Corporate Social Responsibility Voluntary Guidelines

We have seen the business sector generating wealth and value for the shareholders in the last sixty years, but simultaneously we also have the problems of poverty, unemployment, illiteracy, malnutrition etc. facing the nation. The corporate growth is sometimes seen as widening the gap between the India and Bharat through its income skewing capability. This gap needs to be bridged. While the Government undertakes extensive developmental initiatives through a series of sectoral programmes, the business sector also needs to take the responsibility of exhibiting socially responsible business practices that ensures the distribution of wealth and well-being of the communities in which the business operates. Indian business has traditionally been socially responsible and some of the business houses have demonstrated their efforts on this front in a laudable manner. However, the culture of social responsibility needs to go deeper in the governance of the businesses. There are, appreciably, several cases of companies in India involved in diverse issues such as healthcare, education, rural development, sanitation, micro-credit and women empowerment, arts, heritage, culture, and conservation of wildlife and nature, etc. However, given the economic progress and increase in corporate profits on the one hand, and reality of human-poverty and development indicators in India on the other, analysis of the many surveys suggest that though many companies in India have taken on board the universal language of CSR, CSR seem to be in a confused state. Individual companies define CSR in their own limited ways and contexts. The end result being that all activities undertaken in the name of CSR are merely philanthropy, or an extension of philanthropy. Creating trusts and foundations seem to be a favorite route of CSR practice by Indian companies, but largely such trusts and foundations work at an arms length from the company preventing the mainstreamin g of CSR into the core business processes and limiting CSR to community development only. Nearly all companies with CSR embedded in the core corporate activity do so because of company tradition rather than a company strategy leading to ad hoc and largely CEO-driven CSR policy. While the surveys reveal various business practices in CSR, many questions remain to be asked: Do the businesses have a responsibility to occupy the development space vacated by the state in order to fulfill the Indian constitutions promises to its citizens? Should CSR be driven by the business case all the while or do ethics that demand business sensitivity to inequities gain currency? Should CSR go beyond individual business actions to a larger collective lobbying mode for social good?

It seems that CSR in India has been evolving in the domain of profit distribution only. There is a need to increase the understanding and active participation of business in equitable social development as an integral part of good business practice.

The Ministry of Corporate Affairs Voluntary Guidelines. These guidelines will also enable business to focus as well as contribute towards the interests of the stakeholders and the society. Fundamental Principle Core Elements: Each business entity should formulate a CSR policy to guide its strategic planning and provide a roadmap for its CSR initiatives, which should be an integral part of 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 the Board. The CSR Policy should normally cover following core elements: 1. 2. 3. 4. 5. 6. Care for all Stakeholders Ethical functioning Respect for Human Rights Activities for Social and Inclusive Development Respect for Environment Respect for Workers' Rights and Welfare

If CSR is to be more meaningful and make a significant contribution to development, CSR needs to address some challenging issues What are the actual or potential developmental problems and contradictions associated with the CSR, as currently constituted? Are the investment and competitive strategies of companies, as well as their lobbying and fiscal practices, compatible with basic development objectives? Does the CSR agenda really respond to the development needs, concerns and priorities of workers, communities and firms in developing countries? Is CSR working for or against democratic policymaking, regulatory and planning processes in developing countries? These issues will have to be addressed for CSR to be more than just public relations and ad hoc community development initiatives. India Corporate Week was organized from December 14 - 21, 2009, in order to assist the businesses to adopt responsible governance practices, the Ministry of Corporate Affairs has prepared a set of voluntary guidelines which indicate some of the core elements that businesses need to focus on while conducting their affairs. These guidelines have been prepared after taking into account the governance challenges faced in our country as well as the expectations of the society.

Implementation Guidance: 1. The CSR policy of the business entity should provide for an implementation strategy which should include identification of projects/activities, setting measurable physical targets with timeframe, organizational mechanism and responsibilities, time schedules and monitoring. Companies may partner with local authorities, business associations and civil society/nongovernment organizations. 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 a particular area. Independent evaluation may also be undertaken for selected projects/activities from time to time. 2. Companies should allocate specific amount in their budgets for CSR activities. This amount may be related to profits after tax, cost of planned CSR activities or any other suitable parameter. 3. To share experiences and network with other organizations the company should engage with well established and recognized programmes/platforms which encourage responsible business practices and CSR activities. This would help companies to improve on their CSR strategies and effectively project the image of being socially responsible. 4. The companies should disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their website, annual reports, and other communication media.

