Sustainable Business Practices as regulated by SEBI in India

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The legislation around sustainable responsible practices by businesses in India is limited to guidance like the National Voluntary Guidelines, which the Securities and Exchange Board of India (SEBI) had asked the top 100 firms to adopt a few years back.

SEBI as per its circular dated August 13, 2012 mandated the inclusion of a “Business Responsibility Report” (BRR) as part of company’s Annual Report for top 100 listed entities based on market capitalisation at the BSE Limited (BSE) and the National Stock Exchange of India Limited (NSE) as on March 31, 2012. The reporting framework is based on the ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs)’ released by the Ministry of Corporate Affairs, Government of India, in July 2011 which contains 9 Principles and Core Elements for each of the 9 Principles.

The Key Principles and their core elements are enumerated as follows:

  1. Principle 1- Ethics, Transparency & Accountability. Businesses should conduct and govern themselves with Ethics, Transparency & Accountability.
  • Businesses should develop governance structures, procedures and practices that ensure ethical conduct at all levels; and promote the adoption of this principle across its value chain.
  • Businesses should communicate transparently and assure access to information about their decisions that impact relevant stakeholders.
  • Businesses should not engage in practices that are abusive, corrupt, or anti-competition.
  • Businesses should truthfully discharge their responsibility on financial and other mandatory disclosures.
  • Businesses should report on the status of their adoption of these Guidelines as suggested in the reporting framework in this document.
  • Businesses should avoid complicity with the actions of any third party that violates any of the principles contained in these Guidelines.
  1. Principle 2- Product Life Cycle Sustainability. Businesses should provide goods and services that are safe and contribute to sustainability throughout their life cycle.
  • Businesses should assure safety and optimal resource use over the life-cycle of the product – from design to disposal – and ensure that everyone connected with it- designers, producers, value chain members, customers and recyclers are aware of their responsibilities.
  • Businesses should raise the consumer’s awareness of their rights through education, product labelling, appropriate and helpful marketing communication, full details of contents and composition and promotion of safe usage and disposal of their products and services.
  • In designing the product, businesses should ensure that the manufacturing processes and technologies required to produce it are resource efficient and sustainable.
  • Businesses should regularly review and improve upon the process of new technology development, deployment and commercialization, incorporating social, ethical, and environmental considerations.
  • Businesses should recognize and respect the rights of people who may be owners of traditional knowledge, and other forms of intellectual property.
  • Businesses should recognize that over-consumption results in unsustainable exploitation of our planet’s resources, and should therefore promote sustainable consumption, including recycling of resources.
  1. Principle 3- Employee Well Being. Businesses should promote the well being of all employees.
  • Businesses should respect the right to freedom of association, participation, collective bargaining, and provide access to appropriate grievance Redressal mechanisms.
  • Businesses should provide and maintain equal opportunities at the time of recruitment as well as during the course of employment irrespective of caste, creed, gender, race, religion, disability or sexual orientation.
  • Businesses should not use child labour, forced labour or any form of involuntary labour, paid or unpaid.
  • Businesses should take cognizance of the work-life balance of its employees, especially that of women.
  • Businesses should provide facilities for the well-being of its employees including those with special needs. They should ensure timely payment of fair living wages to meet basic needs and economic security of the employees. Businesses should provide a workplace environment that is safe, hygienic humane, and which upholds the dignity of the employees. Business should communicate this provision to their employees and train them on a regular basis.
  • Businesses should ensure continuous skill and competence upgrading of all employees by providing access to necessary learning opportunities, on an equal and non-discriminatory basis. They should promote employee morale and career development through enlightened human resource interventions.
  • Businesses should create systems and practices to ensure a harassment free workplace where employees feel safe and secure in discharging their responsibilities.
  1. Principle 4- Stakeholder Engagement. Businesses should respect the interests of, and be responsive towards all stakeholders, especially those who are disadvantaged, vulnerable and marginalized.
  • Businesses should systematically identify their stakeholders, understand their concerns, define purpose and scope of engagement, and commit to engaging with them.
  • Businesses should acknowledge, assume responsibility and be transparent about the impact of their policies, decisions, product & services and associated operations on the stakeholders.
  • Businesses should give special attention to stakeholders in areas that are underdeveloped.
  • Businesses should resolve differences with stakeholders in a just, fair and equitable manner
  1. Principle 5- Human Rights. Business should respect and promote human rights.
  • Businesses should understand the human rights content of the Constitution of India, national laws and policies and the content of International Bill of Human Rights. Businesses should appreciate that human rights are inherent, universal, indivisible and interdependent in nature.
  • Businesses should integrate respect for human rights in management systems, in particular through assessing and managing human rights impacts of operations, and ensuring all individuals impacted by the business have access to grievance mechanisms.
  • Businesses should recognize and respect the human rights of all relevant stakeholders and groups within and beyond the workplace, including that of communities, consumers and vulnerable and marginalized groups.
  • Businesses should, within their sphere of influence, promote the awareness and realization of human rights across their value chain.
  • Businesses should not be complicit with human rights abuses by a third party.
  1. Principle 6- Environment Protection. Businesses should respect, protect, and make efforts to restore the environment.
  • Businesses should utilize natural and man-made resources in an optimal and responsible manner and ensure the sustainability of resources by reducing, reusing, recycling and managing waste.
  • Businesses should take measures to check and prevent pollution. They should assess the environmental damage and bear the cost of pollution abatement with due regard to public interest.
  • Businesses should ensure that benefits arising out of access and commercialization of biological and other natural resources and associated traditional knowledge are shared equitably.
  • Businesses should continuously seek to improve their environmental performance by adopting cleaner production methods, promoting use of energy efficient and environment friendly technologies and use of renewable energy.
  • Businesses should develop Environment Management Systems (EMS) and contingency plans and processes that help them in preventing, mitigating and controlling environmental damages and disasters, which may be caused due to their operations or that of a member of its value chain.
  • Businesses should report their environmental performance, including the assessment of potential environmental risks associated with their operations, to the stakeholders in a fair and transparent manner.
  • Businesses should proactively persuade and support its value chain to adopt this principle.
  1. Principle 7- Policy Advocacy. Businesses, when engaged in influencing public and regulatory policy, should do so in a responsible manner.
  • Businesses, while pursuing policy advocacy, must ensure that their advocacy positions are consistent with the Principles and Core Elements contained in these Guidelines.
  • To the extent possible, businesses should utilize the trade and industry chambers and associations and other such collective platforms to undertake such policy advocacy.
  1. Principle 8- Inclusive Growth and Equitable Development. Businesses should support inclusive growth and equitable development.
  • Businesses should understand their impact on social and economic development, and respond through appropriate action to minimize the negative impacts.
  • Businesses should innovate and invest in products, technologies and processes that promote the well-being of society.
  • Businesses should make efforts to complement and support the development priorities at local and national levels, and assure appropriate resettlement and rehabilitation of communities who have been displaced owing to their business operations.
  • Businesses operating in regions that are underdeveloped should be especially sensitive to local concerns.
  1. Principle 9 – Customer Value. Businesses should engage with and provide value to their customers and consumers in a responsible manner.
  • Businesses, while serving the needs of their customers, should take into account the overall well-being of the customers and that of society.
  • Businesses should ensure that they do not restrict the freedom of choice and free competition in any manner while designing, promoting and selling their products.
  • Businesses should disclose all information truthfully and factually, through labelling and other means, including the risks to the individual, to society and to the planet from the use of the products, so that the customers can exercise their freedom to consume in a responsible manner. Where required, businesses should also educate their customers on the safe and responsible usage of their products and services.
  • Businesses should promote and advertise their products in ways that do not mislead or confuse the consumers or violate any of the principles in these Guidelines.
  • Businesses should exercise due care and caution while providing goods and services that result in over exploitation of natural resources or lead to excessive conspicuous consumption.
  • Businesses should provide adequate grievance handling mechanisms to address customer concerns and feedback.

