Dr.

SHAKUNTALA MISRA NATIONAL REHABILITATION UNIVERSITY

LUCKNOW

PROFITABILITY VS.WELFARE THE LEGAL PERSPECTIVE

CSR RELATION WITH CONSITUTION

SUBMITTED TO: SUBMITTED BY:

Mrs. VIJETA DUA TANDON ASHISH SINGH

Assistant Professor, Roll No: 14

DSMNRU, Lucknow L.L.B. 8th SEMESTER

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 TABLE OF CONTENTS

Introduction…………………………………………………………..3
Importance……………………………………………………………4
History and Evolution of Indian CSR………………………………..4
National Voluntary Guidelines (NVG)………………………………5
CSR Under Companies Act ,2013…………………………………...7
Specific Features Companies Act……………………………………8
The Objectives of the policy…………………………………………9
Scope…………………………………………………………………9
Role of CSR Committee……………………………………………...10
CSR in Perspective of the Indian Constitution……………………….10
Constitutional Arguments on mandatory CSR and voluntary CSR….10
Conclusion……………………………………………………………13
Reference……………………………………………………………..14

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 INTRODUCTION
The concept of CSR is not simple to define; various concepts and themes overlap this term. The
concepts of corporate citizenship, sustainable business, environmental responsibility, the triple
bottom line, social and environmental accountability, business ethics and corporate accountability
are all very much linked with CSR.

The term CSR itself came into common use in the early 1970s. The last decade of the twentieth
century witnessed a shift in focus from charity and traditional philanthropy towards a more direct
engagement of business in mainstream development, and concern for disadvantaged groups in
society. In India, there is a growing realization that business cannot succeed in isolation and social
progress is necessary for sustainable growth. An ideal CSR practice has both ethical and
philosophical dimensions, particularly in India where there is a wide gap between sections of
people in terms of income and standards as well as socio-economic status1

BUSINESS PERSPECTIVE
Focuses on the importance of ‘reputation capital’ for capturing and sustaining markets. CSR is
nothing but a new business strategy to reduce investment risk and maximize profits by taking all
the stakeholders into confidence.

ECO - SOCIAL PERSPECTIVE

Recognizes the fact that social and environmental stability and sustainability are two major
prerequisites for sustainability of the market in the long run. CSR is both a value and a strategy for
ensuring sustainability of a business.

RIGHT - BASED PERSPECTIVE

Focuses on the fact that consumers, employees, stakeholders and affected communities have a
right to know about corporations and their businesses. It stresses accountability, transparency, and
social and environmental investment as major aspects of CSR.

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 IMPORTANCE

CSR HAS BECOME AN IMPORTANT ISSUE BECAUSE OF THE FOLLOWING FACTORS;

■ CSR helps in strengthening the relationship between companies and stakeholders.

■ It enables continuous improvement and encourages innovations.

■ Attracts the best industry talent as a socially responsible company.

■ Provides additional motivation to employees.

■ Mitigates risk as a result of its effective corporate governance framework.

■ Enhances ability to manage stakeholder expectations.

HISTORY AND EVOLUTION OF INDIAN CSR

India has the world’s richest tradition of corporate social responsibility. Though the term CSR is
comparatively new, the concept itself dates back to over a hundred years. CSR in India has evolved
through different phases, like community engagement, socially responsible production and
socially responsible employee relations. Its history and evolution can be divided into four major
phases.2

PHASE 1 (1850 TO 1914)

The first phase of CSR is known for its charity and philanthropic nature. CSR was influenced by
family values, traditions, culture and religion, as also industrialization. The wealth of businessmen
was spent on the welfare of society, by setting up temples and religious institutions. In times of
drought and famine these businessmen opened up their granaries for the poor and hungry. With
the start of the colonial era, this approach to CSR underwent a significant change. In pre-
Independence times, the pioneers of industrialization, names like Tata, Birla, Godrej, Bajaj,

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promoted the concept of CSR by setting up charitable foundations, educational and healthcare
institutions, and trusts for community development. During this period social benefits were driven
by political motives.

