PublicationsComparing the CSR Regulations in India and the UK

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ABSTRACT

CSR regulations have become extremely relevant to promote sustainability of life, business and the environment owing to the capitalist nature of most economies around the world. India and the UK have been pioneers of this concept, but have approached the idea very differently. India is the first country in the world to mandate the concept of CSR spending as a part of the corporate law framework. The United Kingdom does not mandate such spending. However, it is one of the first countries to integrate the Triple Bottom Line Approach of people, profit and planet amongst its corporations through different regulations. India follows a mandatory approach as compared to the voluntary form of CSR spending developed in the UK. This paper concludes that both these approaches to CSR have had a positive impact in their societies respectively, thereby implying that both these structures are favourable.

INTRODUCTION

Corporate Social Responsibility (‘CSR’) is a business approach that looks to achieve sustainable development by providing social, environmental and technical support to all the stakeholders in society. The United Nations Industrial Development Organizations defines Corporate Social Responsibility as a concept of management where the companies integrate the social and environmental concerns with their business operations and interactions with their stakeholders.[1]CSR is referred to as the “Triple-Bottom-Line-Approach” as this approach promotes the commercial interests of the Company while fulfilling their social responsibilities.[2] The concept of CSR is different from that of charities and philanthropic activities, owing to its broad scope, and the approach being a continuous process.[3]  The notion of CSR has garnered support from Corporations around the world.

India being the first country to mandate CSR spending and the UK being one of the first countries to integrate a ‘Triple Bottom Line Approach’ into the structure of corporations. This paper analyses and compares the CSR regulation in India and the UK, with an emphasis CSR of Small and Medium Enterprises (SMEs) and the nature of CSR spending of the two countries, i.e., mandatory vs voluntary.

THE CSR REGULATION IN INDIA AND UK
 INDIA

The initial attitude towards CSR was a voluntary one that would be adopted by the companies towards the society and the stakeholders. Increasingly, CSR has been gaining legal status. Some countries have incorporated facets of CSR in their basic corporate laws to exhort companies to fulfil their obligations towards non-shareholder constituencies. However, India is the first country in the world to mandate CSR expenditure under the Companies Act, 2013 (the ‘Indian Act’). Under Section 135 of the Act,[4] CSR is compulsory for all companies that meet the fiscal criterion of –

  • The net worth of the Company should be higher than Rs 500 crore.
  • The annual turnover of the Company should be Rs 1000 crore or more.
  • Annual net-profits of the Company should be at least Rs 5 crore or more.

The companies, crossing the prescribed threshold, are required to spend at least 2% of their average net profit for the immediately preceding three financial years on CSR activities and form a committee consisting of the board of directors who would have to overlook the CSR expenditure of the Company.[5] The CSR committee must ensure that the committee consists of four board of directors of the Company who meet at least twice a year to review and assess the CSR activities of the Company.[6] A quorum of at least two members is needed to hold the meeting. The CSR committee will recommend a formal CSR Policy and will recommend CSR activities, set forth a budget, describe how the Company will implement the project, and establish a transparent means to monitor progress. The CSR activities were to align with Schedule 7 of the Indian Act, that consists of a list of Activities like promotion of education, health and women empowerment.[7] The Concept of CSR intends to bring the Social Responsibility activities of a company, in line with the national agenda of the government. He felt that the new legislation gave the Companies a wide array of activities on which they could make their investment.[8] This list was to be interpreted liberally rather than coextensively.

The Ministry of Corporate Affairs sent a circular clarifying certain doubt that had arisen regarding the CSR regulations of the Indian Act. Firstly, it stated that the expenditure incurred by a company to not violate other statutes like the Environmental laws and the Labour laws could not form a part of the CSR expenditure of the Companies.[9] Secondly, it stated that the companies must engage in their CSR activities on a programme basis rather than having one-off events or one-off expenditure.[10] The third clarification made by the circular was that the expenses borne by the Company is paying the salaries of the CSR employees of the Company would come under the CSR expenditure of the Company.[11]

A foreign holding company for CSR activities in India will qualify as CSR spend of the Indian subsidiary, only if they invest through the Indian subsidiary, and the last clarification was that contribution to an NGO or a society, or a section 8 company would count as CSR expenditure, only if it is to complete their CSR objectives.[12] The Ministry of Corporate Affairs has further clarified that the CSR activities of a company must vary from the actions that they perform in the ordinary course of business.[13] For instance, a pharmaceutical company distributing medicines for free to the people belonging to lower strata of society would count as CSR expenditure as the pharmaceutical companies would not perform this task in the ordinary course of their business.

