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Review of The  Companies  (Corporate Social Responsibility Policy)Rules 2014- Suggestions

There are reports that the new government is reviewing some provisions of Companies Act 2013, including the CSR provisions. This review, it is reported, will address some concerns of industry and business associations. We are back to consultation process of 2012 and 2013 conducted by Indian Institute of Corporate Affairs on behalf of Ministry of Corporate Affairs. Main points that the industry and business made at that time is:

  1. CSR cannot be mandatory

  2. CSR cannot be limited to neighboring community development without any link to business.

The  Companies (Corporate Social Responsibility Policy)Rules 2014, issued on 27th February , 2014 and applicable beginning 01st April 2014, continued to perceive CSR, despite serious objections by many in Industry, as something that is do not further business interest. It is welcome that  the final notification deleted words like “CSR Actions cannot be benefitting business”, and  had only limited exclusions like, “activities undertaken in pursuance of normal course of business” “ CSR projects cannot benefit only the employees”. However, limiting CSR to “community actions” that have little linkage to business is not in line with the prevalent understanding of this word….or as it is defined or perceived in Rio +20 . In sharp contrast, Department of Public Enterprises also mandates the CPSUs to spend certain percentage of their profits on sustainable development/CSR , but here definition of sustainable development/CSR clearly and explicitly includes actions that benefit the business directly and indirectly and in long and short terms.

At Rio +20, all nations resolved that “

We acknowledge the importance of corporate sustainability reporting and encourage companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle. We encourage industry, interested governments as well as relevant stakeholders with the support of the UN system, as appropriate, to develop models for best practice and facilitate action for the integration of sustainability reporting, taking into account the experiences of already existing frameworks, and paying particular attention to the needs of developing countries, including for capacity building (p 47, The Future We Want).

Globally, there is an increasing demand from the investors (about 80  large global financial institutions representing about 70% of global capital flows adopted equator principles)  and other stakeholders,  that the businesses have to generate and deliver value to all stakeholders. It is believed, that a business that delivers value to all stakeholders and measures such value in economic, social and environmental terms is in fact acting in self interest and building long term shareholder value.

Realizing that Responsible conduct of Business and disclosing the same through sustainability report,  not only builds  intrinsic business value but also improves access to capital, many notable business groups in India have embraced sustainability practice and disclosures. Many of these companies, follow GRI guidelines and some others commit to 10 principles of United Nations Global Compact and communicate progress. In line with this, Ministry of Corporate Affairs, have articulated National

Voluntary Guidelines on Social, Environmental and Economic Responsibilities of the Business. It has urged all the businesses in India, to practice these nine principles of responsible business and SEBI went ahead and amended listing agreement and included a requirement that top 100 listed companies on an exghange have to disclose their policy and performance on the nine principles of National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of the Business.

So, what is to be corrected in the   Companies (Corporate Social Responsibility Policy)Rules 2014?

The Companies (Corporate Social Responsibility Policy) Rules 2014 make it mandatory to have board focus on CSR, develop and deploy CSR policy and disclose. It specifies that company spend 2% of average of its last three preceding year’s profits and in case it does not, it has to provide reasons in the disclosure. This prescription that company through its board have to have focus on CSR and govern the processes to deliver social value would have been appreciated by the business  if the CSR was defined to deliver long term shareholder value, contributes to the welfare/benefit of the stakeholders(like customers, suppliers, communities etc) and improves the access to capital. Many industry leaders believe that managements and  boards struggle to generate and balance the short term interest of shareholders and long term benefit of the company and the shareholders cannot receive adequate attention and such an attention  may be effectively achieved by regulation as in the  Companies (Corporate Social Responsibility Policy)Rules 2014. Business has serious objection to the way CSR is defined , excluding activities/projects/programs that have a business benefit .

I tried picking the brains of Sustainability / CSR officers in the Industry over the week end. Suggestions that have good acceptance is that the schedule VII  of the  Companies (Corporate Social Responsibility Policy)Rules 2014 that lists the projects and programmes may be modified to include

Suggestion 1

Any action in furtherance of adherence to National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of the Business, Minstry of Corporate Affairs OR 10 principles of United Nations Global Compact OR any other such Global guidelines of Business responsibility principles

Suggestion 2

As in recent (April 2013), Department of Public Enterprises guidelines on CSR /Sustainability for Central Public Sector Enterprises, allow CSR expenditure on furtherance of sustainable development inside business operations in addition to activities listed in schedule iiv.

Implementation of suggestion 1, is an action on p47 of Rio +20 and only about 10 countries have acted on the same till date. This will give India , a leadership position and will ,at the least, improves the access to capital. Suggestion 2, would expand the definition of CSR in the rules, and makes it more acceptable to business.

#CompaniesAct2013 #Corporatesocialresponsibility #Rio20 #UnitedNationsGlobalCompact

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