Section 135 CSR

Definition:
A company exists because of the society which can also be described as its sole source for deriving profits. There is no company that can function without the help of a proper societal structure. Hence societies often act like assets for a company. Unlike the tangible assets for which the company conducts regular maintenance, the intangible assets like the society also requires some specific obligations to be fulfilled by the company. Certain responsibilities that are termed as Corporate Social Responsibilities needs to be fulfilled by the company to return its favor towards the society. These responsibilities can range from a wide range activities in the form of social services, charities etc.

These responsibilities often yield to create a good impact for the company as it increases the trust among consumers which in turn upholds the dignity of the company for creating a better future.
As per section 135, every company with a net worth of Rs. 500 crore or more or a total turnover which is Rs. 1000 crore or more, or a net profit which has a yield of Rs. 500 crore or more in its immediately preceding financial year must constitute a CSR committee which shall constitute three or more directors out of which at least one must be designated as an independent director.

Historical Evolution of CSR:

The historical evolution of CSR derives its roots from the late 1800s. During that period, work culture in the factories and industries were not paid the required attention that they deserved. Business owners and investors were also unaware of the fact that certain obligations must be fulfilled towards the welfare of the society. Hence with the rise of philanthropic approach, businesses slowly started to realize the necessity of CSR.

CSR creates an impact on both the business and the society. The operational structure which required long working hours with minimum to no benefits for the employees gradually came to an end. The production structure of the companies and factories were re-designed to maximize the potentiality of its employees. Factory conditions were also improved keeping in mind the safety of the workmen.

In 1953, an American economist named Howard Bowen published his book named 'Social Responsibilities of a Businessman' in which the term Corporate Social Responsibilities came into existence for the first time. This particular book recognized the impact that corporate organizations can create upon a society as far as welfare and development are concerned. This forced the business tycoons to perform their obligations for a greater and common good.

Capitalism to Socialism:

In the early 1900s, businesses were only meant to earn profits. Hence, the scope of CSR was quite narrow if compared to the modern age. Industrialists back in the day were only driven with the aim of earning profits. They did not perform any obligations towards the society nor the society demanded anything from them. This was due to the lack of awareness among the people as they saw businesses as profit making bodies and not as charitable institutions. But as time passed by, people started demanding different rights that companies became bound to fulfil.

This includes reduction in working hours, prohibition of unfair trade practices etc. In the early 1960s, this notion of capitalism and profit making began to shift as companies started to recognize their obligations towards the society. With the emerging of modern problems for the modern society, companies also focused on various charitable doings and not just profit making. As CSR continue to develop, companies also designed new decision-making strategies, in which their decisions were not only meant for earning profits, but also featured practices that were meant to benefit the society and the people.

Therefore, companies started to view society as an asset. At this point of time, CSR mainly included notions such as protection of environment, waste management, labor laws etc. With the emergence of globalization in the 1990s, the scope of CSR became more prevalent as various Agreements involved companies to provide their consent. Agreements like the Kyoto Protocol forced the companies to adopt sustainable development by keeping environmental damage to a minimum. Multinational corporations became more focused on developing eco-friendly techniques of production and other possible green ways of conducting business.

CSR in Present Day:

In the 21st Century, companies have started to include the CSR policies in their internal operations because businesses nowadays are inclined towards getting positive feedback from their consumers and thus have become more consumer friendly. Hence companies often engage in CSR activities in order to refine their goodwill in the market, as well as attract consumers. The scope of CSR has widened and companies nowadays allocate a separate amount of fund for CSR activities. CSR activities are not only beneficial for the society but also the business as well. As a matter of fact, CSR also helps the company to recruit talented human resources, as employees these days often tend to find values in the organization they are working.

This creates an upper hand for the company as well as the individuals attached to it. The course of Industrialization has cherished as well as caused numerous side effects to the society. But in order to evolve as developed nations, industrialization is also necessary. Hence, the aim is to strike an ecological balance by keeping environmental harm to a minimum.