UNITED KINGDOM

The concept of CSR originated in the British Isles in the 1800s.[14] Even the term CSR did not exist until then, several benevolent entrepreneurs believed in the concept of providing for proper living conditions and social security schemes for their employees, as they thought it was paramount to keep their employees happy and content for greater work efficiency.[15] These ideas were considered revolutionary at that time and were the reason for the birth of modern CSR as envisaged by us today. Under the laws of the United Kingdom, CSR is not a mandatory activity for companies like in India.[16]CSR is a voluntary act that has no legislation that has been made just for CSR. A company that follows the triple bottom line approach system has to meet the requirements given under the Companies Act, 2006, which has given the directors the duty of dealing with the environmental and social impacts of their Company.

Other laws in the UK guide the concept of CSR as we know today, they are namely – Accounts Modernisation Directive, which requires that large Public Limited companies now must report publicly on environmentally significant matters, The Working Time Regulations, 2001, The Health and Safety at Work Act, 1974. This list of Legislations is not exhaustive and will keep growing from time to time, as these are just guiding on the CSR expenditure and do not mandate CSR spending for companies.[17]

The lack of legislation mandating CSR expenditure has made the companies take up a voluntary approach to the CSR activities of the firm. The Confederation of Business Industry stated that the reason for having voluntary CSR expenditure in the UK is to encourage companies to define their CSR expenditure as per their core competency.[18] They believe that standardisation of the standards of CSR would not necessarily raise the standards of CSR expenditure, and would instead put an extra burden on small and medium level enterprises.[19]

Under the Tony Blair government, UK was the first country to have a “Minister for CSR” under the Trade and Industry Department, to promote the CSR activities across the various departments of the government.[20] This step brought the concept of  CSR under the more stringent supervision of the government.[21] The Companies Act, 2006 of the UK has made a significant change, like the CSR expenditure of Companies in the United Kingdom. It has reduced the scope of the voluntary managerial board led CSR expenditure from an action carried out by the Companies purely voluntarily for making the world a better place to actions by companies to address their impacts on society. The outcome is that CSR is as an advertising or precautionary exercise.

The process of internalising the effects of the corporation has further narrowed the scope of CSR. It has reduced the effectiveness of CSR owing to the lack of core competencies to reduce their harmful effects. So even though there exists no statute or legislation mandating the CSR expenditure, the guidelines provided have narrowed down the scope of CSR in the UK.[22] The Judiciary in the United Kingdom has not mandated CSR expenditure but has acknowledged that the fact that the directors of a company are not only liable to their shareholders but all the stakeholders. In the case of Smith v Barlow, they have stated that under the present conditions of the Companies should acknowledge and discharge both their social and private responsibilities.[23]

CSR FOR SMALL AND MEDIUM ENTERPRISES (SMEs) IN INDIA v the UK

The mandatory CSR regulations given under the Indian Act have included companies having a net profit of 5 or more crores[24], thereby bringing SMEs under the ambit of mandatory CSR. The CSR activities of these companies are mostly affected by the personal position of the promoters of the business. The quantum of the money that is available to these companies is lesser than other companies and hence do not create a significant impact on the society on their own. Thus, the SMEs form a collaboration by pooling in their CSR funds, often in the same geographical territory. The collaboration helps in creating a sizeable impact on the community and reduces the operational costs for the firms.[25]

 As we know in the United Kingdom, there are no mandatory laws for the CSR expenditure of companies; hence it is under other legislations that the companies must comply with CSR regulations.[26] There is no mention of which companies must undertake these acts, and hence every Company must follow the legislations that are laid down for the companies involved in business activities. And with SMEs turning over £1.9 trillion and responsible for 60 per cent of UK private sector employment in 2017, their role involuntarily promoting positive environmental and social change is significant.[27] Whatever the organisation’s size, people and the planet really should be on a par with profit these days. They have mostly been involved in helping the local communities and do their bit for the benefit of the environment, like going paperless and reducing their power consumption. Majority of the SMEs in the UK prefer to perform charity organisations rather than indulging in long term programmes.[28]

THE NATURE OF CSR SPENDING – MANDATORY v VOLUNTARY

India has seen a substantive increase in the CSR spending made by the companies that qualify for the CSR spending as per Section 135 of the Indian Act. In 2017 the CSR spent increased by 20 per cent.[29] The actual CSR spend was 88 per cent of the prescribed expenditure as compared to 84 per cent of the expenditure in 2016.[30] Almost 1/3rd of the companies spent more than the prescribed amount of CSR expenditure. In the Indian context, most of the CSR expenditure is made in the fields of education and health care, whereas eradicating malnutrition and hunger deaths is gaining popularity among the companies.[31]

