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CHAPTER 7

SOCIAL COMMITMENT AND CORPORATE SOCIAL

RESPONSIBILITY

“Governance is the process whereby people in power make decisions that

create, destroy or maintain social systems.” - Maria Ramos (CEO:

Transnet)

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7.1 Introduction

Corporate Social Responsibility is the voluntary role and contribution on the

part of the business community towards a better social and environmental

development, which is beyond their investment to organizational development.

The business organisations can be lead by large multinationals and for small,

locally based businesses. While, the actions on the part of business

organisations here to be ethically bound to its stakeholders, who include

customers, owners/investors, government, suppliers and competitors.

Corporate Social Responsibility consists of a wide-range activities and

programs that involve businesses looking at how to improve their social,

environmental and local economic impact, their influence on society, social

cohesion and human rights, and fair trade. Key areas of concern are

environmental protection and the well being of employees, the community and

civil society in general, both now and in the future. It refers to the

comprehensive approach that a corporation takes to meet or exceed

stakeholder expectations beyond measures of revenue, profit and legal

obligation. The industrial expansion is a threat to the people living near by

and it invites protest from many like consumer, investors, activist groups,

government regulators and other stakeholders. To develop a better rapport

with the community in the implementation of the developmental activities the

Non Governmental organisations can play better role with the industry and

community. They can help the industrial management in convincing the

expansion program to the community and there by develop a proactive and

social environmental and industrial development policy. Lower operating

costs, Enhanced brand image and reputation, Reduced regulatory oversight,

Product safety and decreased liability, Improved financial performance etc are

the benefit to the organisation. The benefit of Corporate Social Responsibility

not only for the community and organisation but also for the employees. 1

1 http://www.indianmba.com/Faculty_Column/FC292/fc292.html , Date 18th of December 2011,

Time:-5:08 P.M.

http://www.indianmba.com/Faculty_Column/FC292/fc292.html

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7.2 Corporate Governance beyond Profit Maximisation

Business and Society have been inter-dependent since time immemorial.

Though the dominant paradigm of business has been profit earning, the

obsession with profit at any cost causes harm to both business and the society

and ultimately the business flounders and fizzles out. Fortunately, corporate

examples are there to vindicate that ultimately businesses that successfully

blend their concern for profit with humane concern stay, survive and thrive.

Hence, there is the need for humane business management.

Initially , the dominant objective of business was profit and of the wealth of

the owners. But, business history is replete with instances that the mindless

obsession with profit maximization at any cost, when carried to any extreme,

can lead to failures like Enron, WorldCom, Parmalat, Satyam and Union

Carbide etc. At the same time, these are also the business organization

conducting business following practices detrimental to the social well-being

ultimately perish. On the other hand, business organizations demonstrating

their social concern by blending their concern for profits with humane

concerns like Johnson & Johnson, Maruti Limited, Reliance Industries

Limited, and Tata Iron & Steel Company, etc. survive and thrive in the long-

run. That is why there has been a dominant shift in business paradigm beyond

profit maximisation to social/humane concern. Now, social responsibility of

business has become the buzzword of business terminology and also has been

caught by storm in business discussions and debates.2

7.3 What is Corporate Social Responsibility?

Corporate Social Responsibility means responsibility towards the society. The

totality of Corporate Social Responsibility can be best understood by three

words: ‘corporate’, ‘social’ and ‘responsibility’. In broad terms, Corporate

Social Responsibility means responsibility towards the society within which

they are based and operate, not denying the fact that the purview of Corporate

Social Responsibility goes much beyond this. Different people have described

corporate social responsibility differently. Some of the more popular name of

2 S.S. Khanka , “Corporate Governance: Beyond Profit Maximisation”, The Chartered Accountant,

May 2005, p. 1466.

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corporate social responsibility are profit making only, going beyond profit

making, voluntary activities, concern for the broader social system, Economic,

legal and voluntary activities, and Giving way to social responsiveness.

According to Phillip Kotler and Nancy Lee, “CSR is a commitment to

improve community well being through discretionary business practices and

contributions of corporate resources”.

Mallen Baker defined CSR as “way companies manage the business

processes to produce an overall positive impact on society.”3

According to Bowin H.R., “ Social responsibility is the obligation of

businessman to pursue those polices , to make those decisions, or to follow

those lines of action which are desirable in terms of objectives and values of

society.”

According to World Business Council for Sustainable Development in

2004 defined Corporate Social Responsibility as “Corporate Social

Responsibility is the continuing commitment by business to behave ethically

and contribute to the economic development while improving the quality of

life of workforce and their families as well as of the local community and the

society at large.”4

The definition of Corporate Social responsibility is not a difficult concept and

can be explained as:-

Corporate means organized business.

Social means everything dealing with people.

Responsibility means accountability between the two.