PHASE 2 (1910 TO 1960)

The second phase was during the Independence movement. Mahatma Gandhi urged rich
industrialists to share their wealth and benefit the poor and marginalized in society. His concept of
trusteeship helped socio-economic growth. According to Gandhi, companies and industries were
the ‘temples of modern India’. He influenced industrialists to set up trusts for colleges, and
research and training institutions. These trusts were also involved in social reform, like rural
development, education and empowerment of women.

PHASE 3 (1950 TO 1990)

This phase was characterized by the emergence of PSUs (Public Sector Undertakings) to ensure
better distribution of wealth in society. The policy on industrial licensing and taxes, and restrictions
on the private sector resulted in corporate malpractices which finally triggered suitable legislation
on corporate governance, labour and environmental issues. Since the success rate of PSUs was not
significant there was a natural shift in expectations from public to private sector, with the latter
getting actively involved in socio-economic development. In 1965, academicians, politicians and
businessmen conducted a nationwide workshop on CSR where major emphasis was given to social
accountability and transparency.

PHASE 4 (1980 ONWARDS)

In this last phase CSR became characterized as a sustainable business strategy. The wave of
liberalization, privatization and globalization (LPG), together with a comparatively relaxed
licensing system, led to a boom in the country’s economic growth. This further led to an increased
momentum in industrial growth, making it possible for companies to contribute more towards
social responsibility. What started as charity is now understood and accepted as responsibility.

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 NATIONAL VOLUNTARY GUIDELINES (NVG)3

National voluntary guidelines are applicable to all businesses irrespective of size, sector or
location. These guidelines were designed with the aim of assisting enterprises to become
responsible entities much before the CSR Act (Companies Act -2013) came into force. In fact
various propositions from NVG have been taken into consideration for structuring the Companies
Act. The principles behind the guidelines are as follows:

PRINCIPLE 1 Businesses should conduct and govern themselves with ethics, transparency and
accountability

PRINCIPLE 2 Businesses should provide goods and services that are safe and contribute to
sustainability throughout their life cycle.

PRINCIPLE 3 Businesses should promote the well-being of all employees

PRINCIPLE 4 Businesses should respect the interests of, and be responsive to, all stakeholders,
especially those who are disadvantaged, vulnerable and marginalized.

PRINCIPLE 5 Businesses should respect and promote human rights.

PRINCIPLE 6 Businesses should respect, protect, and make efforts to restore the environment.

PRINCIPLE 7 Businesses, when engaged in influencing public and regulatory policy, should do
so in a responsible manner.

PRINCIPLE 8 Businesses should support inclusive growth and equitable development.

PRINCIPLE 9 Businesses should engage with and provide value to their customers and
consumers in a responsible manner.

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CORPORATE SOCIAL RESPONSIBILITY UNDER COMPANIES ACT
2013

(1) Every company having net worth of rupees five hundred crore or more, or turnover of
rupees one thousand crore or more or a net profit of rupees five crore or more during
any financial year shall constitute a Corporate Social Responsibility Committee of the
Board consisting of three or more directors, out of which at least one director shall be
an independent director.
(2) The Board's report under sub-section (3) of section 134 shall disclose the composition
of the Corporate Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,—

(a) formulate and recommend to the Board, a Corporate Social Responsibility

Policy which shall indicate the activities to be undertaken by the company as
specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to in
clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to
time.
(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social
Responsibility Committee, approve the Corporate Social Responsibility Policy for
the
company and disclose contents of such Policy in its report and also place it on the
company's website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility
Policy of the company are undertaken by the company.
(5) The Board of every company referred to in sub-section (1), shall ensure that the
company spends, in every financial year, at least two per cent. of the average net profits of
the company made during the three immediately preceding financial years, in pursuance of
its Corporate Social Responsibility Policy:

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 Provided that the company shall give preference to the local area and areas around it where
it operates, for spending the amount earmarked for Corporate Social Responsibility
activities:
Provided further that if the company fails to spend such amount, the Board shall, in its
report made under clause (o) of sub-section (3) of section 134, specify the reasons for not
spending the amount.
Explanation.—For the purposes of this section “average net profit” shall be calculated
in accordance with the provisions of section 198.
SPECIFIC FEATURES COMPANIES ACT – 2013

■ The provisions of the CSR Act apply to all companies that have any one of the following in any
financial year

■ Net worth of INR 500 crores or more

■ Turnover of INR 1,000 crores or more

■ Net profit of INR 5 crores or more

■ An average of the previous three financial years’ PAT will be considered for calculating the 2%
for CSR.