The fact that now companies know their social obligations and would work towards it more efficiently is a significant argument. Another reason how this mandatory CSR regime has helped India is that it has eliminated evils like corruption, bribery and exploitation of labour as every Company is mandated to spend a certain amount of their profits towards CSR. Another benefit that has accrued to India, owing to mandatory CSR is that the government through these Corporations have intertwined the agenda of national development with the CSR activities of the Company. The legislation has also ensured that more companies follow the notions of sustainability.[32]

There are some harmful impacts of the mandatory CSR legislation in India as well, one of the most prominent disadvantages is the increased cost of bureaucracy and the increased cost for the companies to follow the legislation for sustainability. Another constant critique of the mandatory CSR legislation is that it has not been effective in aligning the activities of the Companies with the National development agenda, as a significant chunk of the CSR spending in India is done by the Public Sector Units only, almost 1/3rd of the total.[33] The attitude of incurring CSR activities just to fulfil the mandatory legislation is a growing one amongst Indian companies.

The CSR in the United Kingdom has seen an increase in the awareness of the companies, thereby increasing the CSR expenditure. The voluntary nature of CSR expenditure is of the primary reasons to see this increase is the pressure imposed on the companies by the employees of the Company. Voluntary CSR activities by companies would improve the employee-employer relations in most instances and helps rationalise a company’s relationships with its vendors and helps assure that the entire supply chain of Company adheres to consistent, well-defined and principled ethical standards. Research by marketing agency Cone Communications found that nearly two-thirds of young people won’t take a job at a company with poor CSR practices.[34] The survey of 1,000 people found 75% of millennials would take a pay cut to work for a responsible company, and 83% would be more loyal to a business that enables them to contribute to solving social and environmental problems[35]. Thus, voluntary CSR actions also act as a PR mechanism for the Company as it will work towards the betterment of the Company’s relations with its shareholders and other investors. Voluntarily undertaking CSR would also reduce the legal risks that extend to the Company and build its brand reputation in society.

One of the significant challenges to voluntary CSR is the framing of the CSR policy for the Company by the directors of the Company. In the UK, the nature of CSR is moving towards reducing the impact of the companies, thereby reducing the scope of voluntary CSR spending. Another problem that has come up from the concept of voluntary CSR is the fact that many companies engage in these activities purely to improve their brand image and have no real intention of working for the society. CSR must not be done only for PR purposes, as it also has a tangible impact on a company’s bottom line. Companies that integrate climate-change management into strategic planning, for example, see an 18% higher return on equity than those that don’t, according to a study by CDP, a non-profit that helps companies with environmental disclosure[36]. While there are many reasons why a company might achieve good results, it’s clear that companies leading the way on sustainability can and do perform well financially[37].

CONCLUSION

The primary purpose of CSR is to ensure that a company can grow sustainably without facing many troubles. Corporate Social Responsibility in the Indian context has successfully interlinked business with social integration and environmental sustainability. From responsive exercises to reasonable activities, corporates have displayed their capacity to make a critical change in the public and enhance the general personal satisfaction. In the present social circumstance in India, it is troublesome for one single body to achieve change, as the scale is enormous.

Corporate bodies have the aptitude, essential reasoning, labour and capital to encourage broad social change. Powerful associations between corporate, NGOs and the legislature will put India’s social improvement on a quicker track which will, in turn, create a lot more opportunities for the businesses in the future. Therefore, it can be said that mandating such expenditure is necessary from an Indian context to bring the corporations on the same page as the Government policies. The most recognisable example is that of contributions to the PM CARES Fund which would be considered CSR,[38] to encourage more corporations to make contributions in furtherance of the country’s fight against the virus.

The United Kingdom, in contrast, has had a corporate environment where social responsibility and social impact have always been considered an integral part of the functioning of the corporation. The growing importance of CSR is evident from the fact that there are indicators like the FTSE4Good Index, a series of ethical investment stock market indices which accounts for the social responsibility measures of a company[39]. These indices are extremely powerful, as they have an impact on the share price of the Company and can facilitate or reduce investments in the corporation based on these indices. Most companies in the United Kingdom have accepted the fact that investment in socially responsible activities will benefit the profit motives of the companies in the long run and hence willingly undertake these activities to garner goodwill in the market. Thus, both mandatory or voluntary forms of CSR expenditure are adequate for the corporation’s depending on the corporate environment they are in India or the United Kingdom, respectively.