As a concept, corporate social responsibility has gained momentum recently

in India, but as a way of life, Indians have practiced corporate social

responsibility since times immemorial to affect social welfare and social well-

being. Here is one such instance to quote from the first verse of ‘Ishavashya

Upanishad’ that describes: “All that exists in this Universe is the abode of the

Almighty. Therefore, enjoy the good things in life by sharing them with

3 “Corporate Social Responsibility-Towards a Sustainable Future” A white paper by KPMG India. 4 http://www.mallenbaker.net/csr/definition.php, Date:-12th of January 2012, Time: - 6:01 P.M.

http://www.mallenbaker.net/csr/definition.php

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others. Do not covet the possessions of others”. This akin to the concept of

Vasudhaiva Kutumbakam, in which the whole earth is to be treated as one’s

family.

Without going into semantics of its definition, corporate social responsibility

can simply be defined as businessman’s decisions and actions taken for

reasons at least partially beyond the firm’s direct economic or technical

interest. The underlying justification behind corporate social responsibility is

that business organizations operate within the society and earn profits by

taking inputs from the society and then selling its outputs to the society itself.

Therefore, just like a citizen, corporations also like corporate citizens have to

reciprocate to the society for what it receives from the society. This implies

that both business and society are interdependent. Both can survive only with

cooperation with each other.5

7.4 Paradigm Shift: From Profit to People

Business dies when society condemns and rejects it. No business can survive

without societal approval and sanction. The inter-dependant nature of

relationship between the business and the society is best illustrated by the

management guru Peter Drucker (1954) by the example of a ship and sea. He

states that the relationship between business and society is “like the

relationship between a ship and the sea which engirds it and carries it, which

threatens it with storm and shipwreck, which has to be crossed but which is

yet alien and distant.”6

Profit is oxygen to business. No business can survive without profit. Hence,

business must earn profit but with social concern. Business operations need to

benefit business and society on a symbiosis basis. Alternative business

practices of blending concern for profit with human concerns ensuring stay

and survival of business abound in corporate history. Corporate social

responsibility does not impinge upon business profitability, rather it helps

increase the profitability in long run, if not in short-run. The relationship

between business and society is just like ship and sea. Just as no ship can reach

5 Supra n. 2. 6http://vidyasagar.ac.in/journal/Commerce/1%20How%20Being%20Good%20Is%20Good%20For%20

Business.pdf Date:- 18th of September 2011, Time:- 7:40 P.M.

http://vidyasagar.ac.in/journal/Commerce/1%20How%20Being%20Good%20Is%20Good%20For%20Business.pdfhttp://vidyasagar.ac.in/journal/Commerce/1%20How%20Being%20Good%20Is%20Good%20For%20Business.pdf

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the other side of its destination without cooperation and sanction from the sea,

business can also not stay and succeed for long period without acceptance and

sanction from the society. Corporate history is witness that business flourishes

only where society thrives. Hence business corporations need to show and

exhibit their concern for the well being of the society within which these

operate. Corporate Social responsibility earns ‘social capita’, also called

‘social patronage’, for the business, which involves the creation of trust,

reciprocity, and tolerance of third party actions. Corporate Social

responsibility offers bonus also in terms of stronger employee bondage with

the organization and stronger and deeper motivation.7

7.5 Alternative to Corporate Social Responsibility

All evidence suggests that profit maximization by a business organization does

not necessity confer maximum benefit on all parties and stakeholders. Instead,

it results in inequitable consequences. At the same time, it would also be

wrong to infer that profits are not important. In fact, they are crucial for

survival of business. Only when a firm is profitable can continue in business

and discharge its social responsibility also. But being profitable is not end

itself. It is a means to other wholesome pursuits to be undertaken by the

business.8

Profit with a purpose larger than one’s self-interest is the best guarantee for

long-term peace, stability, and social cohesion, and is fundamentally necessary

for corporations to pursue their business unhindered.9 As per the existing laws,

ownership of modern business firms is conferred on people who invest their

money in financial equity. Accordingly, they have been given exclusive rights

to the profits earned. But, the fact remains that a modern firm has other types

of equities as well in addition to financial equity. Investments in these other

equities are made by a variety of stakeholders. These include:

7 Supra n. 2 p. 1467. 8 Id. at 1469. 9 S K Chakraborty, Verghese Kurien, Jittu Singh, Mrityunjay Athreya, Arun Maira, Anu Aga, and Anil

K Gupta Pradip N Khandwalla (Coordinator) , “Management Paradigms Beyond Profit Maximization”

http://www.vikalpa.com/pdf/articles/2004/2004_jul_sep_97_117.pdf , Date:-25/09/2011, Time:-2:53

P.M.

http://www.vikalpa.com/pdf/articles/2004/2004_jul_sep_97_117.pdf

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7.5.1 Intellectual equity

Employees invest their ideas in improving technological processes, produce

quality, cost of management, and customer services. It is worth mentioning

that these initiatives usually go far beyond the outline of normal duty for

which they are compensated.10

Company should provide an environment to

employees to update the knowledge and nourish their skills. Company should

direct their Human Resource department to organise the training programme

for improving the their skills.

