WITH GREAT POWER COMES GREAT RESPONSIBILITY: CSR UNDER COMPANIES ACT, 2013

CSR or Corporate Social Responsibility is a form of corporate self-regulation integrated into a business modal. CSR policy honours the triple bottom line: people, planet, profit. It’s like a corporate conscience, integrating the public interest in corporate decision making by encouraging community growth and development and voluntarily eliminating practices that harm the public, regardless of legality. The idea is that the company makes more profit by operating with perspective though some argue that it distracts from the economic role of business.

Government of India has repeatedly emphasized on its mandate to make growth “Inclusive” and has incorporated the same principle not only in Government schemes and projects but also in policies meant for private sector and others. The Companies Act 2013 is a step forward in that direction, with inclusion of section 135 CSR provision mandating private companies to spend a minimum of 2% of their net profit on developmental activities. The Ministry of Corporate Affairs (MCA) has vide its notification dated 27 February 2014, and in exercise of powers conferred by section 1(3) of the Companies Act, 2013 (‘the Act’), notified 1 April 2014 as the date on which the provisions of section 135 and Schedule VII of the Act shall come into force.

With effect from April 1, 2014, every company, private limited or public limited, which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities. The CSR activities should not be undertaken in the normal course of business and must be with respect to any of the activities mentioned in Schedule VII of the 2013 Act.

The activities that can be undertaken by a company to fulfil its CSR obligations include eradicating hunger, poverty and malnutrition, promoting preventive healthcare, promoting education and promoting gender equality, setting up homes for women, orphans and the senior citizens, measures for reducing inequalities faced by socially and economically backward groups, ensuring environmental sustainability and ecological balance, contribution to the prime minister's national relief fund or any other fund set up by the Central Government  for socio economic development and relief and welfare of  SC, ST, OBCs, minorities and women, contributions or funds provided to technology incubators located within academic institutions approved by the Central Government and rural development projects. The concept of CSR is controversial and experts do not even agree on how to define it, but both critics and enthusiasts do agree that CSR is voluntary by its nature.

The law making CSR compulsory in India is severely criticized. While India has experienced rapid economic growth, the benefits of this growth have not been distributed equitably. Inequality, which was already high, has increased even more.. Trickle-down economics are not working. The proposed law does not go far enough in reducing inequality and helping the disadvantaged. Without a coercive enforcement mechanism, it is unlikely that the law will result in widespread compliance. In other words, “mandatory” CSR will remain largely voluntary.

Many activities that companies undertake are both profitable and good for society. Companies would undertake these activities regardless of the law, since they are profitable activities. Under the new law, they will be able to classify these activities as CSR with no real change in social welfare.

Even to the extent that there would be a real increase in socially beneficial activities, the spending would not go to democratically determined priorities, but rather to whatever the companies prefer to emphasize. It is the government's responsibility to determine high-priority needs of society and target public expenditures in these areas. With the proposed law, the government is abdicating one of its primary functions. It would be preferable for the government to impose a tax on companies and use the additional funds to provide public goods and reduce inequality in a systematic and democratic manner.

The proposal would be an enforcement nightmare, exacerbating an already bad situation where many laws are poorly enforced in India and further undermining respect for law.