These guidelines are a refinement of the CSR Voluntary Guidelines, 2009 and also provide for a structured format for the Business Responsibility Reports requiring certain specific disclosures, demonstrating the steps taken by companies to implement the said principles. Listed companies beyond the top 100 have also been encouraged by SEBI to voluntarily disclose information on their ESG performance in the BRR format. Infact, as a part of its corporate governance efforts, SEBI is now looking at expanding from the top 100 to top 500 listed companies the BRR requirement.

APPLICABILITY OF BRR

The applicability of the Business Responsibility Report to different categories of companies so far is as under:

CATEGORIES

APPLICABILITY

Business entities already preparing responsibility and sustainability reports based on internationally accepted reporting frameworks.

These entities may not prepare a separate report for the purpose of these guidelines but furnish the same to their stakeholders along with the details of the framework under which their BR report has been prepared and a mapping of the nine principles contained in these guidelines to the disclosures made in their BR reports.
Business entities that have chosen to adopt these guidelines completely or in part, but are not yet fully capacitated to prepare a comprehensive BR report. These entities may furnish a simple communication to their stakeholders indicating their commitment to adoption on these guidelines in full or in part, and basic details of the activities undertaken in pursuance to these guidelines. The communication may be in a free format and should be signed by the owner/Managing Director of the CEO of the entity.

Business entities that would like to prepare comprehensive reports after adopting these guidelines.

Disclosures in the BR report have been suggested based on certain parameters to facilitate these entities to demonstrate their adoption of these guidelines in letter and spirit.

SUGGESTED FRAMEWORK FOR BRR

A framework for Business Responsibility Reporting in the form of standard disclosure template has been put out by SEBI (click here) based on which companies which effectively contribute to the economic and social betterment of communities and the environment also report their performance in these areas. Apart from this, the CSR Report to be submitted by Indian companies satisfying certain criteria as a part of their annual report under Section 135 of Companies Act, 2013 and the CSR Rules, 2014 will also form a key input into the company’s Business Responsibility Report and Sustainability Report.

REFERENCE:

  1. SEBI, Business Responsibility Reports, Circular CIR/CFD/DIL/8/2012 at http://www.nseindia.com/content/equities/SEBI_Circ_13082012_3.pdf
  2. Ministry of Corporate Affairs, Government of India, National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business at http://www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011_12jul2011.pdf
  3. PTI, SEBI may soon make biz responsibility reports must for top 500 firms at http://www.firstpost.com/business/sebi-may-soon-make-biz-responsibility-reports-must-for-top-500-firms-2486100.html
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A Summary of the High Level Committee Recommendations for the Effective Implementation of the CSR Mandate

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In line with the national endeavor to include those sections of the society in the growth process, which had hitherto remained excluded from the mainstream of development, CSR was conceived as an instrument for integrating social, environmental and human development concerns in the entire value chain of corporate business in India.  The principle of “inclusive and equitable growth”, focused on encouraging business action on national development priorities including community development initiatives and strategic CSR based on the shared value concept, was subsequently translated into a mandatory provision of CSR in Section 135 of the Companies Act, 2013.  The CSR rules prescribe corporates to undertake CSR activities beyond their normal course of business or to say, adopt the philanthropic level of Carroll’s Pyramid of Corporate Social Responsibility.  As updated earlier,  owing to the genuine concerns about this new legislation , for which there is no parallel elsewhere in the world, a high level committee was appointed by the Government in February to suggest measures for the improved monitoring of the implementation of the CSR policies in India.  After 6 months of discourse, the panel has finally come out with its recommendations (http://www.mca.gov.in/Ministry/pdf/HLC_report_05102015.pdf) along with some issues that require a change in the law of CSR to remove the difficulties, ambiguities, and complexities.

The key points from the report are summarized as follows:

