The latest changes in company law relating to corporate social responsibility (CSR) have created a situation in which a firm which comes under its purview is legally bound to be socially responsible, that is good.
What is CSR?
- If you are a company with a net worth of ₹500 crore or a turnover of ₹1,000 crore or have made a net profit of ₹5 crore then you will have to incur a CSR expenditure of 2 percent of the average net profit of the preceding three years.
- The law, which came into force in 2014, says a company under CSR will seek to fight hunger and poverty, promote education and vocational skills, empower women, take forward gender equality and also strive to enhance environmental sustainability.
- CSR activity should be focussed locally — in the area where a company is present. These are typically the duties which a company would discharge to society under Gandhiji’s idea of trusteeship. Now, in a sense, trusteeship will be legally enforced.
What is the change?
- A socially ‘irresponsible’ firm will be subject to a penal offense under the law which could attract a fine of up to ₹25 lakh and the defaulting officers in the company in question could face a prison term of up to three years.
- The guidelines forbid activity under CSR which benefits a company’s employees and their relatives. Also, normal business or promotional activity like organizing a marathon, running awards and sponsoring content on TV should not be carried out under CSR.
Cause of concern –
- The law till now asked a company to layout a CSR policy and agenda and include in its annual report what has been done. If there has been a shortfall in action then there has to be an explanation.
- Now, not spending the requisite amount in the right way will be like not paying statutory dues. Expectedly, the business has cried foul and described the legal changes as leading to over-regulation and expanding inspector raj, even as the current official talk is to reduce it.
- The way the law now stands, underspending on CSR amounts to committing a criminal offense. If nothing else, this directs the focus on spending, not outcome. For example, emphasis will be on maintaining records of expenditure on education, whether the children concerned have actually learned something or not being another matter.
Government explanation –
For its part, the government has argued that it is simply trying to work towards greater accountability and compliance which will make for better corporate governance.
Way forward –
If threat of fine or jail is unlikely to make companies more socially responsible, what will? Certainly public opinion. The public rewards companies for their business ethics, exemplified by IT firms, and sense of social responsibility. There is a global movement for ethical and socially responsible investing in the fields of social justice and environmental sustainability.
Source – The Hindu Business Line
Also read: 9th August – The big picture on tigers