The thrust of new Companies Bill was to enhance corporate governance, accountability and responsibility of directors and independent directors .. Corporate social responsibility (CSR) is about how companies run their business to produce an overall positive impact on the society on a continuous basis to contribute to the economic development and betterment of lives of all the stakeholders of the company. Many companies have realised that if they want to survive or want sustainability in the long run, they have to play an active role in the welfare of community and care for environment. Many private companies such as Tata Steel, Larsen & Toubro, Reliance Industries, Hindalco, Bharti Airtel, Mahindra and Mahindra, TCS, Maruti Suzuki, Tata Motors and ICICI Bank spend huge amount of money voluntarily on CSR activities. Also public sector companies are not lagging behind and these have made a name for themselves in CSR activities by adopting villages and extending help in the field of education, healthcare, etc. It could be seen that many companies have been taking CSR activities seriously. What is the connection between companies and CSR? Let us now explore the connection between CSR and companies. Companies run businesses to earn profits for their owners and shareholders. Although profit earning is the main objective, companies cannot ignore interest of other stakeholders such as employees, suppliers, customers, society and their surroundings. They have to pay attention to the welfare of employees and their families to retain good talent. Similarly by producing good quality of products at reasonable prices, interests of both company and its consumers can be balanced. By contributing to the government in the form of taxes on its sales / profits and caring for the environment, it takes care of the society directly or indirectly. New Companies Bill 2012 The much awaited Companies Bill, 2012 has been finally passed by both the houses of parliament. Now it requires the assent of President to become an Act and to replace the old Companies Act, 1956. The thrust of new Companies Bill was to enhance corporate governance, accountability and responsibility of directors and independent directors. The Bill also ensures independence of independent directors and auditors. Further, it introduced new concepts such as one man company, dormant company and mandatory corporate social responsibility (CSR) in the interest of stakeholders. The Bill provides for setting up of special courts for speedy trials and stronger steps for transparent corporate governance practices as well as measures to curb corporate misdoings. Governments efforts for effective CSR activities The Ministry of Corporate Affairs (MCA) had introduced CSR voluntary guidelines in 2009 as the passing of Companies Bill was delayed. MCA was expecting many companies to comply with these guidelines. These guidelines required companies to frame CSR policy constitute CSR Committee, allocate funds for identified CSR activities and finally execute the CSR projects. This New Companies Bill contains certain provisions about CSR activities, formation of CSR committee, mandatory spend amount and manner in which 2% of average net profits should be spent by the companies registered under the Companies Act. Provisions in New Companies Bill:

Clause no.135 of the Bill deals with CSR provisions. This clause states that compliance of CSR is mandatory, if company meets any one of the following criteria Net worth of Rs. 500 crore or more, or Turnover of Rs. 1,000 crore or more or Net profit of Rs. 5 crore or more during any financial year.

The CSR requirements to be complied with can be summarised as follows:

Companies which meet the criteria (any one of 3) as mentioned above are required to constitute a CSR committee with three or more directors (at least one of them to be independent director).

Functions of the Committee:

It shall formulate a CSR Policy and recommend to board and indicate CSR activities to be undertaken. CSR activities may include eradication of hunger and poverty, promotion of education, gender equality, reducing child mortality and improving maternal health, environment sustainability, social business projects or any other matters as may be specified. (Readers may refer to schedule VII) It shall recommend to the Board, amount of expenditure to be spent for identified CSR activities. Review CSR activity from time to time.

Responsibility of the Board:

The board of directors of company must approve the CSR policy recommended by CSR committeeand disclose the same in the directors report. Further, it should ensure that the CSR policy is displayed on the companys website in such manner as may be prescribed. It should ensure that the company spends at least 2% of the average net profits made during the three financial years immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy (net profits to be calculated as per Clause 198) While spending the committed CSR funds, preference must be given to local areas around which the company operates. If the company fails to spend, the company must specify the reasons for not spending the amount in its directors report. General instructions to the statement of profit and loss require the companies to which CSR clause is applicable should give following note. k) In case of Companies covered under Section 135, amount of expenditure incurred on corporate social responsibility activities.