  1. All information relating to the implementation of CSR by companies including amount spent, activities undertaken, geographical areas covered etc., as reported by the Companies in their annual disclosures should be compiled by the MCA & placed in the public domain to facilitate research and provide useful feedback for policy formulation. This would take care of stakeholders’ queries including those pertaining to RTI applications, Parliamentary Questions related to macro level analysis or unit level company wise information on CSR.
  2. Action should not be taken against companies on the ground of non-compliance with CSR provisions of the Act at least for the initial two to three years- which according to the panel is going to be ‘a learning period’ for all stakeholders. Companies need to be provided some grace period for capacity building in the field. Explanation, duly approved by the Board of the Company for shortfall, if any, in the CSR expenditure vis-à-vis the mandatory 2% of the average net profits, however, has to be placed in the public domain. The existing provisions of the law do not empower the Government to go beyond this.
  3. The existing provisions of the Act/Rules like mandatory disclosures, accountability of the CSR Committee and the Board, provision for audit of the accounts of the company, etc provide sufficient safeguard against non-compliance. The Board of a company is both responsible and accountable for its CSR policy. An external monitoring agency is neither required nor desirable, as the companies are internally capable to undertake the exercise.
  4. CSR Policies and CSR expenditure of CPSUs are subject to the audit of the Comptroller & Auditor General (C&AG) of India. The existing mechanism of CAG audit as well as study by COPU seems to be sufficient to monitor CSR implementation by CPSUs. Further, the practice of signing MoU between CPSUs and the administrative Ministry is expected to put in place some monitoring mechanism, if required.
  5. All public goods as far as possible should be incorporated in the list of permissible CSR activities under Schedule VII and an omnibus clause should be provided to cover those that are left out. The inclusion of such a clause would take care of development concerns, needs and priorities that cannot be anticipated. CSR activities must be for larger public good and for any activity that serves public purpose and/or promotes the well-being of the people, with special attention to the needs of underprivileged.
  6. The ceiling of administrative overhead expenditure of companies under CSR should be increased from the present provision of 5% to 10% of the total CSR expenditure. This would require appropriate amendments to the relevant provisions of the Act/Rules. These costs should, however, not include expenditure incurred on capacity building of the implementation agencies.
  7. Corporate entities can be categorized into two groups- i)those with less than Rs. 5 crore spend per annum on CSR; and ii) others with CSR budget of Rs. 5 crore or more. While companies with CSR budget of Rs. 5 crore or more could be mandated to follow all the procedures/conditions laid down in the Act and Rules, those with less than Rs. 5 crore of CSR budget, need not take CSR programs in project/programme mode. Smaller companies should be allowed to take up any programme/activity covered under the omnibus provision of “Public Provision”. They can also pool funds with similar companies with CSR spend of less than Rs. 5 crores. This suggested threshold of Rs. 5 crore (in CSR expenditure) should be adjusted for inflation, using the GDP deflator or Wholesale Price Index (WPI) every three years, and this figure should be rounded off to the nearest crore.
  8. There should be uniformity in tax treatment for CSR expenditures on all eligible activities, even the Prime Minister’s National Relief Fund (PMNRF). Otherwise, there can be a temptation on the part of companies to direct at least a part and possibly a substantial part of their CSR budget to activities like the PMNRF to avail benefits, leading to distorted allocation of CSR funds across development sectors. The intent of the Act is to inculcate a sense of involvement and responsibility in the corporate sector for social development by utilizing not just their funds, but also their managerial skills. A Board’s decision should be guided by compelling community social needs instead of tax saving implications.
  9. Outsourcing of CSR services to Implementing Agencies attracts payment of Service Tax, whereas if the company enters into a MoU with the Implementing Agency, the contribution made is treated as grant, and, therefore, not liable for payment of Service Tax. This is an anomaly that needs to be corrected.
  10. “Carry forward” provision for unspent balances of CSR funds as applicable to government companies should be extended to private companies. However, there should be a sunset clause of 5 years, after which the unspent balance should be transferred to one of the funds listed in Schedule VII.
  11. Section 8 companies should be outside the purview of the CSR provisions of Companies Act, 2013. Further, the applicability of Section 135 to foreign companies should be reassessed. However, CSR provisions should be made applicable to profit making listed entities that are not incorporated under the Company Law on mutatis mutandis basis- either through amendments in their respective Statutes or as a mandatory condition under the listing agreement of SEBI.
  12. The definition of “Net Profit” under Section 135(1) and Section 135(5) requires clarification as does the scope of the expression “any financial year” in Section 135(1) by the Ministry of Corporate Affairs.
  13. It is not feasible to monetize and count employees contribution to CSR activities towards CSR spend of the company. It could become subjective, if not arbitrary in allocating cost of the employees’ time spent on CSR activities of the company.
  14. Companies have the requisite capacity and expertise to carry out due diligence of potential implementation agencies. Therefore, Government cannot and should not maintain any data bank of implementing agencies for undertaking CSR activities of companies. Undertaking due diligence of these agencies should squarely remain the responsibility of the Boards and their CSR committees.
  15. The Government should have no role to play in engaging external experts for monitoring the quality and efficacy of CSR expenditure of companies. The Boards/CSR Committees are sufficiently empowered to engage any external firm, if they so require.
  16. The opportunity to use the substantial funds generated to benefit the deserving poor and under-privileged sections of the society should not be missed. CSR resources should be ring-fenced by the CSR committees/Boards. All programs/projects should be approved by the Boards on the recommendations of their CSR Committees. Any changes to the programs/project should also be undertaken only with the approval of the Committee/Board. The provisions of the law/rules should be strengthened to ensure this.
  17. Annual awards should be set up- one each for the two categories of companies, large and small, to incentivize the corporates to implement CSR in right earnest.

The overall intent of the recommendations proposed by the high level committee as evident is to encourage companies to undertake CSR activities in the right spirit. The measures suggested pave way to an efficient corporate system/mechanism for ensuring accountability & effectiveness, provided they get adapted into the law. An ideal assessment of the qualitative and quantitative aspects of the CSR implementation, however, will only be possible once sufficient data is gathered in the next two or three years.

The Emergence of a New Area of Legal Practice: Corporate Social Responsibility

Picture2The great debate for lawyers in the coming century is …whether the ascendancy of economics, competition and technology, unrestrained, will snuff out what is left of the nobility of the legal calling and the idealism of those who are attracted to its service.’-The Hon Justice Michael Kirby AC CMG, Legal Professional Ethics in Times of Change, address to the St James Ethics Centre Forum on Ethical Issues, Sydney, 23 July 1996

Most lawyers no doubt welcome the trend [towards extension of formal legal liabilities with new forms of ‘moral liability’], but it is worth asking whether the net result will be improved social and environmental performance on the part of targeted industries and companies, or whether it will be little more than a feeding frenzy for the legal profession – forcing companies back into compliance mode and minimalist solutions.’ John Elkington, Editorial, Sustainability Radar, October/November 2004

‘An evolving challenge that faces lawyers is the need to more securely integrate the litigation and policy dimensions of CSR lawyering – for lawyers to merge their reactive and proactive inclinations. This may of course cause structural as well as cultural clashes within the traditional model of large law firms – as one UK-based litigator has put it to me…ironically it is in the lawyers’ financial interests for their clients to become embroiled in costly litigation.’ -Professor David Kinley, Lawyers, corporations and international human rights law, The Company Lawyer, Volume 25 No. 10, 2004

With India enacting the world’s first corporate social responsibility law two years back, it is time to acknowledge the emergence of a new area of legal practice- Corporate Social Responsibility. Personally, I believe it’s a blessing in disguise for idealistic lawyers like me, who want to work with corporates but have always been hesitant to choose hardcore commercial law jobs over social inclinations (the latter being the reason for opting for the profession in the first place). While I do understand that it’s a niche and an under-developed area of law, I believe that supplemented together with a management background, this can be an ideal profession for someone bent upon going off the trodden path and pursuing societal impact.