Nowadays, every multinational corporation has an inhouse Committee/Council which is aimed at developing and recommending CSR policies. These Committees are responsible for allocating and providing advisory reports to the Board of Directors, for the fulfilment of CSR activities. The BOD examines and verifies the reports and provides consent to execute such CSR activity. Recommendations and contents of the CSR policy may vary from company to company depending on its size and volume of operations carried.

Global Framework of CSR:

CSR has become an important element when it comes to global business practices and designing strategies. International Organizations like the United Nations is also involved in the surveillance for whether a company or an organization which fits the parameters of falling under the purview of CSR is performing its activities or not. Hence, the United Nations acts as a watchdog over the companies, forcing them to carry out their obligations towards the society.

The United Nations Committee on Human Rights restricts the companies to engage in unfair and unlawful trade practices which might harm consumer interests. Moreover, the OECD guidelines also prohibit the companies to get involved in corruptions, respect the validity of Labor Laws, to curtail activities that pose threat to the environment and may cause pollution etc. These guidelines are often comprehensive and businesses and corporations might have to interpret them accordingly.

The International Labor Organization (ILO) is also a governing body for businesses and organizations. Their focus is to supervise and interpret labor laws and ensure that companies are following them accordingly and the interests of the workmen are taken care of. These generally includes relief from long working hours, provision of minimum wages, safe and secure working conditions, elimination of child labor etc. According to it, workmen should be considered as assets of the company as they are responsible for all the lower and middle level management tasks. In other words, they are the 'powerhouse' of the company and hence the company must meet its obligations towards them.

CSR in UK:

CSR in UK is driven by a strict legal framework, in which companies must publish reports regarding their environmental and social impact of conducting business. This law is specifically governed by the Companies Act 2006, which encourages the companies to practice CSR and develop its policies accordingly. Apart from it, companies have to undergo a rigorous risk assessment procedure in order to calculate the potential risks that particular project might pose towards the environment. An equitable working environment, mental wellbeing of the employees, assigning mentors to every team etc., are also covered under the CSR activities.

CSR in Asia:

Asia is mixture of different cultures and ethnicity. Different nations have different approaches to CSR. Some are voluntary while some are involuntary. For instance, countries like India poses strict supervision upon the companies to practice CSR. On the other hand, CSR in Singapore is practiced voluntarily by the companies and sustainability reports are published accordingly.

Some companies are more inclined towards development of specific communities, while some are more focused on societal welfare. But the common subjects of CSR are mostly addressed by every company, which may include policies governing climate change, promoting the essence of education to backward communities, provision of proper healthcare facilities etc. Some of the Asian countries have highly benefitted from CSR activities. CSR in Asia has also resulted in a long-term growth of economies rather than just philanthropic services.

Theories of CSR:

1. Shared Value Theory:
   Corporate organizations must meet certain economic and social needs when conducting their business operations. The Shared value theory of CSR mainly focusses on how companies can manage to improvise their competitiveness and productivity in the market while simultaneously meeting such ethical and economic needs of the society. Under the Shared Value Theory companies design and prepare different policies as well as engage in practices in which they could maximize their profitability and at the same time share ethical values with the society. This may include promoting sustainable development, developing social conditions for the local areas and specific communities if any.
   
   The theory of Shared Value also focusses on ethical and economic responsibilities such as provision of clean drinking water, implementing modern agricultural techniques, eliminating water pollution, creating employment opportunities in the specific area etc. For instance, the shared value theory is often directly proportional to business improvisation, as it creates strong consumer values and hence develops relationship, which from the business point of view can be seen as beneficial.
    
2. Stakeholder Theory:
   As the name suggests, Stakeholder Theory is pretty much self-explanatory in nature as it aims to protect the interests of the stakeholders or the individuals who resides around the business or the factory. The policies and practices of the business creates a direct impact on the stakeholders and hence the company is responsible to preserve their rights. Stakeholders impose different types of obligations over a business.
   