■ CSR policy of a company should ensure that surplus arising out of a CSR activity will not
become part of business profits.

■ CSR policy should specify that the CSR corpus will include the following: a) 2% of average net
profit; b) any income arising thereof; c) Surplus arising out of CSR activities.

■ Companies may collaborate or pool resources with other companies to undertake CSR activities
and any expenditure incurred on such collaborative efforts will qualify for computing CSR
spending.

■ All companies falling under the provision of Section 135 (1) of the Act should report, in the
prescribed format, the details of their CSR initiatives in the director’s report and on the company’s
website.

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■ In case a company has failed to spend 2% of the average net profit, the reason for doing so
should be mentioned in the annual board report.

THE OBJECTIVES OF THE POLICY

This Policy shall be read in line with Section 135 of the Companies Act 2013, Companies
(Corporate Social Responsibility Policy) Rules, 2014 and such other rules, regulations, circulars,
and notifications (collectively referred hereinafter as ‗Regulations‘) as may be applicable and as
amended from time to time and will, inter-alia, provide for the following:

• Establishing a guideline for compliance with the provisions of Regulations to dedicate a

percentage of Company‘s profits for social projects.

• Ensuring the implementation of CSR initiatives in letter and spirit through appropriate
procedures and reporting

• Creating opportunities for employees to participate in socially responsible initiatives.

SCOPE

Education.

Water Supply including Drinking Water:

Health Care organizing, health awareness Camps on

Environment

Social Empowerment.

Sports and Culture

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 ROLE OF CSR COMMITTEE

The CSR Committee constituted in pursuance of Section 135 of the Companies Act, 2013 shall be
required to carry out the following activities:

a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall
indicate the activities to be undertaken by the company as specified in Schedule VII;

b) Recommend the amount of expenditure to be incurred on the activities referred to in clause (a);
and

c) Monitor the Corporate Social Responsibility Policy of the company from time to time.

CORPORATE SOCIAL RESPONSIBILITY IN PERSPECTIVE OF INDIAN

CONSTITUTION
The corporate social responsibility is assortment of the business interest as well as community
interest for social ordering. The actions of business and industry impact the lives of citizens, both
directly and indirectly hence the business and industry are expected to assure reasonable level of
responsibilities towards the society in addition to their economic and legal obligations. Nowadays
the Governments are also moving towards the welfare state concept. With this purpose in mind,
our Constitution lays down desirable principle and guidelines in Part IV of the Indian constitution.
These provisions are known as the Directive Principle of State Policy under Article 36-51 of Indian
constitution. The Constitution of India aims to establish not only political democracy but also
socio-economic justice to the people to establish a welfare state. Since the increasing of socio-
economic imbalances the Governments are encouraging companies to take up social responsibility
for changing the social structure by eradicating hunger, poverty and malnutrition, promoting
preventive healthcare, promoting education and promoting gender equality etc. For this purpose
the Indian companies Act, 2013, section 135 and schedule VII provides guidelines on
implementation of CSR and mandates the corporate’s to spend 2% of their profit towards CSR
activities for welfare state.