Areas of concern There is a concern whether the amounts spent on CSR will be allowed as business expenditure under the Income Tax Act. Many companies will come forward to spend voluntarily, if such income tax deductions / exemptions are allowed. There is no need for mandatory provision. Moreover, it is not clear whether companies can get away with the requirement by simply disclosing the reasons for not spending mandatory amount. Some guidelines should be framed to give more clarity to deal with unusual situations such as absence of adequate profits or bad economic scenario to make the mandatory spend provision more meaningful. Conclusion Indian corporate world is unhappy with the requirement of mandatory spend on CSR activities as they strongly felt that it is a matter to be left to shareholders and board of directors. If CSR is seen as a philanthropic act, this argument sounds good and in the short term. The horizon of CSR is not so narrow. Neglecting environment may expose the company to the risk of business closure. Similarly, if welfare of workforce is ignored, the resultant labour unrest, may force closure of plant operations. The company which takes CSR as an inevitable part of its business process not only earns a goodwill and image but also attracts all stakeholders. Let us hope India Inc will for a change commit itself to the mandatory spend barring exceptional circumstances. CSR should lead companies to the slogan Live

and let others Live.

The New Companies Bill makes it mandatory for companies to earmark atleast 2 percent of their average net profits for the preceding three financial years, for implementing a Corporate social responsibility (CSR) strategy. The bill is applicable to companies with a net worth of Rs. 500 crore or more, a turnover of Rs 1,000 crore or more and a net profit of Rs 5 crore or more during any financial year. Thus the bill makes it compulsory to not just earmark the funds but also form a CSR committee (of board members consisting 3 or more directors out of which atleast one is an independent director), formulate a CSR policy , allocate the amount to different activities and monitor the implementation from time to time. Further, the CSR policy is to be disclosed on the company website. With regard to implementation, only project based investments, and not mere donations, will be accepted as CSR which involve innovative social inventions/initiatives that factor in hazards, risks and vulnerabilities. Baselines surveys, social impact assessment and meticulous evaluation including documentation is mandatory along with training and re orientation of the staff. The CSR amount unused/unlapsed in a particular year will be carried forward to the following year. CSR budget itself hence is non lapsable. With regard to failure to spend the requisite amount, the bill states that the company shall have to provide sufficient reasons for not spending the allocated CSR budget. While no specific penalties are contemplated in the Bill with respect to CSR, sections 450 and 451, provide for general penalties for flouting the rules and repeat offences. An estimated 2,500 companies fall into this mandatory CSR -reporting category. CSR activities in the first year would be between Rs. 9,000 crore and Rs. 10,000 crore spent in social welfare. Implications for the Companies The new bill has two important provisions with regard to CSR. The first is that the board is mandated to ensure that the company will spend on the CSR. Second being that they have to give an explanation regarding the spending. So, effectively although there is no mandatory obligation on the company, but a responsibility is cast upon the board members.An explanation that is unsatisfactory can empower the regulator to question the roles and duties of the directors making it not just a provision on paper but an obligation on the board, which they may not be able to get away from easily. The idea has also been to make the spending transparent and more than just ad hoc philanthropy. By mandating a CSR team, with 3 directors including one Independent Director, a CSR strategy, ensuring implementation and monitoring of results are all in the direction of pushing companies to develop a management level approach by targeting operational risk mitigation through CSR, as an effective tool. They may be further propelled to understand ground realities, leading to an amalgamation of stakeholder interests with the companys long term goals. This will be an optimal concept, enhancing welfare of all the concerned entities.

Central Tenets of a CSR Strategy Challenges Ahead The first and most important challenge is that of political pressure by local politicians especially for PSUs to spend in their constituencies. The mandatory spending and the essential baseline suveys along with social impact assessment will lose its meaning if the initiatives cant be directed in areas which need them the most with regard to mitigation of operating risks. Another concern is that a mandatory spending is nothing but tax. Hence, mandatory CSR increases the countrys already high corporate tax, implicitly. It stands at 32.5% which itself is higher than the global average of 24.09 %. The figure for other countries, China, Vietnam and Indonasia stand at 25%. Thailand and Turkey are at 20%, South Africa 28% and Nigeria at 30%. Increase in the corporate tax may hamper the countrys ranking as an investment destination, leaving India at a competitive disadvantage in the global marketplace. An added issue is the monetization of the Returns on Investment (ROI) for the companys initiatives. This is because CSR based initiatives may have a huge gestation period and so calculating returns on investments like scholarships for deprived sections or benefit to the environment by adoption of cleaner fuels etc. may be lengthy propositions. Companies may be forced to do some reshuffling within the organization which could lead to diversion of its manpower away from the core activities. Because of lack of expertise, this will further pave way for CSR consulting in huge proportions. Hence, the process of empanelment of expert agencies into the CSR framework of an organization, must be eased. Finally, though the Companies bill is a great step forward, efforts must be made to clear the haze around the kind of activities that may be taken up by companies under CSR to prevent the initiative from getting

mired by emergence of corruption with companies trying to greenwash their profitable activities under the garb of CSR.