It is believed that the treatment of corporate social responsibility (CSR) was one of the key sticking points that delayed the Companies Bill, 2011. Now that there is some clarity, it would be useful to examine the relevant provisions. Clause 135 read with Schedule VII of the Bill deal with the concept of CSR. A number of requirements emerge:

1. The Bill requires large companies (determined with reference to net worth, turnover or profit) to constitute a Corporate Social Responsibility Committee consisting of at least one independent director. The role of the committee is to formulate and recommend to the board a CSR policy for the company. Once the board approves the policy, it must be announced by placing it on the company’s website. The CSR activities may comprise a number of activities listed in Schedule VII. The fairly general nature of the list in that Schedule does not provide assurance that the CSR spending may indeed always be directed to the achievement of the intended purposes. However, it is certainly the case that the more reputed and socially-oriented companies would be more focused in their approach in order to satisfy their social obligations, but then they would do so irrespective of any legal obligation (or persuasion) that serves no additional purpose.

2. Companies must “make every endeavour” to ensure that they spend a minimum amount (2% of the average net profits for preceding 3 years) on activities pursuant to their CSR policy. Since a move to impose a mandatory requirement for CSR has come under severe criticism, the Ministry seems to have adopted a half-way house approach, short of making CSR mandatory. Ultimately, the nature of the obligation, if any, will boil down to semantics and interpretation of the expression “every endeavour”, and it is unlikely that such an obligation is capable of being enforced to any level of specificity.

3. In case companies do not spend the requisite amounts on CSR activities, they must specify reasons in the board’s report annually sent to shareholders. This incorporates the “comply-or-explain” approach typically adopted for corporate governance (e.g. under the Corporate Governance Code in the UK and the Voluntary Guidelines in India).

While the importance of CSR cannot be underestimated, questions continue to remain as to the manner in which it is proposed to be treated in law. Although it is a unique form of legislative provision, there does not seem to be a justification as to why it merits treatment at a statutory level. Arguably, such matters can be more appropriately dealt with through soft norms such as codes of conduct. The present approach may result in a tendency to treat CSR as another item to “check the box”. What is required is a greater understanding of the drivers and motives of corporations and their stakeholders that might engender a more socially responsible behaviour.

(V. Umakanth specializes in corporate law and governance, cross-border investments and financial sector regulation. While his work generally encompasses the Asian markets, his particular focus is on India. He has co-authored a book on Singapore corporate governance, published articles in international journals and founded the Indian Corporate Law Blog.

(Article first published in indiacorplaw)