Corporate Social Responsibility(CSR) : Types and Legal Framework

Corporate Social Responsibility (CSR) has gained a considerable amount of significance in the business world, especially in India, where companies are increasingly realizing the importance of giving back to society. Corporate Social Responsibility (CSR) describes how a company contributes to the well-being of communities and society through environmental and social measures.

What is Corporate Social Responsibility (CSR)?

Corporate Social Responsibility (CSR) is a self-regulating business model that helps companies to be socially accountable to themselves, their stakeholders, and the public. CSR has gained significant consideration in the business world, especially in India, where companies are realizing the importance of giving back to society. By practising it, companies become more conscious of the kind of impact they are having on all aspects of society, including economic, social, and environmental.

Engaging in CSR implies that a company is operating in ways that enhance society and the environment instead of having a negative impact on it.

Geeky Takeaways:

• CSR is a business model by which companies make a concerted effort to enhance the environment and impact it positively.
• CSR helps to promote a positive brand image for companies.
• CSR programs also help to raise morale in the workplace.
• CSR is often classified into four categories: environmental impact, ethical responsibility, philanthropic endeavours, and financial responsibilities.

Corporate Social Responsibility: An Overview

Corporate Social Responsibility (CSR) is a wide concept that can take many forms depending on the company and the industry. To be socially responsible, the company needs to be accountable to itself and its shareholders. Companies that implement CSR programs have often grown their business to the point where they can give back to society. CSR is a strategy that is adopted mostly by large corporations. Engaging in CSR means the company is operating in ways that enhance society and leave a positive impact on it.

Types of Corporate Social Responsibility

In general, mainly there are four types of corporate social responsibility. It is up to the discretion of the company to engage in any of these separately, and lack of involvement in one area does not exclude a company from being socially responsible.

1. Environmental Responsibility

It is the pillar of Corporate Social Responsibility rooted in preserving mother nature. Through efficient operations, a company can ensure that it leaves natural resources better than before its operations. A company can accomplish environmental responsibility through:

• Reducing pollution and emissions through its manufacturing process
• Recycling goods and materials throughout the process
• Supporting causes that help to neutralize the company’s impact
• Distributing goods by choosing those methods that have the least impact on pollution
• Creating product lines that in turn enhance these values

2. Ethical Responsibility

Ethical responsibility is rooted in acting fairly and ethically. Companies set their standards, although external factors may shape ethical goals. Instances of ethical responsibility include:

• Fair treatment to all types of customers regardless of their age, race, culture or gender.
• Positive treatment to all employees including favorable pay and benefits. This implies fair employment consideration to all individuals regardless of personal differences.
• Honest disclosure of operating concerns to investors on a timely basis and in a respectful manner.

3. Philanthropic Responsibility

It challenges how a company acts and how it contributes to society. In simple terms, it refers to how a company spends its resources in order to make the world a better place. It includes:

• Whether a company donates its profits to charities
• Whether a company sponsors events to raise funds or has a presence in the community
• Whether a company supports employee philanthropic endeavours

4. Financial Responsibility

A company must make plans to be more environmentally, ethically and philanthropically focused. But these programmes must be backed by financial investments of programmes, donations or product research. This includes spending on:

• Research and developments on new products that encourage sustainability
• Recruiting different kinds of talents in order to ensure a diverse workforce
• Initiatives that train employees on social awareness and environmental situations
• Ensuring transparent financial reporting including external audits on a timely basis

Benefits of Corporate Social Responsibility

Corporate Social Responsibility (CSR) is equally valuable for a company as it is for a society. It helps to create a stronger bond between employees and corporations and aids them in feeling more connected to the world around them. Benefits of CSR include:

1. Brand Recognition

Consumers are more likely to act favourably towards those companies that have provided benefits to their customers. Customers are now becoming more aware of the impacts companies have on their community, and many now base purchasing decisions on a CSR aspect of a business. As company engage themselves more in CSR, it is more likely to receive favourable brand recognition.

2. Guarantees Profit Growth

Customers are likely to spend more on socially responsible companies. Companies get recognition by being socially responsible and getting covered by the press attracts more customers eventually leading to profit growth.

3. Investor Relations

For companies looking to outperform the market, implementing CSR strategies tends to improve how investors feel about an organization and how they view the company’s worth.

4. Employee Engagement

CSR-related firms and employees serve as non-financial job benefits that strengthen employee retention. Workers are more likely to stick around companies they believe in, which in turn reduces employee turnover and the total cost of a new employee.

5. Risk Mitigation

Companies can mitigate risk by adhering to CSR practices. Activities such as discrimination against employee groups, disregard for natural resources or unethical use of company funds must be avoided. This type of activity is likely to lead to legal proceedings or litigation that may harm the company financially or expose it to negative news headlines.

Legal Framework of CSR in India

Corporate Social Responsibility implies a concept, whereby it is decided voluntarily by a company to contribute to a better society and a better environment – a concept where the companies integrate social concerns into their business for the betterment of their stakeholders and society in general.

However, Section 135 of the Companies Act, 2013 mandates that certain companies must contribute a certain amount towards CSR activities. As per the act, Corporate Social Responsibility means and includes but is not limited to:

• Projects and Programmes related to activities specified in Schedule VII of the act.
• Projects and Programmes related to those activities which are undertaken by the Board of Directors of a company.

The provision of CSR applies to every company who fulfils any of the following conditions in the preceding financial year:

• Net worth of more than ₹500 crore
• Turnover of more than ₹1,000 crore
• Net profit of more than ₹5 crore

The Board of Directors of every company where the CSR provision applies must ensure that the company spends at least 2% of their average net profits from the preceding three financial years towards CSR activities. And, in case, the company has not completed three financial years since its incorporation, then it must spend 2% of its average net profits made during the immediately preceding financial year as per its CSR policy.

Conclusion

CSR is not just a voluntary activity but a mandatory obligation for certain companies in India. Recent development in CSR includes focusing on sustainable development, social entrepreneurship and impact assessment. Companies are always expected to continue expanding their CSR activities since awareness is on the rise.

Frequently Asked Questions (FAQs)

1. What is the composition of the CSR committee?

Answer:

CSR committee constitutes a minimum of 3 or more directors, in cases where the independent director is present. However, where there is no requirement to appoint an independent director, the minimum number of directors is 2 or more.

2. Who is required to form a CSR committee?

Answer:

Every company having immediately preceding financial year’s

• Net worth of more than ₹500 crore
• Turnover of more than ₹1,000 crore
• Net profit of more than ₹5 crore

3. What is the amount of CSR expenditure?

Answer:

In every financial year, the company shall spend at least 2% of the average net profits of the company made during the immediate three preceding financial years.

4. Whether the ‘average net profit’ criteria for section 135(5) are Net Profit before Tax or Net Profit after Tax?

Answer:

Computation for net profit for section 135 is as per section 198 of the Companies Act, 2013, which primarily is Net Profit Before Tax.

5. Is the requirement to constitute a CSR committee mandatory in every case?

Answer:

No, if the amount of CSR spent is less than ₹50 lakhs, then there is no need to form a committee, the Board of Directors will only perform the function.