 

REFERENCES-

[1] “What Is CSR” (United Nationals Industrial Development Organisation) https://www.unido.org/our-focus/advancing-economic-competitiveness/competitive-trade-capacities-and-corporate-responsibility/corporate-social-responsibility-market-integration/what-csr, accessed 20 July 2020.

[2] ibid.

[3] ibid.

[4] Section 135, Companies Act, 2013.

[5] ibid.

[6] ibid.

[7] Schedule 7, Companies Act, 2013

[8] PTI, “Sachin Pilot Urges Companies to See CSR as Investment, Not a Burden” (Business Today, 10 September 2013) https://www.businesstoday.in/current/corporate/sachin-pilot-on-corporate-social-responsibility-companies-act/story/198487.html, accessed 20 July 2020.

[9] Clarifications about provisions of Corporate Social Responsibility under section 135 of the Companies Act, 2013.” General circular. Government of India, Ministry of Corporate Affairs, 18 June 2014. http://www.mca.gov.in/Ministry/pdf/General_Circular_21_2014.pdf, accessed 20 July 2020.

[10] ibid.

[11] ibid.

[12] ibid.

[13] Bhavik Narsana & Saswat Subasit, “CSR: Normal course of business in times of COVID-19” (Yourstory, 10 July 2020) https://yourstory.com/2020/06/csr-normal-course-business-covid-19-times, accessed 20 July 2020.

[14] “CSR in the United Kingdom” (Soft and Green Insights) https://www.sofidel.com/en/soft-and-green/csr-the-united-kingdom, accessed 31 July 2020.

[15] ibid.

[16] Becky Toal and Veronica Broomes, “Legislation and Regulations Relevant to CSR” (alchemyassistant.com) https://www.alchemyassistant.com/topics/iLd3HjQDVDMwjZT3.html, accessed 20 July 2020.

[17] ibid.

[18] ibid.

[19] ibid.

[20] Soft and Green Insights, Supra 15.

[21] Adhikari A, “Corporate Social Responsibility: Voluntary or Mandatory?” (NJA Law Journal 2014) at 185.

[22] Johnston A, “The Shrinking Scope of CSR in UK Corporate Law” https://scholarlycommons.law.wlu.edu/cgi/viewcontent.cgi?article=4556&context=wlulr, accessed 20 July 2020.

[23] Smith v Barlow (1953) 98 A. C. 581, at 155.

[24] Section 135, Companies Act, 2013.

[25] Lahoti Y, “Corporate Social Responsibility By SMEs” (blog.ipleaders.in, 15 December 2015) https://blog.ipleaders.in/corporate-social-responsibility-smes/, accessed 20 July 2020.

[26] Toal and Brooms, Supra 17.

[27] James Foxall, “How SMEs Can Manage Their Social Responsibility” (Business Library, 4 June 2018) https://www.telegraph.co.uk/business/sme-library/managing-your-business/managing-social-responsibility/ , accessed 31 July 2020.

[28] ibid.

[29] Shah, Bhomik, “CSR Spend in India in FY 2017: Rise in Actual CSR Spend, Mild Improvement in Compliance.” CSRbox.org, 10 July 2017,https://csrbox.org/India_CSR_news_CSR-Spend-in-India-in-FY-2017–Rise-in-Actual-CSR-Spend,%20-Mild-Improvement-in-Compliance_70, accessed 20 July 2020.

[30] ibid.

[31] ibid.

[32] General Circular, Supra 10.

[33] Toal and Broomes, Supra 17.

[34] Murray S, “Why Giving Back Is the Best Way Forward for Businesses” (The Guardian, 2 February 2018) https://www.theguardian.com/careers/2018/feb/02/why-giving-back-is-the-best-way-forward-for-businesses, accessed 20 July 2020.

[35] ibid.

[36] ibid.

[37] ibid.

[38] Shishir Sinha, “Contributions to PM CARES Fund will be considered as CSR: Centre” ( Business Line, 27 May 2020) https://www.thehindubusinessline.com/economy/policy/contributions-to-pm-cares-fund-will-be-considered-as-csr-centre/article31684769.ece, accessed 31 July 2020.

[39] FTSE Russell, https://www.ftserussell.com/products/indices/ftse4good, accessed 31 July 2020.

 

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