   For instance, the business must be aware of its production procedures and must restrict any sort of activity that can pollute the water bodies such as ponds, rivers etc. These water bodies are sometimes, the sole source of freshwater and contaminating it, may pose a serious threat for the stakeholders who are dependent on it. Also, businesses must be aware of the quantity resources that is available in that demographic area. Using too much of resources may result in its rapid depletion which in turn may harm the residing communities. Hence, optimization of resources is essential.
    
3. Triple Bottom Line Theory:
   Companies often measure their growth in terms of bottom-line results. The Triple Bottom Line approach not only helps the companies to track their economic growth, but also provides significant data with relevance to the social and environmental impact that is caused by them. The company can keep the track of responsibilities in columns and each column requires an independent report to be published by the company.
   
   • People: This includes the welfare that is done by the company with respect to its people or consumers who are a part of the society. Sharing opportunities and resources such as the introduction of high-yielding agricultural seeds, etc., forms an integral part of this process. The company's obligations towards the people may vary from time to time depending upon the business carried out by the company.
      
   • Planet: This includes the obligations of the company towards the environment. For instance, a company may restrict the emission of harmful gases, engage in optimization of resources, promote green techniques of production, provide clean drinking water for the surrounding communities, etc.
      
   • Profit: The triple bottom line theory also focuses on the profit margins of the company as mentioned earlier. This approach enables the company to maintain a column in order to calculate economies of scale or the costs incurred for the revenues earned. All these columns require independent reports to be published by the company given a particular financial year.
      

Project Recommendations:

1. The board of directors shall derive recommendations that are prepared by the CSR Committee with reference to the initiation and execution of projects related to societal benefit with adherence to the conditions that such CSR policy covers the subjects specified in Schedule VII of the Act.
2. Derive recommendations relating to the subjects specified under Schedule VII of the Act.

Importance and Necessity:

1. Highlights and refines the image of the company in the eyes of the consumers which in turn also contributes to the goodwill. Goodwill creates a sense of security in the minds of the investors resulting in capital generation.
2. Helps the company to build a strong consumer recognition and relationship.
3. When a corporate body indulges in societal welfare, it attracts media personnel which also contributes to the recognition of the said company in terms of building prospects in the future as the business carries to move on.
4. Helps the company to strive out in the fast-paced competitive environment giving it an opportunity to develop its potential in terms of the product and service provided by it.

Implementation:

1. The Board of Directors shall supervise the recommendations made by the CSR Committee based on the subjects specified under Schedule VII of the Act.
2. The Company shall restrict itself from engaging in any sort of CSR activities that are not mentioned in the policy framed by the CSR committee based on its recommendations.
3. A company must spend at least 2% of its net profits of the preceding three financial years in CSR activities, and the Board of Directors must be specified with the same. The 2% must be spent by the company in every financial year in which it conducts its business operations.
4. In such a situation where the company has been incorporated for less than three financial years, the net profits of those financial years shall be taken into reference for which the company has conducted its business since its date of incorporation.

 

CSR Expenditure:

Different companies may have different approaches to preparing their CSR expenditure policies. But the rule says that the directors of the company must ensure and verify that the expenditure do not exceed 5% of the total funds sanctioned for CSR, in a given financial year.

If any surplus amount is left after the completion of the targeted CSR activities, then such amount must not be included in the net profits of the company, rather the following to be done:

1. Spent on another project.
2. An 'Unspent CSR Account' is to be created by the company for the surplus amount to be transferred.
3. Again, transferred to the CSR fund as specified in Schedule VII, within a period of 6 months after the expiry of the financial year.

Although, the company can spend the surplus amount of CSR for creation and acquisition purposes of various financial assets.

