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Applicability of CSR under Companies Act 2013

CSR (Corporate Social Responsibility) has been made compulsory for certain class of the companies in India. The CSR applicability may be described under the Companies Act of 2013. In this article, we will discuss Applicability of CSR.

What is CSR?

Corporate social responsibility is a self-regulatory mechanism. It is a process where business monitors and ensures its compliance with the spirit of the law. It is something beyond the compliance as it engages action that appear for some social good and which is beyond the interest of the firm.

Corporate social responsibility^[1] can be referred to the ethical principle that an organization is responsible for, and will get to know that how the behavior of the organization may affect the society and the environment in which it is operating.

Corporate social responsibility is considered as a Company’s responsibility toward the community and environment in which it is operated. This can be achieved through:

1. Reducing their waste and pollution process.
2. By contributing to social and educational programs.
3. Earning adequate returns on employed resources.

CSR is also known as:

1. Corporate conscience.
2. Corporate Citizenship.
3. Responsible business.

Corporate Social Responsibility strategies encourage the company to make a positive impact on the environment and stakeholders.

Consumers are of the view that:

1. While achieving business target simultaneously companies should do CSR activities.
2. If a Company does charity work it will definitely receive a positive response.
3. Consumers are more loyal to those companies who support charity.

Corporate Social Initiatives

Corporate social responsibility includes six types of corporate social initiatives:

1. Corporate philanthropy: Company donations to charity, including cash, goods, and services, sometimes via a corporate foundation
2. Community volunteering: Company-organized volunteer activities, sometimes while an employee receives pay for pro-bono work on behalf of a non-profit organization
3. Socially-responsible business practices: Ethically produced products which appeal to a customer segment
4. Cause promotions: Company-funded advocacy campaigns
5. Cause-related marketing: Donations to charity based on product sales
6. Corporate social marketing: Company-funded behavior-change campaigns

Common CSR Actions

Some of the common CSR actions include:

1. Environment Sustainability:

• Waste management.
• Renewable energy.

2. Community Involvement:

• Raising money for charity purpose.
• Employing local workers.
• Engaging in fair trade practices.

3. Ethical Marketing:

• Companies who are doing their business ethically are placing a higher value on their customer, they do not manipulate their consumers.

Ministry of Corporate Affairs has also realized the importance the Corporate Social Responsibility and had recently notified some provisions.

According to Companies Act 2013, following companies should contribute at least 2% of the average net profit for the immediately preceding 3 financial years, companies who have to follow this criterion are:

1. The net worth of the company is Rs. 500 Crore or more.
2. Turnover of the company is Rs. 1000 Crore or more.
3. Net profit of the company is Rs. 5 Crore or more.

NOTE: This provision is applicable not only to Indian Companies but also to Branch and Project offices of the foreign company in India.

Why Business Need to Follow CSR Compliance?

All the stakeholders of business including investors, managers, employees, and consumers have begun to understand how economic growth of a business or industry is linked with environmental and social well-being. Although it is just a voluntary activity by business organizations, it has almost become an integral part of business activities as undertaking social activities can indirectly benefit the organization for the long run. Because when a business operates in an environmentally, socially and economically responsible and transparent manner, it helps the organization succeed in particular through social acceptance & shared value.

Latest CSR Trends on CSR Applicability

As CSR has become an integral part of most businesses, it is now the new norm instead of just an optimal activity. Different types of technologies had enabled the companies to solve more efficiently all the social and environmental issues. The combination of people from diverse backgrounds and experience help organizations to effectively identify and solve social, environmental and economic challenges. The latest trend in CSR for companies is emerging in the field of human rights both domestically and globally. Trends also follow in empowering women among reputed companies.

Some other Provisions on CSR

Other provisions on CSR include:

• Maximum 5% administrative overheads

Companies can build CSR capacities of their own personnel but it should not exceed 5% of total CSR expenditure of the company.

• Surplus

The CSR policy should provide that the surplus arising out of the CSR projects or activities will not form part of the business profit of company.

• CSR Annual report

The board report of the company should include an annual report on CSR.

• Display CSR activities on the Company’s website

The Directors of the company is required to approve CSR policy as recommended by the CSR committee and shall display it on the company’s website.

Pros and Cons of Corporate Social Responsibility

PROS-

• Improved Company Reputation

Making the policy of corporate social responsibility and implementing the same with a genuine action, can help in building or improving the reputation of a business.  If a company’s behavior creates a negative impact on the public and because of this there is a loss or reduction in the profitability of the company. Corporate social responsibility has become one of the methods to improve the reputation of the business and increase its profitability.

• Better customer relation

Corporate social responsibility is to get involved in the society or community where the business is operating. Getting involved with the society where the business is operating helps in building a trust relationship between the business and the customer. This trust relationship helps in building a long-term relationship and helps the business the benefit of the doubt that if at any time something’s goes wrong customers rather thinking or assuming any malicious intent will trust the company. Customers tend to stick with those companies those who get involved in the society in which it is operating.

• Shareholder Resistance

Investors generally acquire stocks in those companies which are socially responsible but the ultimate aim is to earn a maximum return. There are some companies like Toyota which have earned because of corporate social responsibility.

• Cost

The cost or expense incurred in adopting Corporate Social Responsibility policy is one of the drawbacks. Organization of programs for the reduction in the environmental impact requires a huge expense in availing equipment apart from the ongoing cost. After incurring heavy expenses also there is no guarantee or clear evidence that implementing such a policy would increase the profitability of the business.

• Effect on cash flow

The effect on cash flow remains a disadvantage for shareholders as profit making obligations is not being fulfilled.

Conclusion

It may be noted that in case the company fails to spend the amount towards CSR activities, then the board is required to specify the reason for not spending the amount in its report.

Read our article: Corporate Social Responsibility under Companies Act 2013