Constitutional Argument on Mandatory CSR and Voluntary CSR

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The major Indian companies CEO have stated that the process should be more ‘democratic’ the
CSR is essentially a ‘voluntary’ exercise it is not within the scope of law to statutorily mandate
positive action; it can only enforce minimum standards. The decision regarding allocation of a
Public company’s profits towards CSR should be subject to the shareholders’ vote, not the
government’s legislative powers. The Directive Principles of State Policy are non justiciable, as
per Article 37 of the Constitution i.e. they cannot be enforced in a Court of Law, because these
Principles impose positive obligations on the State. Generally the Government imposes tax and
Money given as ‘tax’ goes to the State, and not directly to the community. For what purpose that
money is used is left to the discretion of the Government. In a country like India, where often the
money does not use to the grass root level due to various reasons such as corruption, bureaucracy,
population etc, mere payment of taxes cannot be a means of ensuring that social good is being
done. On the other hand, the measure under clause 135 is much more effective than a tax –
companies have full freedom to give priority to social causes they want to support, and because
the money is directly pumped into CSR initiatives, the impact is much higher.

Clause 134 provides for mandatory disclosure of the implementation of the CSR Policy, and
provides for penalty in case of failure to do the same. Hence, not only does the measure under
clause 135 not amount to a ‘tax’, it is also more effective than a taxation scheme. Thus, it is
submitted that ‘voluntary CSR’ is no longer sufficient to ensure that companies realize their
obligations towards various stakeholders (both at a micro and macro level) – it is only through
‘mandatory CSR’ that companies would take up CSR initiatives in a more streamlined manner.

Clause 135 Violates Fundamental Rights of Indian Constitution

The Clause 135 of the Companies act 2013 is having various problems with the way in which
clause 135 has drafted. The clause 135 creates a categorization among the companies in India. The
Clause divides into two categories first those with an annual turnover of rupees one thousand crore
and more, or those net worth of rupees five hundred crore and more, or a net profit of rupees five
crore and more. Second other remaining Companies. Clause 135 is applicable only to three types
of companies those with an annual turnover of rupees one thousand crore and more, or those net
worth of rupees five hundred crore and more, or a net profit of rupees five crore and more. Since
this clause creates a classification and violating Article 14 [9] of the Indian Constitution I,e
Equality before law yet it to be tested the constitutional validity under Article 14 of Indian

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constitution. As per the Supreme court the classification of Article 14 divided two types i. The
classification must be based on a clear differentia. ii The classification created must have a
balanced nexus to the object sought to be achieved by the Act. The clause 135 easily satisfies the
first classification but in second classification it fails. It has been stated by the Minister for
Corporate Affairs, the purpose of this clause is to ensure that ‘corporate entities contribute
meaningfully’ towards the growth and prosperity of the nation now how these figures of turnover,
net worth and profit of company arrived or why these particular companies should be subjected to
such an obligation why not to other remaining companies having a net worth of below five hundred
crores, or a turnover of rupees below thousand crores, or a net profit of rupees below five crores.
Such a categorization of companies seems ‘arbitrary’. Moreover, the three classes of companies
have been created under this clause create confusion. There are certain companies which have
revenues exceeding rupees one thousand crore, but

Have incurred a net loss would also be required to mandatorily undertake CSR obligations under
clause 135 of companies Act 2013. Thus, the various discussions on the clause 135 have failed to
show a nexus between the classification created by the clause and the object of clause 135 of the
Companies Act 2013, Thus, this clause would be liable to be struck down as violate of Article 14
of the Constitution, and it subject to judicial review.

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 Conclusion

1. It is not clear what all constitutes CSR activities as the list specified under Schedule VII of the Act
seems like an inclusive list and not exhaustive so amend schedule VII because it restrict the scope
of CSR activities it should provide a vast definition for CSR, in order to provide companies with
the freedom to select from a large number of areas.
2. The CSR provisions under the 2013 Act require a minimum of 3 directors for the constitution of
the CSR committee, clarification needed as to whether qualifying private companies would be
required to appoint a third director to comply with the CSR provisions.
3. There may be exemption of CSR, especially in case of companies which are not profitable, but fall
under the designated category due to triggering net worth or turnover criteria.

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 REFERENCES

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http://articles.economictimes.indiatimes.com/2011-03- 24

http://articles.timesofindia.indiatimes.com/2011-03-s26/software-services/29191926_1_csr-azim-
premjicorporate-social-responsibility.

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