Functions of CSR Committee [Sec 135 (3)]:

Any company whether Indian or Foreign may fall under the purview of CSR provisions given the net worth of the said company. Hence such a company according to the provisions of the Company Act 2013, must formulate a CSR committee which shall regulate and supervise matters related to the Company's fulfilment of its obligations towards the society or the CSR activities in which the company tends to involve. Hence, to do so, such committee must prepare a policy in which it shall include various recommendations related to the subjects specified under Schedule VII of the Act. This generally includes the project or projects in which the company shall invest in. Such as:

1. Environmental Protection: A company may sanction its investment related to the protection of the environment, conduction of business activities without damaging the environment, optimization of resources, emphasizing more on green techniques of production, management of fossil fuels, etc.
    
2. Societal Development: Contributing for a better and cleaner society with relation to societal welfare and development, creating more jobs and framing a non-exploitative work culture.
    
3. Ethical Business Tactics: Ethical business tactics with a transparent approach of providing services to the society without indulging in any sort of unfair trade practices like black marketing or dumping of products to jeopardize another country's market. The CSR policy must aim to abolish such practices if they exist.
    
4. Consumer Rights: Improvising on providing services to their consumers by developing an efficient customer care cell, designing grievance redressal authorities for handling consumer grievances and solving them efficiently and providing relief to the aggrieved parties in connection to the problem.
    
5. Human Rights and Accountability: CSR policies often cherish human rights which also hold the company accountable in case it voluntarily or involuntarily involves itself in some wrongdoings or misleading practices which might pose harm to the consumers. It also maintains transparency in relation to the internal operations of the company and hence insists the company publish regular reports related to its financial health. This upholds the shareholder rights and makes it easier for the investors to make an informed decision.

The above includes some general examples but CSR may range from a wide range of activities from different topics related to the functioning of a company and how it shall fulfil its obligations towards its consumers, the environment, and the society on an overall basis. Hence, the CSR committee must include only those recommendations in its policy which shall pose a concern and is of utmost importance for the company to address. The CSR Committee then shall submit its report to the management of the company which includes the Board of Directors.

Such report shall be verified and supervised by the management and then be sanctioned for its execution. Such recommendations of the policy must be posted and regularly maintained by the company in its official website and hence it must disclose all necessary information related to the policy. Investors and anyone with a specific vested interest in the company's undertakings and operations may refer to the official website of the company for any sort of information.
 
Challenges to CSR:

1. One of the main challenges that is faced by CSR is the lack or absence of proper legal framework. The Companies Act 2016, guides the CSR activities to some extent, but the supervision is limited. Companies engage in different types of activities, namely finance, sales, production, marketing etc. Hence, in order to validate and measure the impact of CSR, there exists no such well-defined metrics. Therefore, companies are given the task of developing their own measuring models, which can track the growth and implementation of CSR activities. Developing these models can be quite time consuming and requires lot of funds to be sanctioned.
    
2. Another dominating challenge for CSR is the lack of transparency and organizations are reluctant to publish clear reports for CSR activities. For instance, a company might be evasive to admit the environmental harm that is caused by one of its projects and might hide the negative impacts. Disclosing such information may result in serious allegations against the company, for damaging the environment. Due to the lack of specific legal frameworks companies often manage to escape from these situations.
    
3. Rapid economic growth and increase in commercial services can also pose as a challenge to companies for meeting CSR requirements. For example, companies engaged with sales and marketing must regularly fulfil their targets within a given period. This creates a constant pressure upon the companies and hence, it gets difficult for them to involve in CSR activities. On the other hand, companies have other obligations like generating regular returns for the shareholders to keep them satisfied. These obligations tend to hold more importance for the company as they are directly proportional to business development and raising capital, which makes CSR a secondary objective.

 
Criticisms to CSR:

1. Lack of Effectiveness: Some claims that CSR is not as effective as it should be due to the lack of legal framework. While some argue that companies should carry out societal responsibilities as a part of their core business strategies rather than making CSR a separate subject or initiative.
2. Greenwashing: CSR is often viewed as a strategic technique of greenwashing that is used by the companies. Greenwashing is a method which is used by companies to distract public from the negative doings or practices in which it is involved. For instance, a company may involve in unfair trade practices and simultaneously promote CSR activities in order to create a good public image and hide its wrongdoings.
3. Inadequacy: CSR activities are often unable to redress certain issues such as income inequality, global warming, preservation of human rights etc. Hence, some people argue that CSR is not capable of redressing the major issues of the society.

