CSR in Government Companies

The concept of corporate social
responsibility (CSR) has acquired tremendous prominence in India since the
enactment of the Companies Act, 2013 and the Companies (Corporate Social
Responsibility Policy) Rules, 2014 (the CSR Rules). They are applicable to
large companies, whether or not they are listed on the stock exchange.
Now, the Ministry of Heavy
Industries & Public Enterprises of the Government of India has issued the Guidelines
on Corporate Social Responsibility and Sustainability for Central Public Sector
Enterprises
(Guidelines). These apply to central public sector enterprises
(CPSEs), which are essentially companies or undertakings owned or controlled by
the Central Government. These new Guidelines come into effect from April 1,
2014.
The Guidelines represent an
important step in India’s foray into CSR in an unparalleled manner. Some of the
unique features of the Guidelines are discussed below.
Applicability
The Guidelines are applicable to
all CPSEs and are in addition to the provisions of the Companies Act and the
CSR Rules. In other words, CPSEs are subject to a higher standard of social
responsibility than companies in the private sector. Although the operation of
CPSEs (or other state-owned enterprises) in India have not been the
subject-matter of a detailed study from a corporate governance perspective,
this sector encapsulates a larger element of public interest compared to other
companies run on largely commercial lines with profit-making being the
principal motive.
By imposing higher standards on
CPSEs, the Government appears to require them to pave the way for greater
social obligations among business enterprises. This is a welcome move. In the
past, government companies have been criticized for their lackadaisical
attitude towards corporate governance and for adopting and implementing practices
that were not only inferior to those in the private sector but also below par
judging by the legal requirements (e.g. for board independence). By
spearheading the efforts towards CSR, the CPSEs may now have to take the lead
in introducing and implementing sustainable and socially responsible business
practices.
Sustainability and CSR
One of the criticisms of the
Companies Act and the CSR Rules is that they focus on CSR spending (which is
essentially corporate philanthropy) and in fact specifically provide that matters
carried out by companies in pursuance of their business are not covered within
the ambit of CSR. As observed in a previous
blog post
:
…CSR excludes
“activities undertaken in pursuance of the normal course of business of the
company”. This appears somewhat paradoxical in that the companies’ normal
business conduct will not be taken into account for CSR. This is because the
Companies Act’s focus on CSR as a matter of expenditure of funds by companies
rather than as a matter of conduct or corporate behaviour. It must be
re-emphasized that CSR goes beyond mere spending, and must also promote social
responsible and sustainable business practices.
The Guidelines applicable to CPSEs
go a step further and lay significant emphasis on sustainability in business
practices. They expressly state that CSR and sustainability are complementary
in nature and must be dealt with together. Hence, sustainability issues must be
ingrained into the business policies and strategies of the CPSEs to the extent
possible.
This approach is combining
sustainability and CSR is a necessary one. It is important for companies to
imbibe sustainability in their regular business practices by taking into
account the interests of long-term stakeholders, including shareholders and other
affected parties such as creditor, employees, consumers and the community. This
is also consistent with the broader duties of the directors in section 166(2)
of the Companies Act, 2013. Under the Guidelines, this would be complemented
through CSR, which essentially relates to corporate spending (of a share of
profits) into specified activities. This approach combines socially responsible
business practices as well as spending (as a form of corporate philanthropy).
While the Companies Act and the CSR Rules applicable to all companies provide
for the spending aspect, they pay short shrift to the sustainability aspect (in
that there is nothing in that regime to provide for sustainability or social
responsibility in regular business practices). To this extent, the Guidelines
for CPSEs score over the Companies Act and the CSR Rules. Perhaps, one might
even suggest that the next round of reforms or amendments to company law must
consider adopting the CPSE approach for all companies under the broader CSR
mandate.
Mandatory Nature
Although it was initially intended
to make CSR mandatory under the Companies Act, the provision was subsequently
diluted. In its final form, CSR spending represents a compromise which allows
companies to adopt a “comply-or-explain” approach. However, for CPSEs the
Guidelines adopt a strict mandatory approach. The Guidelines state that it
would be “mandatory for all CPSEs which meet the criteria as laid down in
Section 135(1) of the Act, to spend at least 2% of the average net profits of the
three immediately preceding financial years in pursuance of their CSR
activities as stipulated in the Act and the CSR Rules.” They also add that “in
case of CPSEs mere reporting and explaining the reasons for not spending this
amount in a particular year would not suffice and the unspent CSR amount in a
particular year would not lapse. It would instead be carried forward to the
next year for utilisation for the purpose for which it was allocated.” Even
here, CPSEs are held to a much higher standard of CSR spending than companies
in the private sector.
Overall, the Guidelines embrace a
more overarching approach towards CSR than the Companies Act and the CSR Rules.
It is indeed heartening to note that government companies are leading the way
in this regard. As always, much however depends upon the implementation of the
Guidelines in determining the success of this approach towards CSR.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • As commented:
    Origin (Doubting Thomas):

    "St. Thomas, apostle who doubted Jesus’ resurrection until he had proof of it (John 20:24–29)
    First Known Use: 1883"

    Now, having traced the origin, and given to know what that idiom means, still not minding to take the possible risk of self being dubbed as one:
    The CSR spending , given a statutory shape, and made mandatory for some, and not so for the rest in the corporate world, is referenced to 2 % of yearly profits ; and subject to a cap of average profits for a 3 year period. The points of basic doubt that instantly surfaces are mainly these:
    Does that necessarily mean, and inevitably imply, that for any company to be hauled up and/or being called upon to explain in case of non compliance, the empowered authority may have to wait for the qualifying profits to be quantified much after the end of each year, also for the 3 year period end and the audited final accounts are made available?
    Has the government already thought of, and truly effective machinery is in place, so also have formulated equally effective measures to keep a satisfactorily good, if not foolproof, track / monitoring of the actual spending, apart from quantitatively, for only the permitted / envisaged purposes?
    On the premise that as emphasised in the write-up, in cases of PSUs the aim is also to achieve the avowed objective of “good governance”, to what extent the ultimate responsibility and related answerability of CAG, statutory auditor(s) , the internal management and internal audit/controls , and the like are envisaged/covered in the road map ?
    Perhaps, hopefully, some sort of answers must be available, and forthcoming, if and when so inquired into or warranted.

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