7.5.2 Goodwill Equity

The community around a business organization invests its goodwill by

continuously supporting the operations of business in spite of inconveniences

the business causes to the community, for example, environmental and noise

pollution and traffic congestion.11

If the company does not focus on investing

in community goodwill, the company is missing a chance for long-term

growth. Investing in goodwill is community development at its most basic,

grassroots element. Each time company advertise their community events on

local bulletin boards, websites and public radio stations, they are building

goodwill. Over time, customers become their best sales force, because they

believe in company, not just in products or services.12

7.5.3 Growth Equity

The government by providing law and order, economic policies, and

infrastructural facilities as supportive conditions of business invests her

growth equity in the business.13Government should pursue a sound policy

framework encompassing encouragement of entrepreneurship, development of

indigenous technology through investment in research and development,

bringing in new technology, dismantling of the regulatory system,

10 S.S. Khanka , “Corporate Governance: Beyond Profit Maximisation”, The Chartered Accountant,

May 2005, p. 1469. 11 Ibid. 12 http://technorati.com/business/small-business/article/building-community-goodwill-leads-to-small/

Date:- 25/09/2011 , Time:- 3:20 P.M. 13 Supra n. 11 p. 1470.

http://technorati.com/business/small-business/article/building-community-goodwill-leads-to-small/

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development of the capital markets and increasing competitiveness for the

benefit of the common man.14

7.5.4 Knowledge Equity

Educational, training, and research institutions invest knowledge equity by

investing their expertise through their research and knowledge product, i.e. the

students.15

Therefore, it is unfair for shareholders to appropriate all the profits.

These other stakeholders too would like to receive some dividends for their

investments, i.e. equities. The same serves as the germane for the idea of

corporate social responsibility. As business firms are embedded in a society

and draw all their resources from it, they must act like responsible citizens.

That the neglect of societal interests can be detrimental and can shake the

foundations of business built over decades.

Therefore, while pursuing their interests, they must also ensure that they

contribute to the well-being of those around them. The fundamental idea

embedded in corporate social responsibility is that business corporations can

not longer act as isolated economic entities detached form the broader issues

of society. The flurry of recent corporate frauds that have come to the light

suggests that the single goal of profit maximization neglecting concern for the

social well-being has the germ of unethical conduct.16

7.6 Corporate Citizenship

Although corporate bodies have always been held accountable financially

and legally, it is only in recent times that their operations have come in for

social and environmental scrutiny. Quite apart from statutory enforcement,

companies will be well advised to take the initiative to meet their community

obligations, because failure to fulfill such commitments is likely to create

problems even in their operational areas.17

Corporate citizenship is the business strategy that shapes the values

underpinning a company’s mission and the choices made each day by its

14 http://siadipp.nic.in/publicat/nip0791.htm , Date:- 25th of September 2011,Time:- 3:34 P.M. 15 Supra n. 13. 16 Ibid. 17 The Concept of Corporate Citizen Ship, The Hindu,( Online Edition), 19th of July 2001,

http://hindu.com/2001/07/19/stories/0619000d.htm .

http://siadipp.nic.in/publicat/nip0791.htmhttp://hindu.com/2001/07/19/stories/0619000d.htm

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executives, managers and employees as they engage with society. Corporate

citizenship in the 21st century is driving a major transition from a model that

allowed unconnected activities-such as compliance with governance and

ethical laws endorsing global standards promoting strong philanthropic and

volunteer activities to serve as surrogates for citizenship.18

Corporate citizenship consists in meeting a company's social responsibilities

and moral management with as much devotion and dedication as in its

commercial agenda. Corporate citizenship concerns all organisations, whether

a large manufacturing company, a local school, a national charity, or a small

family-run shop. While all organisations must be viable and operate within

their financial limits, they must also work within the law of the land and

comply with the health, safety, and environmental norms and parameters.19

7.6.1 Essential Elements of Corporate Citizenship

7.6.1.1 Minimise Harm

Work to minimise the negative consequences of business activities and

decisions on stakeholders, including employees, customers, communities,

ecosystems, shareholders, and suppliers. Examples include operating ethically,

supporting efforts to stop corruption, championing human rights, preventing

environmental harm, enforcing good conduct from suppliers, treating

employees responsibly, ensuring the safety of employees, ensuring that

marketing statements are accurate, and delivering safe, high-quality

products.20

7.6.1.2 Maximise Benefit

Contribute to societal and economic well-being by investing resources in

activities that benefit shareholders as well as broader stakeholders. Examples

include participating voluntarily to help solve social problems( such as

education, health, youth development, economic development for low-income

18 P.V. Khatri and Indu Baghel , “Corporate Social Responsibility Challenges in the Age of

Globalisation ”, (2009), p. 45. 19 Supra n. 17. 20 Supra n. 18.