 
Case Laws: 
Charan Singh Meena v. Union of India, this case was adjudicated by the Madhya Pradesh High Court on February 7, 2018. 
Facts of the Case:
In this case SPV Renew Solar Energy Private Ltd. was a subsidiary of Renew Power Ventures Private Ltd. This company was engaged in harnessing solar energy by installing solar panels for commercial and domestic purposes. The petitioner Charan Singh Meena filed a PIL alleging that the company was not fulfilling the obligations of CSR that are mentioned in Section 135 of the Companies Act 2013.

He also contended that the company failed to meets its obligations towards the society and various districts and villages of Madhya Pradesh which needed welfare were not provided with any. For instance, Section 135 of the Companies Act 2013, requires companies having a net worth of rupees five hundred crore or more or a turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during a given financial year shall formulate a CSR committee which will in turn govern all the CSR policies, projects, and regulations that the company undertakes.
 
Legal Framework:
Section 135 of the Companies Act also highlights that a company must spend at least 2% of its average net profits that are made by it in its preceding three financial years for CSR activities and it shall include the subjects that are mentioned in Schedule VII of the Act, which includes issues such as environmental sustainability, gender equality, promoting education to backward classes of the society etc.
 
Allegations:
The petitioner contended that there was no evidence of genuine CSR activities that were undertaken by the company and a lot of activities were limited only to the paperwork. The petitioner also contended a lot of backward communities and local bodies needed welfare but the company failed to provide it.
 
Defense:
The company claimed that they have conducted CSR activities and served the society by means of providing educational opportunities to the deprived communities, developed infrastructural facilities using solar energy, provided sanitation facilities to schools, improved hygiene facilities etc. They also claimed that these activities were carried out in the village areas of Hullpur, Ladpura and other adjacent areas.
 
Judgement;
The High Court of Madhya Pradesh observed that though Section 135 of the CSR created a binding for the companies to engage in CSR activities, there existed no real time metrics or mechanism, from which the government could gather specific data regarding the engagement of companies in CSR activities. In other words, the Government was unable to track the implementation of CSR by the companies. The Court also expressed its thoughts that without proper monitoring techniques, CSR cannot be implemented properly and most of its policies will only be confined to mere paperwork.

Although, the Court took measures to supervise the CSR activities more efficiently by serving the demographic region and maintaining a record as to which companies shall fall under the purview of Section 135 of the Companies Act, 2013 and if it was found that companies were reluctant and evasive of implementing CSR activities, then it shall impose strict legal action upon them. The Court also prescribed that although companies framed various CSR policies, such policies must be implemented on ground rather than being limited to just paperwork and theory.
 
Vedanta Resources plc v. Lungowe (2019), adjudicated by the Supreme Court of UK
Facts of the case:
Vedanta Resources plc was a UK based company that was incorporated and domiciled in the UK. Apart from that, Vedanta Resources also operated a subsidiary business under its policies and incorporation with the name of Konkola Copper Mines (KCM), which was apparently domiciled in Zambia. The subsidiary business was directly operated by Vedanta Resources and all the policies and frameworks were developed by the parent company.

This case came into existence when 1826 Zambians allegedly contented that Konkola Copper Mines was conducting their projects by damaging the environment and thus violating their CSR obligations towards the environment. Their conduct affected the daily livelihood of people living in the Chingola region of Zambia.

The affected Zambians also contended that the parent company that is Vedanta Resources was responsible for this conduct and hence the company failed to preserve the interests of the society. As Vedanta Resources was directly involved in terms of managing its subsidiary, the Zambians claimed that it was the parent company who must be held liable for their loss as environmental harm was caused due to negligent operations of its subsidiary.
 