The role of corporate social responsibility in corporate governance is increasingly being recognized in a globalized economy. It is at the top of the board of director’s agenda and is also good for business. Attempts are fervently being made to integrate it as a part of the corporate DNA consistent with the corporate assumption of human right responsibilities. Moreover, there is an active search for eco-efficient solutions. Though CSR efforts have generally been viewed as voluntary actions undertaken by corporations, the new CSR model that has emerged in India is a marked departure as it is known in the United States and as it has been developing through global norms. (International organizations such as the UN, the OECD and the ILO have adopted guidelines for good business practice aimed at safeguarding human rights and promoting respect for key social considerations. The White Paper on corporate social responsibility from 2009 and ISO 26000 are other initiatives which are influencing corporate work on social responsibility.)

However, there is still no sign of consensus and clarity on CSR rules, structures, or procedures in India; hence, offering tremendous scope for policy, research and the opportunity to set business precedents. Moreover, the norms that Lawyers draw on in giving their advice to companies are shifting. There is increasingly an ethical case for Lawyers to maximize their contribution to corporate social responsibility beyond the ‘business case’ for action. Uptil now, there has been very little reflection on the nexus between corporate responsibility and the wider public functions of the legal profession. Yet in wake of a statutory obligation concerning the same that is precisely what may now be needed.

THE ROLE OF A LAWYER IN CSR

‘The role of the lawyer in the old days involved compassion for the client’s entire predicament, tempered by detachment and also a measure of concern for the public good. The growing ascendancy of the economic view of law and a decline of its self -image as a helping profession, will continue the decline of idealism and professionalism unless this is arrested’. -Hon Justice Michael Kirby, summarizing AT Kronman’s The Lost Lawyer – Failing Ideals of the Legal Profession 

Lawyers need to be given a significant place within CSR because their profession is at the foundations of corporate social responsibility:-

‘..the significant present involvement of lawyers in corporate responsibility (CR) is no accident but directly referable on the one hand to the relevance to CR of legal skills and technical expertise and on the other hand to the fact that the ability to make independent and objective judgements is a core professional attribute of lawyers…It is natural for the lawyers to be involved. CSR is partly about compliance with the law and regulations so it falls naturally within a lawyer’s scope. Many lawyers also have a secondary role, that of conscience of their company.

Using a legal practitioner to develop a CSR strategy makes sense because ‘there are few people whose job it is to see the consequences and the whole picture for the organization that either fails to comply with the law or that complies partly or provides an inadequate response.’

As part of a profession premised on ethics, lawyers can provide advice to clients beyond just compliance and risk management processes,  encompassing the issue of human rights, societal impacts and the leverage a company can use to institute positive change, including communication through its brand, economic leverage and technical expertise. Although there are a multitude of CSR professionals, lawyers have the ability to provide advice on strategic CSR and within the appropriate context.  They can help create company structures to best serve the emerging norms on the corporate duty to respect and for  corporates to go beyond just philanthropy and charity.

CSR and law are not mutually exclusive but are in fact intrinsically interrelated concepts. Lawyers have long held leadership roles in society, whether as leaders of institutions themselves or counselors to those leaders and institutions. For CSR, the lawyers can exercise leadership by seeing, then working for, a vision of more equitable, multi-stakeholder outcomes that respect everyone’s rights and creatively accommodate them in the long-term interests of the company and its stakeholders. CSR emerges from a complex network of social expectations, through the interplay of hard law legislation and jurisprudence, constantly evolving customary and soft law norms, international best practice standards, private regulations, and direct contract-like understandings between corporations and their stakeholders. Comprehension and navigation of such a complex web of rules and expectations is squarely within the competence of legal theorists and practitioners, and cannot be fully understood as simply a branch of ethics or organizational behavior. Transcending notions merely focusing on “zealous advocacy,” modern ethical codes for lawyers expect the lawyer to bring the whole person as an “officer of the legal system and a public citizen having special responsibility for the quality of justice” to representing and advising clients. This includes knowledge of social and legal trends, expectations, and moral concerns that affect how the client actions will affect long–term success and perceptions by society. This context of legal, social, and moral trends, expectations and standards can come from hard law, non–binding yet influential “soft law,” self–regulation by the business itself, and ethical regimes and norms, all of which lawyers must be familiar with and take into account as matters of basic competence these days. Moreover, as with ensuring high–quality, ethical decisions in government, doing so in the context of corporate governance requires attention to good policies, procedures, and checks and balances. Lawyers play critical roles in such areas.  At their best, leading lawyers help clients seize new opportunities, such as constructing new bottom–of–the–pyramid business models, creating positive social value and innovation via social entrepreneurship that conceives of new socially useful products and services, partnering with others in multi-stakeholder initiatives like the UN Global Compact, and engaging in strategic philanthropy that helps solve persistent social problems. Furthermore, CSR is a natural fit for lawyers because it reflects the enormous role that corporations have in all aspects of our economy and the moral imperative to exercise that influence in a way that involves doing well and doing good.  A significant component of that moral imperative is promoting a sustainable future, which means complying with environmental, health and safety laws and conducting business activities in ways that limit the use of natural uses and minimize adverse ecological impacts- all of which requires innovative thinking and strategic planning.

Role as a CSR strategy consultant

A field like CSR is of immeasurable value to all professionals and academic in relevant fields of law, policy and business. And with CSR becoming a statutory obligation in India, Lawyers have a even more vital role to play in designing and implementing effective CSR policies and procedures. Lawyers can advice the company on the scope of an effective CSR program permissible under Section 135 and Schedule VII of the Companies Act, the disclosure and reporting requirements while ensuring that they are adhered to along with legally required Board reports concerning the CSR activities to be submitted as part of the financial statements. Lawyers can play a significant role in CSR strategy chiefly because of their expertise in understanding relevant concepts and because of their legally protected role as confidential advisors. In India, an effective CSR strategy has to attend to both legal and stakeholder concerns. So CSR is as much about good business as it is about legal compliance. When it comes to establishing a monitoring mechanism, Lawyers once again can play the primary role in overseeing the development of an effective CSR strategy, incorporating legal insights and legal protections without sacrificing stakeholders, while relaying on diverse groups on corporate staff and independent consultants to implement it. A Lawyer can not only play the role of an information manager but also that of an intermediary between the company and any third parties involved in CSR implementation.