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communities , and workforce development), ensuring stable employment,

paying fair wages, and producing a product with social value.21

7.6.1.3 Be Accountable and Responsive to Key Stakeholders

Build relationships of “trust that involve becoming more transparent and open

about the progress and setbacks businesses experience in an effort to operate

ethically. Create mechanisms to include the voice of stakeholders in

governance, produce social reports assured by third parties, operate according

to a code of conduct, and listen to and communicate with stakeholders.22

7.6.1.4 Support Strong Financial Results

The responsibility of a company to return a profit to shareholders must always

be considered as part of its obligation to society.23

Ultimately, what distinguishes a company’s practice of corporate citizenship

is expressed by the way in which it delivers its core values. The competitive

companies of the future will find how to fundamentally align and embed their

core values including the values that society expects them to hold. Values are

becoming a new strategic asset and tool that establishes the basis of trust and

cooperation. We can say that corporate citizenship is an idea and a philosophy

which has both ethical and economic dimensions. It advocates doing the right

thing. It gives more importance to the means, than the ends. It expects

business organisations to conduct themselves in an upright and straightforward

manner. Companies have rights and responsibilities vis-a-vis the community

which they seek to serve.24

7.7 Responsibilities of Companies under the Companies Act, 1956

The Companies Act, 1956 stipulates following types of responsibilities for a

company:

21 Id.at 46. 22 Ibid. 23 Ibid. 24 Supra n. 18.

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7.7.1 Responsibilities to have Corporate Form

More than then persons carrying on the business of banking are required to

form a company under the Companies Act, 1956. More than twenty persons

carrying on any other business are also required to form a company.25

The Act

allows many corporate forms.26

The most widely used forms are private

company27

limited by shares and public company28

limited by shares. Since a

public company has substantial social impact, this study is relatively more

concerned and is more focused on such companies.29

7.7.2 Responsibilities Connected with the Formation of a Company

A company has to make public its details, before it can be formed. Towards

this end, certain public documents30

are to be registered with the Registrar.31

These document when registered bind the company and members to the same

extent as if they respectively had been signed by the company and by each

member.32

The memorandum and articles embody only the social contract

between the shareholders inter se, and possibly between the shareholders and

Directors and do not constitute any contract between the company and its

promoters, and the promoter cannot rely on a provision in the Articles except

perhaps if he is a member and claims the general right to have the company’s

business conducted in accordance with the Articles.33

A company is to send

copies of these documents, for a fee of one rupee, to any of its members

demanding the same.34

25 The Companies Act, 1956; Section 11(2). 26 Id.; Section 12. 27 Id.; Section 2(35). 28 Id.; Section 2 (37). 29 Section 43 A, of the Companies Act, 1956 provides for situations when a private company is treated

as a public company. 30 The documents are (i) the memorandum governed by Section 13 to 25 of the Companies Act, 1956,

(ii) articles of association governed by Sections 26, 27 to 30 of the Companies Act, 1956. A public

limited company limited by shares is required to register its memorandum, but such a company has a

choice to register the articles or not to do so. 31 The Companies Act, 1956; Section 2(40). 32 Id.; Section 36 . 33 Melhado v. Porto Alegre Rly. Co. (1874) LR 9 CP 503:43 LJCP 253:31 LT 37:23 WR 57. 34 The Companies Act, 1956; Section 39.

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7.7.3 Member’s Responsibilities

The members35

of a company become severally liable for the debts incurred by

a company, if the at any time number of members of a company is reduced, in

case of a public company, below seven , or in the case of a private company,

below two, and the company carries on business for more than six months

while the number is so reduced, every person who is a member of the

company during the time that it so carries on business after those six months

and is cognizant of the fact of it is carrying on business with fewer than seven

members or two members, as the case may be, shall be severally liable for the

payment of the whole debts of the company contracted during that time, and

may be severally sued.36

In such case the law disregards corporate form.

