenditure. The CSR laws allow the government to abduct such primary functions.
CSR law has been categorized as a controversial idea under the opinion of many academics and officials. Also, Indian law has not put much clarity on the definition, purpose, and expenditure of the same. Only a few listed activities are prescribed under the law, including matters related to hunger& poverty, growth of education, and social business projects, which proves to be vague for a legal definition. Surprisingly, the law has not even included or defined the purpose of enforcement or penalties in the case of non-compliance.
The CSR law proves to be inherently contradictory as this inspirational exercise makes it hard to legislate aspirations. The rule here only sets a minimum standard, but there is no impetus for positive actions. An excellent example of this could be companies spending on building good schools, but this fact still does not fulfill the legal requirement by just spending money on it.
India always has issues with inequalities, which has risen even more in the past few years. The CSR law does even stand out, reducing it, or helping the sufferers.
The real effectiveness or compliance of law won't be possible without coercive enforcement of such a mechanism. It will undoubtedly remain voluntary while giving progress in illusion. India makes under the first country mandate companies on spending for CSR, but the logic of other countries remains crystal clear.