Companies should make Lawyers a part of CSR committees and develop the program incorporating their recommendations, sensitive to legal and reputational risk to be implemented, as appropriate, for the company’s different functions. Legal expertise ensures that businesses accurately understand the scope of relevant legal requirements and business responsibility as well as particular legal risks they need to address. By appointing a lawyer incharge, the company can ensure control over the information flowing from CSR due diligence. Independent consultants can be retained to advise on stakeholder concerns and reputations risks, develop appropriate due diligence and report indicators based on definitions of core terms, train company executives and staff on CSR policies and procedures, prepare independent reports on the company’s impact and market it in order to value.  Although this is the reason why I would recommend a Lawyer with a management background for the role of an external sustainability/CSR consultant in an organization, i.e., to ensure a multi-disciplinary and 360 degree approach towards the formulation and execution of a CSR program without increasing the team numbers leading to varied perspectives. Further, getting external/independent CSR strategy consultants on board will help preserve the legitimacy before stakeholders and ensure effective engagement.

The functions that a Lawyer can perform in a CSR Committee can include the following and more:

For long-term assignments:

  • Analyse strengths, weaknesses, opportunities and threats (SWOT-analysis) of a given company in relation to CSR;
  • Design CSR policies;
  • Design a strategy for the company to address CSR adequately; (It is recommended that longer-term tasks be performed in co-operation with either in-house or external competencies in organisation management – including crisis management, communication, human resources, training etc. depending on the objectives of the client.)
  • Integrate CSR under existing risk management and compliance programmes;
  • Design and implement concrete projects under CSR;
  • Create CSR screening systems for investments;
  • Develop a framework for supply chain management systems with due regard to the participation of SME’s;
  • Develop a framework for CSR as part of Quality Management;
  • Implement in-house training on CSR; and
  • Integrate CSR into existing risks and quality management schemes and compliance programmes.

For short-term assignments:

  • Consider the ‘what, why and how’ of a CSR approach – its challenges, dilemmas and opportunities;
  • Undertake CSR assessments of affiliates, branches, investment opportunities, suppliers, licensees or other partners;
  • Undertake CSR assessments as part of due diligence;
  • Respond to media or NGO criticism;
  • Provide assurance statements on CSR reporting in relation to scope, relevance and compliance with international standards;
  • Undertake assessment of concrete CSR projects;
  • Network with other companies and/or associations;
  • Coordinate and supervise the CSR work of the company; and
  • Assess the legal implications of CSR reporting and advertising.

Therefore, Lawyers can advice on all aspects of an effective CSR strategy, from the operationalisation of the company’s CSR efforts at management level to the implementation, reporting and compliance within the organisation. The goal is to help businesses stay ahead, and help ensure that CSR becomes a value-added element in the business.

Role as an in-house counsel

Traditionally, it is the in-house lawyers within large businesses who lead development and supervise implementation of compliance programmes reflecting the business’s core values or operating principles. For in-house counsels attempting to understand and implement a CSR agenda, what will be more of relevance is (1) what a CSR mandate should entail, and (2) how it should be carried out? The internalization of a CSR mandate; initiation of conscious stakeholder engagement; development of reporting and transparency processes; implementation of best practices beyond compliance with minimum legal expectations; development of review, auditing, and accountability systems, and; defining the appropriate role of community investment within the scope of CSR  will be essential high points of any serious CSR program. However, despite in-house counsels already being deeply involved in CSR – more may still need to be done to place the legal function at the heart of strategic decision-making. The boundaries of what lawyers can realistically do to promote corporate responsibility are determined by the culture in which they work and their ability to position themselves as more than ‘legal facilitators’; by the extent of the ‘business case’ for responsible action on the part of their employer or clients; and in the case of external legal advisors, by the extent to which they may themselves be subject to ‘drivers’ or incentives to integrate CSR-related considerations into the delivery of advice.

Role in policy, research and law-making

There are exciting times for CSR and sustainability in India with there being a radical change in the landscape ever since the enactment of section 135. The participation of the company in CSR policy-making at such times can be an asset to the organization. As it is, CSR not only assumes legal compliance, it also influences public policy and law-making on a more hidden and indirect way. When giving advice on CSR matters to clients, Lawyers can participate in the tailoring of their CSR policy and normative framework. This role is of extreme importance as the CSR commitments undertaken by companies are going to be evaluated under the prescribed Act, and may form a basis for an explanation, even if the law is not yet penal. Businesses of all kinds are generally comfortable with the idea that lobbying public policy makers to uphold their commercial interests is an acceptable activity. Thus, corporate responsibility could spur Lawyers to play a positive advocacy role in public policy processes that touch on the sphere of influence of the legal profession. Lawyers are also likely to be called upon to assist companies in compliance. Law firms are no exception. It won’t be long before law firms start establishing teams, even that of a multidisciplinary nature, to answer these demands. And the contributions that Lawyers and law firms make to public policy debates – for example consultations on proposals for new legislation – may on occasion expressly be framed to further the commercial interests of their clients. This can serve the incidental purposes of drawing the attention of potential clients to the suitability of individual Lawyers or law firms as advisers.

Even though the contours of the role of a lawyer in corporate social responsibility in India are still unclear with companies mostly relying on accounting professionals for the implementation of their CSR programs, the fact that lawyers have always been considered invaluable to this field is affirmed by their assuming this responsibility even in countries that only endorse voluntary CSR. The need for viewing CSR from a legal perspective: as a stakeholder-oriented form of lex mercatoria (customary commercial law), and as a form of “enforced self-regulation in the shadow of the law” encompassing the  seven legal principles of Integrated, Sustainable Decision-Making; Stakeholder Engagement; Transparency; Consistent Best Practices; Precautionary Principles; Accountability and Community Investment has already been recognized. With a rise of ‘voluntary’ corporate responsibility tools internationally, lawyers are already deeply embedded within the corporate responsibility agenda. And now with India becoming the first country in the world to provide for a mandatory CSR obligation, it has become the legitimate field of study for lawyers and legal theorists. Now we have a law that promulgates CSR obligations which legal practitioner can use to apply CSR in a legal context. It can be identified in the course of advice or advocacy as an obligation that can guide or justify corporate behavior.