7.7.4 Responsibilities Connected with Issue of Capital

To issue shares37

or debentures38

a company is to issue a prospectus.39

To

invite fixed deposits, a company is to issue a statutory advertisement.40

A

company cannot allot any share capital , unless it receives minimum

subscription.41

A company has to get permission of at least one stock exchange

to deal in company’s shares before being able to issue share capital.42

A

company can at the most pay five percent commission for issue of shares to

persons buying its shares or procuring such buyers. The maximum is two and

half percent for issue of debentures. The commission must be authorized by

the company’s articles of association.43

A company cannot purchase its own shares or assist any one to do so.44

A

company can issue shares at a premium and in certain cases at a discount.45

A

35 Id.; Sections 2(27) and 41. 36 Id.; Section 45. 37 Id.; Section 2(46). 38

Id.; Section 2(12). 39

Id.; Section 2(36).See also Sections 55 to 68 of the Companies Act, 1956 for more details. These

sections govern content of a prospectus and corporate liability for any statutory contravention in case of

issue of prospectus. 40 Id.; Sections 58 A and 58 B. 41 Id.; Section 69. 42 Id.; Section 73. 43 Id.; Section 76. 44 The Companies Act, 1956; Section 77.

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company is to issue share certificates as the evidence of the title of the

member to such shares. A duplicate share certificate is not to be issued with

intent of defraud.46

A company needs (a) authority by its articles, (b) a special

resolution and (c) confirmation by the Court to reduce its share capital.47

A

company having more than one class of shares can vary class rights with the

written consent of three fourths holders of such a class. The dissentient

shareholders can go to the court against such variation, if they are holding at

least ten percent of shares of such class.48

A company can not register a transfer of shares or debentures without a proper

instrument of transfer duly stamped.49

A company can refuse to register a

transfer. An appeal can be made against such a refusal.50

Such procedure of

transfer is unnecessary in case of share warrants as the transfer is by

delivery.51

If debentures are secured, a denture holder is entitled, on demand, to

a copy of the trust deed.52

7.7.5 Responsibilities Related to Charges

A company has to register certain charges53

to be valid against liquidators or

creditors.54

A member or a creditor can inspect copies of instruments creating

charges and company’s register of charges. If the inspection of the said copies

or register is refused, the company, and every officer of the company who is in

default, shall be punishable with fine which may extend to five hundred rupees

and with a further fine which may extend to two hundred rupees for every day

during which the refusal continues.55

45 Id.; Sections 78 and 79. 46 Id.; Section 84. 47 Id.; Sections 100. See also Sections 101 to 105 for more details. These sections deal with the

concept of Reduction of Share Capital in a company. 48 Id.; Sections 106. See also section 107 for more details. These sections relate to the variation of

Shareholders’ Rights. 49 A.K. Majumdar and G.K. Kapoor, “Company Law”, (2011), p. 230. 50 The Companies Act, 1956; 111. 51 Id.; Sections 114 and 115. 52 Id.; Section 118. 53 Id.; Section 124. 54 Id.; Section 125. 55 Id.; Section 144.

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7.7.6 Responsibilities related to Management and Administration

A company is to have registered office. Notice of situation of the office is to

given to the Registrar. Each office and business correspondence of a company

is to bear name and address of its registered office.56

There are certain

restrictions on commencement of business by a company.57

A company is to

maintain a register of shareholders and debenture holders.58

A company has to

file annual returns.59

A company is to hold statutory meeting, annual general

meeting, extra ordinary general meeting. A company is to cause minutes of all

proceedings at such meetings. A company has to follow statutory procedure

laid down by the Company Act, 1956.60

A company cannot appoint more than one managing director at a time.61

A

company cannot pay more than eleven percent of the net profits by way of

managerial remuneration. Previous approval of the Central Government is

required for payment of managerial remuneration in case of absence of profits

or inadequate profits.62

A company cannot make any tax free payment to any

of its officer or employee.63

A company cannot allow undischarged insolvent persons to manage it.64

A

fraudulent person also cannot be allowed to manage a company.65

A company

cannot appoint a firm or a body corporate to its office or place of profit.66

A

company cannot pay dividend unless it makes profit or has reserves. A

company to provide for depreciation before paying dividend.67

A company has

to distribute dividend within thirty days of its declaration.68

A company has to

56 Supra n.49 p.12, 38, 76, 88, and 96 to 97. 57 The Companies Act, 1956; Section 149. 58 Id.; Section 150 and 152. 59 Id.; Section 159. 60 Id.; Section 165. For more details see sections 166 to 197 which deal with the procedure for the

Meetings and Proceedings in a company. 61 Id.; Section 197 A. 62 Id.; Section 198. 63 Id.; Section 200. 64 Id.; Section 202. 65 Id.; Section 203. 66 Id.; Section 204. 67 Id.; Section 205. 68 Id.; Section 207.

