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.
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.
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.