Clearly, the field of CSR is growing and is a potential growth area for lawyers- especially those with an interest in working around the world. Commercial law firms around the world are explicitly beginning to take up corporate responsibility in their own practices. It is expected that CSR, in its own right, will engage lawyers more and more in the years to come. In India, it is an area of the law that is still in its infancy, so any decision that is made  will in some way establish precedents and best practices for others in the industry. While the vision is clear, the means to get there is still under discussion. Far reaching duties for the legal profession regarding CSR are being suggested and it is important that the legal profession determines its own future in the area and develops policies and practices which are fit for the purpose, proportionate and take account of the imperative of our role, consistent with the regulatory regimes. It is the Lawyer’s role to assist their clients in positioning their business successfully in this new legal landscape. And they need to address this role with humility, so that the essential vibrancy and innovation inherent in corporate social responsibility can be sustained. And this Lawyers need to do immediately, before the role of the legal practitioner as a strategic advisor to business in a globalized world becomes obscenest.  Specially, practitioners of law interested in staunching the trend of proliferation of CSR consultancies staffed by accountants and management advisors with little or no legal training, and preserving the Lawyer’s role of strategic importance within corporate management structures need to start acting now.

Lawyers moved quickly to claim a stake as mediators and facilitators, arguing that their problem-solving skills and independence made them well suited to the task. Even so, some commentators questioned whether legal skills and the lawyer’s mindset were in reality sufficiently well-tuned to the consensus-building process of mediation-  ‘The mediation process can be preserved, while still admitting lawyers into mediation, if there are changes. The legal attitude, curriculum and environment must be broadened. Lawyers must learn how to generate creative options. They must understand collaboration. And they must learn how to facilitate, not just evaluate.’ A similar shift may now be required of the legal profession as it seeks to define its space in the corporate responsibility agenda.

It is an opportunity to define leading edge practice for business lawyers. The field is open for pioneering lawyers – wherever they are based – to show the way.

REFERENCES:

  1. Afra Afsharipour & Shruti Rana, The Emergence of new corporate social responsibility regimes in China and India at http://digitalcommons.law.umaryland.edu/cgi/viewcontent.cgi?article=2446&context=fac_pubs
  2. Chip Pitts, Authentic Leadership: the lawyer’s role in corporate social responsibility, business and human rights at http://www.l4bb.org/Blog95A5M8/blog_topic.php?action=view_topic&list_num=1&people_id=John&people_name=Chip%20Pitts&people_title=Lecturer&people_institution=Stanford%20Law%20School%20USA%20&%20Oxford%20University&people_location=Oxford&people_country=United%20Kingdom&formatted_people_registration_date=9%20November%202010&topic_id=2&category_id=&cur_page=0%27);%27);
  3. CCBE, Corporate Social Responsibility and the Legal Profession: Guidance II at http://www.ccbe.eu/fileadmin/user_upload/NTCdocument/EN_CSR_Guidelinespd1_1395048991.pdf
  4. CCBE, Corporate Social Responsibility and the Role of the legal profession: A Guide for European Lawyers at http://www.ccbe.org/fileadmin/user_upload/NTCdocument/EN_CSR_guidelinespd1_1221057092.pdf
  5. Halina Ward, Corporate Social Responsibility and the Business of Law at http://pubs.iied.org/pdfs/G00195.pdf
  6. Katie Vloet, A growing field of law: Corporate social responsibility at http://global.umich.edu/2013/11/a-growing-field-of-law-being-global-and-responsible/
  7. Michael Torrance, Book Note on Michael Kerr, Richard Janda & Chip Pitts, Corporate Social Responsibility: A Legal Analysis (Markham, Ont: LexisNexis, 2009) at http://lawjournal.mcgill.ca/userfiles/other/2094570-Torrance.pdf
  8. Rubi Sandhu, Lawyers, CSR and the “debilitating context” at http://ccbriefing.corporate-citizenship.com/2015/03/09/lawyers-csr-and-the-debilitating-context/

 

Legal Framework governing Corporate Social Responsibility (CSR) in India

LogoIn an unprecedented move, India became one of the first countries in the world to legally mandate CSR expenditure for companies satisfying a certain criteria in August, 2013.

Before an attempt is made to explore this concept of CSR both in a legal and a managerial context, it is important to get well versed with the policy guidelines pertaining to it so far. Here’s taking a look at the background of CSR in India along with the concerned statutory provisions and rules which supplements its understanding in the Indian context at large.

CSR VOLUNTARY GUIDELINES, 2009 

(http://www.mca.gov.in/Ministry/latestnews/CSR_Voluntary_Guidelines_24dec2009.pdf)

The Corporate Social Responsibility Voluntary Guidelines were released by the Ministry of Corporate Affairs, Government of India as early as December, 2009. The guidelines recognized that post the global financial crisis, the corporate sector had found itself standing in the midst of a sustainability crisis that posed a threat to the very existence of the business. The need for an inclusive growth was, thus, very much evident. However, this required all stakeholders to assume and discharge their responsibilities. 

The guidelines identified the gap between India and Bharat and the role of corporates in bridging it through social responsible business practices, ensuring the distribution of wealth and well-being of the communities in which the business operates. It was accepted that this would complement what the Government was already doing by undertaking extensive developmental initiatives through a series of sectoral programmes.

Indian business sector practices have been traditionally known to incorporate various methods of discharging social responsibility. However, inspite of a lot of human and economic energy available for utilization in the area, a mechanism to channelize this energy was found to be largely lacking. Thus, the need of the hour was for the Government, corporate sector and the communities to partner together.

With CSR evolving from simple philanthropic activities to integrating the interest of the business with that of communities in which it operates, the state and non-state actors could effectively partner to find and implement innovative solutions to problems poverty, illiteracy, malnutrition etc which has resulted in a large section of the population remaining as “un-included” from the mainstream. Against this background, the Ministry bought out the set of voluntary guidelines in order to enable companies to add value to their operations and contribute towards the long term sustainability of the business. Moreover, the guidelines were prepared with the help of valuable suggestions received from trade and industry chambers, experts and other stakeholders along with the internationally prevalent and practiced guidelines, norms and standards in the area of CSR.

What needs to be noted here, however, is that these guidelines explicitly and unambiguously recognized CSR as something purely voluntary- something that the company would like to do beyond any statutory requirement or obligation. The intent of the Voluntary Guidelines was solely to provide companies with guidance in dealing with the expectation, while working closely within the framework of national aspirations and policies. Furthermore, the guidelines clearly mentioned that they were not intended for regulatory or contractual use though it was expected that “India Inc” would make sincere efforts to consider compliance with them.