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keep proper books of accounts at its registered office.69

A company has to

facilitate inspection of its accounts by the Registrar and other authorized

officers.70

A company has to present its annual accounts and balance sheet before its

annual general meeting.71

Board of Directors report is to be attached with the

balance sheet.72

The concerned officer of the company is duty bound to

furnish information required to be given in the balance sheet or profit and loss

account of a company without delay to the company, and also to the

Company’s Auditor whenever he so requires.73

A company is to appoint

auditors and get its accounts audited.74

The registrar is empowered to ask a

company to call information or explanation regarding documents to be

submitted to him by the company.75

7.7.7 Responsibilities Related to Directors

A company having paid up share capital of not less than Rs. One crore can not

enter into a contract, with any of its directors, or his relative, or a film in

which such a director or relative is a partner in such a firm, or a private

company of which the director is a member or director, without the previous

approval of the Central Government. The contract should be either for the sale,

purchase or supply of any goods, materials or services; or for underwriting the

subscription of any shares in , or debentures of , the company.76

The company

has to maintain a register having contracts in which its directors are interested

with the contract’s particulars.77

The company has to disclose to its members

information about any of its directors interest in an appointment of any of its

manager, or managing director.78

69 Id.; Section 209. 70 The Companies Act, 1956; Section 209 A. 71 Id.; Section 210. The form and content is governed by Section 211. 72

Id.; Section 217. 73 Id.; Section 221. 74 Id.; Section 224. See also Section 225 to 233 for more details regarding the Audit. 75 Id.; Section 234. 76 Id.; Section 297. 77 Id.; Section 301. 78 Id.; Section 302.

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The company has to maintain a register showing particulars of its directors,

managing director, manager and secretary.79

The register is to be kept open for

inspection.80

The company has to keep a register showing shareholdings in it

and debenture-holdings of it and in of its subsidiaries of each of its directors.81

A company is to decide remuneration of its directors either in its articles or by

a resolution in its general meeting. If the articles need a special resolution , the

company is to decide the remuneration by a special resolution in its general

meeting. The decision is subject to section 198 of the Companies Act,1956.82

The Government’s previous sanction is required for increasing managerial

remuneration for companies falling under the Schedule XIII of the Companies

Act.83

A company director is prohibited from any assignment of his office.84

A

company director cannot hold any office or place of profit without the consent

of his company.85

A managing director or a manager cannot manager more

than two companies; he cannot mange more than one company without

unanimous consent of the Board of Directors of the second company. But with

the permission of the Central Government, a person can manager more than

two companies.86

7.7.8 Responsibilities in Case of Compromises and Arrangements

Creditors or members are to be informed about a compromise or arrangement

with them.87

A dissenting shareholder is not bound by the majority-decision of

the shareholders and is to be compensated by the company.88

Companies are

to amalgamate in the national interest, if the Central Government so orders.89

An amalgamated company has to preserve its books and papers till the

Government allows their disposal.90

79 Id.; Section 303. 80 Id.; Section 304. 81 Id.; Section 307. 82 Id.; Section 309. 83 Id.; Section 310. 84 Id.; Section 312. 85 Id.; Section 314. 86 Id.; Section 316 and 385. 87 Id.; Section 393. 88 Id.; Section 395. 89 Id.; Section 396. 90 Id.; Section 396 A.

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7.7.9 Responsibilities in case of Winding up

A company’s directors and managers have to make a statement as to the

affairs of the company, to the official liquidator, in case of winding up order

by the Tribunal.91

In case of voluntary winding up, a company is to publish its decision to wind

up92

; its directors are to make a declaration of solvency93

; it has to notify the

Registrar regarding appointment of liquidator94

; during the winding up, the

liquidator has to call general meeting at the end of each year95

; at the final

such meeting, the company is to be dissolved.96

The liquidator has to call

meeting of creditors every year, in case of voluntary winding up by creditors.97

All Costs, charges and expenses properly incurred in winding up are payable

out of the assets of the company in priority to all other claims.98

Workmen’s

dues, and debts due to secured creditors are to be paid in priority to all other

debts.99

7.7.10 Responsibilities of Foreign Companies

Such companies are responsible to public disclosure. A Foreign Company

which establishes a place of business in India is required to deliver the

following documents to the Registrar of Companies, New Delhi and to the

Registrar of Companies of the concerned State for Registration:

(a) A certified copy of its Constitution with English translation, if it is not is

English.

(b) The address of the Registered or Principal Office of the Company in the

Foreign Company.

(c) List of Directors and Secretary of the Company with particulars.

91 Id.; Section 454. 92 Id.; Section 485. 93 Id.; Section 488. 94 Id.; Section 493. 95 Id.; Section 496. 96 Id.; Section 497. 97 Id.; Section 498. 98 Id.; Section 520. 99 Id.; Section 529 A.

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(d) The Names and Addresses of one or more persons Resident in India who

are authorised to accept Service of Notice and other Documents on behalf

of the Company.