Issues:

• The most significant legal issue that arose, was whether the Supreme Court of UK had the jurisdiction to hear claims against Vedanta Resources and Konkola Copper Mines.
• The second issue that came into existence was whether the parent company is liable for the doings of its subsidiary that is located in Zambia.

Judgement:
The Supreme Court of UK held that the aggrieved party which is the Zambians in this case, has the ability to bring charges and sue Vedanta Resources based in UK as Article 4(1) of the Brussels I Recast Regulation allows them to do so.

The Court also allowed KCM to join the proceeding as a defendant to avoid the risk of any conflicting judgements of the English and Zambian Courts. The Supreme Court also held that the parent company is liable for the loss that is caused to the aggrieved individuals by its parent company, as Vedanta Resources was directly involved in managing its subsidiary and all the policy implementations was done by the parent company in terms of conducting every business operation.

All the sustainability reports regarding the environmental protection were published by Vedanta Resources and therefore it was held liable by the Court of the act of its subsidiary.
This landmark judgement also highlighted that parent company cannot evade its liability when it comes to the wrongdoings of its subsidiary. It also emphasized on corporate accountability and transparency by preventing companies from conducting projects that has potential risks of harming the environment.
 
Emerging Trends of CSR:
Long-term sustainability has become an integral part of the society nowadays. The society as well as the consumers are more focused towards the future. This also increases their expectations and demands. Consumers are not only bounded by the products that a company has to offer but are also looking forward to create a long-term relationship with the company. Hence, it is the duty of the company to create shared values for its consumers.

Shareholders are not only concerned with the financial returns, but they are more willing to invest in companies that demonstrates long term benefits in terms of financial returns accompanied with good ethical standards. This has resulted a shift in perspective of companies nowadays, and their methods of operating have also changed substantially. Government and local authorities have also contributed to this change as they act as watchdogs, governing the companies to implement regular CSR activities in their policies.

Hence, companies are also worried, that evading CSR activities may result in degradation of their goodwill and public image. Businesses have realized that addressing societal challenges and creating values not only develops costumer relationship, but also contributes to long-term business success and prosperity.
 
Future of CSR:
In the current scenario, CSR is limited to the urban areas, where there exists a trend of multinational corporations. These areas serve as main headquarters of these corporations, where every single business decision is taken and implemented, different policies are formulated and funds are sanctioned. In contrary to this, rural areas are often deprived of CSR activities and companies are seen to reluctant to push their CSR policies to the rural parts of the country, where the essence of CSR is actually needed let alone the urban regions of the nation. Hence, companies must design their CSR policies for the benefit of the rural society in the future leading to an overall development.

Another important aspect is the integration of technology with CSR activities. For instance, there exists no proper metrics to guide the implementation of CSR policies nor there lies any technique to determine the benefits derived from implementing a particular CSR activity, at a given region. Technological developments in CSR can deal with these problems by providing real time data and measure the specific impact on the society. Moreover, technological developments in CSR can help the companies to structure their policies, develop networks throughout the globe, provide accurate statistical measure as to which region can benefit from the CSR activities so that companies can allocate resources accordingly.
 
Conclusion:
The dynamic growth of today's society has set clear benchmarks on how companies must operate with continuous improvisation of their products and services. The growth in business opportunities has also contributed to the fact that companies nowadays view society with a different perspective, rather than harnessing the last bit of profits from it. Consumer awareness has also increased significantly, forcing companies to deliver quality certified products.

The Companies Act, 2013 has imposed clear guidelines on how organizations must meet certain obligations towards the society in the form of CSR activities. This requires the companies to formulate their own CSR policies that can prove to be beneficial for the society. Companies nowadays are not only driven by profits, but they are also worried towards environmental sustainability before sanctioning a project.

This trend has been set by CSR which forces the companies to take responsibilities for their actions and hold them liable for any damage caused by their deeds. The expectations of the society have also increased nor are their demands limited to the mere utilization of goods and services provided by a company. This has led to a global change, making companies to re-design their operational dilemma, reconsider environmental sustainability and practice optimization of resources so that their business sustains long-term growth.