The main points of these guidelines are summarized as follows:

  • The guidelines emanated from the fundamental principle that each business entity should formulate a CSR policy to guide its strategic planning and provide a road-map for its CSR initiatives, which should be an integral part of its overall business policy and aligned with its business goals. The policy should be framed with the participation of various level executives and should be approved by Board.
  • The CSR Policy should cover the core elements of – Care for Stakeholders, Ethical Functioning, Respect for Worker’s right and welfare, Respect for Human Rights, Respect for Environment, and Activities for Social and Inclusive Development.

In brief, companies should be responsive towards all stakeholders and create value for them. They should develop mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate them when they occur. The corporate governance systems should, further, be underpinned by Ethics, Transparency and Accountability with the companies refraining from engaging in business practices that are abusive, unfair, corrupt or anti-corruptive.

Moreover, companies should provide a safe, hygienic and humane workplace environment for the workers, upholding the dignity of the employees. They should provide all employees with access to training and development of necessary skills for career advancement, on an equal and non-discriminatory basis. Also, freedom of association should be upheld along with the effective recognition of the right to collective bargaining of labor. An effective grievance redressal system, prohibition on child or forced labor, and equal opportunities should further be ensured and the Companies should respect human rights for all and avoid complicity with human right abuses by them or by third party.

Furthermore, environment should form an integral part of a company’s sustainability goals and companies should react, respond and take suitable measures accordingly. Depending upon the core competency and business interest, companies should also undertake activities for economic and social development of communities and geographical areas, particularly in the vicinity of their operations. These could include: education, skill-building for livelihood of people, health, cultural and social welfare etc., particularly targeted at disadvantaged sections of society.

The implementation guidelines were separately put out and consist of the following points:

  • The CSR policy of the business entity should provide for the implementation strategy which could include identification of projects/activities, setting measurable physical targets with time-frame, organizational mechanism and responsibilities, time schedules and monitoring. Companies can partner with local authorities, business associations and civil society /NGOs. They may influence the supply chain for CSR initiative and motivate employees for voluntary effort for social development. They may evolve a system of need assessment and impact assessment while undertaking CSR activities in particular areas. Independent evaluation can also be undertaken for selected projects/activities from time to time.
  • Companies should allocate specific amount in their budgets for CSR activities. This amount may be related to profits after tax, cost of unplanned CSR activities or any other suitable parameter.
  • The company should engage with well established and recognized programmes/platforms which encourage responsible business practices and CSR activities to share experiences and network with other organizations. This would help the companies in improving on their own CSR strategies and effectively projecting the image of being socially responsible.
  • The companies should, further, disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their websites, annual reports, and other communications media.

The reason why it is good to look into these guidelines despite it being released 3 years prior to the enactment of CSR into law is that it does offer critical reference points for the implementation of the mandate by the companies now.

COMPANIES BILL, 2011

The possibility of a mandatory CSR expenditure for companies first became apparent in the Companies Bill 2011 wherein an explicit statutory provision in the form of Clause 135 was included. The then government had expressed their intention to take into confidence the MPs and other stakeholders, like NGOs for this evolving idea. Moreover, CSR spending was positioned as a responsibility of companies like their tax liabilities.

The clause has been adopted verbatim under Section 135 on the enactment of the Bill except for the addition of a proviso and an explanation.

LEGAL MANDATE- COMPANIES ACT, 2013

Section 135 of the Companies Act, 2013 that governs corporate social responsibility is read as follows:

135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

 (2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

 (3) The Corporate Social Responsibility Committee shall, — (a) 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; (b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and (c) monitor the Corporate Social Responsibility Policy of the company from time to time.

(4) The Board of every company referred to in sub-section (1) shall,— (a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and (b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the 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:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.”

Section 166 of the Act provides that the directors must “act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.

Section 134(3)(o) provides for the company’s obligation to submit details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year as a part of the report by the Board of Directors, attached to the financial statements laid before a company in a general meeting.

As evident, the provision has been approached through a “comply or explain” framework. However, while there is no penalty for failing to spend on CSR under section 135, there are penalties for failing to report on CSR activities conducted or failing to explain why CSR spending was not carried out under section 134(8). Failure to explain is punishable by a fine on the company of not less than 50,000 rupees (approx. $900) and up to 25 lakh rupees (approx. $46,000). Furthermore, officers who default on the reporting provision could be subject to up to three years in prison and/or fines of not less than 50,000 rupees (approx. $900) and as high as 5 lakh rupees (approx. $9,200).

The original Schedule VII of the Act provided for the activities which may be included by the companies in their Corporate Social Responsibility Policies and consisted of activities relating to:-

(i) Eradicating extreme hunger and poverty;

(ii) Promotion of education;

(iii) Promoting gender equality and empowering women;

(iv) Reducing child mortility and improving mental health;

(v) Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;

(vi) Ensuring environmental sustainability;

(vii) Employment enhancing vocational skills;

(viii) Social business projects;

(ix) 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

(x) Such other matters as may be prescribed.

On the 1st day of April, 2014, the provision of Section 135 along with the Schedule VII of the Companies Act, 2013 came into force.

COMPANY (CORPORATE SOCIAL RESPONSIBILITY POLICY) RULES, 2014:

( http://www.mca.gov.in/Ministry/pdf/CompaniesActNotification2_2014.pdf )

The rules came into force on 1st April, 2014 along with the provisions of the Companies Act, 2013. A significant inclusion was the expansion of the coverage of the Act’s CSR requirements to foreign companies with branches or project offices in India making foreign companies with Indian businesses subject to the mandatory CSR provisions. Some of the other important rules are as follows:

DEFINITION: Rule 2(c) of the Corporate Social Responsibility Policy) Rules, 2014 defines CSR to mean and include but not limited to:

  1. Projects or programs relating to activities specified in Schedule VII to the Act; or
  2. Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR committee of the Board as per the declared CSR policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.

CSR COMMITTEES (Rule 5): The companies mentioned in the definition above are required to constitute CSR Committees as under:

  1. An unlisted public company or a private company, covered under section 135, which is not required to appoint an independent director pursuant to section 149(2) should have its CSR Committee without such director;
  2. A private company having only two directors on its Board should constitute its CSR Committee with two such directors;
  3. For a foreign company covered by section 135, the committee should comprise of atleast two persons of which person shall be as specified under section 380(1)(d) of the Act and another person shall be nominated by the foreign company.
  4. Moreover, the CSR committee should institute a transparent monitoring mechanism for the implementation of the CSR projects or programs or activities undertaken by the company.