(e) The Addresses of the Principal Place of business in India. This principal

place of business is to be treated for the purposes of the Companies Act,

1956 as the Registered Office of the Company100

Whenever there is any alteration in – (a) the Charter or Constitution of the

Foreign Company, or (b) the Registered or principal place of business in the

Foreign Country, or (c) the Directors or Secretary, or (d) the Names and

Addresses of Authorised persons in India to accept Service of Documents, or

(e) the principal place of business of the Foreign Company in India, the

Company shall file a Return containing in Alterations.101

The Balance Sheet of

a Foreign Company must be the Form given Part I of Schedule VI to the

Companies Act, 1956 or as near thereto as circumstances admit or in such

other form as the Central Government may approve either generally or in a

particular case.102

Every Foreign Company shall state in which Country it is incorporated. The

Foreign Company should conspicuously exhibit its Name and Country of

Incorporation outside every Office or Place where the Foreign Company

carries on business in India. Outside the office or place of business the writing

should be in legible English and in addition to English, it should be written in

Local language.103

Any process, Notice or other Document may be served on a

Foreign Company by addressing the same to the “Authorised Person” of the

Foreign Company resident in India and either left at his address or sent to the

address by post.104

In relation to a Foreign Company the Registrar of

Companies, New Delhi shall be the Registrar with whom all the Documents

are to be filed. In addition, the Copies of all such Documents have also to be

100 The Companies Act, 1956; Section 592 (1). 101 Id.; Section 593. 102 Id.; Section 211(1). 103 Id.; Section 595. 104 P.S. Anant Narayanan v. Massey Ferguson Ltd., (Canada), (1965) 1 Comp. LJ 269 (Mad.); See also

The Companies Act, 1956; Section 596

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filed with the Registrar of Companies of the State where the Foreign Company

has its principal place of business.105

7.7.11 Responsibilities to Inform

Companies are to furnish information or statistics, if the Central Government

so directs them. The order of the Central Government shall be published in the

Official Gazette and in any other manner as the Central Government may

think fit. The date of demand for information or statistics in the Official

Gazette will be deemed the date of publication of the order.106

Apart from the publication in the Official Gazette the order shall be served on

the individual company concerned in the manner laid down in Section 51 of

the Companies Act, 1956, i.e. by sending it to the Company or Officer at its

Registered Office by post under Certificate of Posting or by Registered Post or

by leaving it at its Registered Office.107

To verify whether the information or the statistics furnished by a company is

correct and complete, the Central Government (a) may require the company to

produce the records or documents for inspection or (b) may ask for further

information.108

The Central Government may direct any inquiry to be made by a person

named in the Order (a) for obtaining information or statistics which a company

has failed to furnish or (b) for the purpose of verifying the correctness and

completeness of the information or statistics furnished by the company.109

7.8 Corporate Responsibility under the Various Labour Legislations

An industry is a social world in miniature.110

Industry helps in production and

provides employment to the people of society. Different categories of human

105 The Companies Act, 1956; Section 597. 106 Id.; Section 615(2). 107 Id.; Section 615(3). 108 Id.; Section 615(4). 109 Id.; Section 615(5). 110 http://www.managementparadise.com/forums/human-resources-management-h-r/37991-industrial-

relations.html, Date:-19th of January 2011, Time:-12:05 P.M.

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elements are involved in an industry.111

Employers pay their sole attention to

the maintenance of machines and the improvement of the technical knowhow

to the utter neglect of the human hands employed to man and machines

because they are readily available and can be easily replaced. Workers are

illiterate and poor and therefore unconscious of their rights.112

Social Justice

requires that the State for its own existence owes an obligation to the

community to bridge the gap between the two classes and evolve a healthy

social order.113

The Government of India has enacted various laws like

Factories Act, Payment of Bonus, Payment of Gratuity Act, Payment of

Wages Act, Employees’ State Insurance Act, Workmen Compensation Act,

Employees Provident Fund Act and Equal Remuneration Act etc. to fix the

responsibility of employer towards its employees.

7.8.1 Corporate Responsibilities under the Factories Act, 1948

The Factories Act, 1948 is meant to regulate corporate impact on workers and

neighborhood of a factory. A company running a factory runs a risk to its

workers and its neighborhood. The Act is to make the company responsible to

the risk. The aim is to prevent the risk, and if risk occurs, to provide remedies,

it is also to ensure safety and care for workers while at work in a factory.

Thus, the Act is to ensure corporate responsibility to life of workers and

neighbors. The Act is ineffective in making a company responsible, because

directors can be immune from the liability for not discharging the

responsibility. Stiff statutory penalties of heavy fines and imprisonment are

unable to deter a company from being irresponsible for the reasons stated

above.

7.8.2 Corporate Responsibilities under the Payment of Bonus Act, 1965

The Payment of Bonus Act, 1965 stipulates corporate responsibility to

workers in two ways:

1. To bridge the gap between the actual wage and need based wage and

2. To give legitimate share in profits above certain level.

111 S.N. Mishra, “An Introduction to Labour and Industrial Laws”, (2001), p.7. 112 Id. at 5. 113 Supra n. 111.

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The rationale of the responsibility is that, since the workers are contributing to

the profits of the company, they work for, their standard of living should be

bettered. But in practice, the responsibility is not effectively enforced. Reasons

are, practice to resort to manipulative accountancy techniques to show less

allocable surplus and the statutory provisions enabling company directors to

pass on the liability to person employed through them for the company.

