Corporate social responsibility ( CSR) – In Detail

What is Corporate Social Responsibility  ( CSR )

Corporate Social Responsibility is a form of corporate self-regulation combined into a business model.  CSR policy operates as a built-in, self-regulating mechanism whereby a business monitors and ensures its active conformity with the spirit of the law, ethical standards, and international norms.  CSR aims to hold close responsibility for the company’s actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere which are collectively also considered as stakeholders.

The expression “corporate social responsibility” came into existence in the late 1960s and early 1970s after many conglomerate corporations formed the term stakeholder, meaning those on whom an organization’s activities have an impact or an effect. It was used to illustrate corporate owners beyond shareholders as a result of a prominent book by R. Edward Freeman, Strategic management: “a stakeholder approach” in 1984. Proponents argue that corporations make more long term profits by operating with a perception, while critics argue that CSR distracts from the economic role of businesses. Others argue CSR is merely a window-dressing, or an attempt to anticipate the role of governments as a watchdog over powerful conglomerate corporations.

CSR is titled to aid an organization’s duty as well as a guide to what the company stands for and will uphold to its customers. Development business ethics is one of the forms of applied ethics that examines ethical principles and moral or ethical problems that can take place in a business environment. ISO 26000 is the acknowledged international standard for CSR. Public sector organizations (the United Nations for example) hold on to the triple bottom line (TBL). It is widely accepted that CSR adheres to comparable principles but with no formal act of legislation. The UN has developed the Principles for Responsible Investment as strategy for investing entities.

Definition of Sustainability:

According to Webster, sustainability means:

  • Able to be used without being completely used up or damaged
  • concerning methods that do not completely use up or destroy natural resources

As it relates to corporate social responsibility, sustainability means administration of business using sustainable methods:

  • Methods that will not exhaust,  wipe out, or completely use up natural resources
  • Methods that can persevere over long periods of  time
  • Methods that are able to last everlastingly

Corporate Social Responsibility in India

The theory of CSR is not new in India. There are several companies who are actively involved in CSR activities but still, the number is relatively less. In our country, CSR is like a voluntary activity rather than a statutory obligation. It is a statutory compliance requirement for the companies to comply with the CSR activities while in other countries such as the UK, France Germany etc. there are voluntary procedure.

Section 135 of Companies Act 2013 deals with the CSR activities. It promotes greater disclosure & clearness. The provision related to CSR includes that companies which meet criteria will have to spend at least 2% of their average profits of last 3 years towards CSR activities. In case companies are incapable to comply with the provisions of CSR then they are required to provide explanation or reason for the noncompliance in the board report. In case they fail to provide a reason for non-compliance then they will be liable for penalty.

CSR Provisions & Applicability

A provision of CSR is applicable to private limited companies and public limited companies along with holding and Subsidiaries Company and foreign companies having offices in India and fulfills any of the following criteria mentioned below:

  • The company has Net Worth of Rs. 500 crore or more;
  • The company has a turnover of Rs. 1000 crore or more;
  • The company with a Net profit of Rs. 5 crore or more.

Companies who fall under these criteria have to spend at least 2% of average net profits of the last 3 financial years on CSR activities.

Computation of Net profit

Every company must report its net profit accrued for the intention of ascertaining the criteria specified under section 135 of the companies act 2013. The rules in respect of Indian company and foreign company are a bit different.

Indian Company

The computation of net profit is arrived at according to CSR rules. For the purpose of contributing to CSR activities, at least 2% of the average net profits of the company of 3 financial years are computed according to sec 198 of the Companies Act 2013, which is mainly net profit before tax (NPBT)

Foreign Company

The Net profits of a foreign company incorporated in India shall be determined in conformity with the financial statements of a foreign Company and shall be computed in accordance with the section 381(1)(a) of the Companies Act.

Implementation of CSR

The following are ways through which activities defined under Schedule VII can be executed:

  • It must be carried out in the local areas inside India and the area where the company operates;
  • It can be performed only as CSR activities or projects;
  • It can also be carried out with the help of registered trust or society or charitable company in India, which is established by parent company, subsidiary or associate company or which is not established by any of these companies if it has verified a track record of undertaking similar activities for at least 3years.
  • Each eligible company has to report on its CSR activities independently but these activities can be conducted in collaboration with other companies.
  • 5% of CSR can also be utilized for the purpose of giving training to its own employees/personnel for execution of CSR activities.

Reporting

It is necessary for the companies to publish a report on its CSR activities on their website annually. The Board of directors has to prepare the annual report about the CSR activities in the prescribed form. Its report must include the brief overview of CSR policy and the composition of CSR committee with the average net profit of the last 3 financial years.

Penalty

Board of Directors of the company are required to disclose all the information concerning its CSR policy and about its implementation on yearly basis. In case the company fails to comply with the CSR provisions, the company has to face a fine which shall not be less than Rs. 50,000 and which may extend to Rs. 25, 00,000. Further, the Officer who has Defaulted shall be punishable by the fine which shall not be of less than Rs. 50,000 which may extend to Rs. 5,00,000 or Imprisonment for a period of 3 years or both. Act provides penalty in case of non- disclosure of information regarding CSR activities but does not hold them liable for not undertaking CSR activities at all.

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