CSR POLICY (Rule 6):  The CSR policy of the company should include a list of CSR projects or programs which a company plans to undertake falling within the purview of Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same; and monitoring process of such projects or programs. Such activities should, however, not include the activities undertaken in pursuance of normal course of business of a company. Also, the Board of Directors should ensure that the activities included by a company in its policy are related to the activities included in Schedule VII of the Act. The policy should, further, specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.

CSR ACTIVITIES (Rule 4) : The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise provided that:

  • if such trust, society or company is not established by the company or its holding or subsidiary or associate company, it should have an established track record of three years in undertaking similar programs or projects;
  • the company has specified the projects or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.

The company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules. Subject to the provisions governing the formation of CSR Committees, the CSR projects or programs or activities undertaken in India only will amount to CSR ExpenditureThe CSR projects or programs or activities that benefit only the employees of the company and their families will not be considered as CSR activities under the Act. Moreover, contribution of any amount directly or indirectly to any political party will also not be considered as CSR activity.

Companies can build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least three financial years but such expenditure should not exceed 5 percent of the total CSR expenditure of the company in one financial year. 

DISPLAY OF CSR ACTIVITIES (Rule 9): The content of the CSR policy, recommended by the CSR committee and approved by the Board of Directors of the company, should be disclosed in the Board Report and on the company websites.

CSR EXPENDITURE (Rule 7): CSR Expenditure should include contribution to corpus for projects or programs relating to CSR activities approved by the Board on the recommendations of its CSR Committee. It, however, should not not include any expenditure on an item not in any conformity or not in line with activities which fall within the purview of Schedule VII of the Act.

CSR REPORTING (Rule 8): The Annexure to the Company (Corporate Social Responsibility Policy) Rules provides for the format of the annual report on CSR activities to be included in the Board’s report. In case of a foreign company, the balance sheet filed under section 381(1) (b) should consist of an Annexure regarding the report on CSR.

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AMENDMENTS:

Schedule VII of the Companies Act, 2013 has been amended several times ever since its conception and these amendments are as follows:

On 27th February, 2014, the Ministry of Corporate Affairs made amendments to Schedule VII of the Companies Act for substituting the following items and entries for items (i) to (x) in the Schedule which came into force on 1st April, 2014:

(i) Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;

(ii) Promoting education, including special education and employment enhancing vocation skills specially among children, women, elderly, and differently-abled and livelihood enhancement projects;

(iii) Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

(iv) Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water;

(v) Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

(vi) Measures for the benefit of armed forces veterans, wars widows and their dependants;

(vii) Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports;

(viii) 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 the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;

(ix) Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

(x) Rural development projects.

As evident, what appears is a closed list of CSR activities that can be implemented under Section 135, running contrary to wider scope of activities as contemplated by the Voluntary Guidelines of 2009.

On 31st March, 2014, “promoting preventive health care” was amended to read “promoting health care including preventive health care” through a notification.

On August 6th, 2014, amendments were made to Schedule VII whereby the item ‘slum area development’ was inserted.

On September 12, 2014, the rule 4, sub-rule (6) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 was amended to insert the words and comma “including expenditure on administrative overheads” after the words “but such expenditure.”

 On October 24th, 2014, in item (i), after the words “and sanitation”, the words “including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation” were inserted. Also, in item (iv), after the words “and water”, the words “including contribution to the Clear Ganga Fund set-up by the Central Government for rejuvenation of river Ganga” were inserted.

On 19th January, 2015, the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2015 made the following amendments in rule 4, in sub-rule (2) of the Companies (Corporate Social Responsibility Policy) Rules:

  1. For the words “established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise”, the words “ established under section 8 of the Act by the company, either singly or alongwith its holding or subsidiary or associate company, or alongwith any other company or holding or subsidiary or associate company of such other company, or otherwise” were substituted;
  2. In the proviso, in clause (i), for the words “not established by the company or its holding or subsidiary or associate company, it”, the words “not established under section 8 of the Act by the company, either singly or alongwith its holding or subsidiary or associate company, or alongwith any other company or holding or subsidiary or associate company of such other company, or otherwise” were substituted.

CLARIFICATIONS

18th June, 2014: A general circular on the clarifications with regard to the provision of CSR under section 135 of the Companies Act, 2015 was issued by the Ministry of Corporate Affairs on 18th June, 2014, addressing the concerns of the stakeholders at length. The intention of the statutory provision in tandem with the CSR rules, 2014 was reiterated to not only be to ensure that the activities undertaken in pursuance of the CSR policy were relatable to the Schedule VII of the Companies Act, 2013 but also that the entries in the said Schedule VII are interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Scheduled VII of the Act were clarified to be broad-based and intended to cover a wide-range of activities, illustratively mentioned in the Annexure to the circular which can be accessed at- http://www.mca.gov.in/Ministry/pdf/General_Circular_21_2014.pdf

The circular, further, clarified that CSR activities were required to be undertaken by companies in the project/programme mode and one-off events such as marathons/awards/ charitable contribution/ advertisement/sponsorships of TV programmes etc. would not qualify as part of CSR expenditure. Also, expenses incurred by companies for the fulfillment of any Act/Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) will not count as CSR expenditure under the Companies Act.  Expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as CSR spend of Indian subsidiary only if the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do as per section 135 of the Act.

‘Registered Trust’ (as referred in Ruler 4(2) of the Company CSR Rules, 2014) was explained to include Trusts registered under Income Tax Act 1956, for those States where the registration of Trust is not mandatory. Contributions to Corpus of a Trust/society/section 8 companies etc. were clarified as CSR expenditure as long as (a) the Trust/society/ section 8 companies etc. is created exclusively for undertaking CSR activities or (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule Vll of the Act.

3rd February, 2015: A general circular was again released on 3rd February, 2015 informing about the constitution of a High Level Committee to suggest measures for improved monitoring of the implementation of Corporate Social Responsibility policies by the companies under Section 135 of the Companies Act, 2013. The composition for this committee includes all stakeholders including government, academic, corporate and industrial representatives. The terms of reference for the committee are as follows,-

  1. Suitable methodologies for monitoring compliance of Section 135
  2. Measures for adoption by the companies for systematic monitoring and evaluation of their own CSR initiatives
  3. Strategies for monitoring and evaluation of CSR initiatives through expert agencies and institutions to facilitate adequate feedback to the Government with regard to the efficacy of CSR expenditure and quality of compliance by the companies.
  4. Different monitoring mechanism if warranted for Government Companies undertaking CSR and
  5. Any other matter incidental to the above or connected thereto.

The report is expected by July-August of this year.

Clearly, the CSR policy in India is still evolving and we can expect considerable changes before its effective implementation is ensured.