Since the statue is ineffective, the workers can be driven to despair by being

compelled to strike. The strike may break not only the workers, but also their

families. The strike may lead to litigation. Here the workers may be at a loss,

since they have no resources to buy legal expertise better than the one

available at the company’s disposal. The despair-scenario for the workers is

bleaker, if they are not united and organised. Then the company can easily

reduce, delay, or even avoid paying the bonus.

In a socialist country whose constitution generally promises economic

justice114

and particularly exhorts the State to endeavour to secure, by law,

living wages and decent standard of living, the most of the workers either get

no bonus, or get it late, or get less than their due and generally have to struggle

for it. This is so, because the corporate power is concentrated in the hands of

the directors elected by a minority but dominant, because of being united,

vote-block of the company promoters.

7.8.3 Corporate Responsibilities under the Payment of Gratuity Act, 1972

Gratuity is a legitimate claim of a workman on his employer. It is earned by

the workmen. It is a kind of retirement benefit intended to help them after

retirement. This is a social security for workers in the events of

superannuation, retirement, resignation, death or total disablement. It is

responsibility of a company to take care of a worker employed by it upon such

events. When a worker works for a company, he dedicates his life for the

company. Therefore, it is natural responsibility that the workers should not be

left in lurch when they are unable to work anymore.

The problem in this area is the tendency of the employer in contesting cases on

the ground of “misconduct” and “quantum” to pay less amount or avoid the

114 The Preamble to the Constitution of India.

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payment altogether. The problem of amount is solved by the supreme court in

Shri Digvijay Woolen Mills Ltd. ETC. v. Mahendra Prataprai Buch Etc.115

where it had ensured that due to weekly offs, the gratuity should not be

reduced. But the problem of less payment or non payment on the basis of

“misconduct” remains.

7.8.4 Corporate Responsibilities under the Payment of Wages Act, 1936

The relationship between a company and its employed worker is based on

economic inequality. The worker is poor and the company is comparatively

much better off than the worker. This can tempt a company to easily tamper

with its responsibility to pay wages payable to employees in particular form,

within the prescribed time limit and without unauthorized deduction. This act

is to ensure this responsibility. No fine shall be imposed on any employed

person until he has been given an opportunity of showing cause against the

fine, or otherwise than in accordance with such procedure as may be

prescribed for the imposition of fines.116

The company can easily skip or delay the responsibility to pay, pr pay less

than the due amount if the workers are not united or organised. Because an

individual worker cannot possibly match his meager resources with those of

the company to fight a legal battle with the company to get his wages,

stipulated by the Act. Since workers and their families have nothing else for

their very subsistence of life, timely and full payment of wages is serious

responsibility for a company as an employer towards its workers.

7.8.5 Corporate Responsibilities under the Employees State Insurance Act,

1948

This act is to ensure corporate responsibility to a very important aspect of lives

of workers and their families. It is to provide care in case of sickness,

maternity and employment injury. In fact, the responsibility is taken by the

State. The act only stipulates payment of nominal monthly contribution for

each worker. The workers themselves also are to contribute towards this end

115 1980 AIR 1944 1981 SCR (1) 64. 116 The Payment of the Wages Act, 1936; Section 8 (3).

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every month. All employees in factories or establishments to which the

Employees’ State Insurance Act,1948 applies shall be insured.117

A company is employing workers. Workers are not mere industrial inputs like

other commodities or raw material. They are human beings. They are part of

society. A company is societal organ. It should not be allowed to treat workers

only as industrial inputs. A company is social institution having duties and

responsibilities towards the community in which it functions. The duty is more

to worker, since they are laying down their lives for the company. Lives of

workers should be a corporate concern rather than a governmental concern. If

a government is saddled with responsibilities of companies, either it may not

be able to perform other developmental and welfare activities or it may

perform all activities inefficiently. Because the governmental resources are

limited. The correct approach may be that a company should be responsible

for a care in case of sickness, maternity and employment injury for its workers

and their families.

7.8.6 Corporate Responsibilities under the Workmen’s Compensation Act,

1923

Under this Act, a company is responsible to life of a worker at work. It has to

compensate a workman incurring personal injury arising out of and in the

course of his employment. The compensation is in the nature of insurance and

has no connection with any wrongdoing on the part of the employer and is to

compensate the loss of earning capacity.

The Workmen’s Compensation Act is a beneficial piece of legislation that has

been enacted to compensate the workmen and their dependants in the event of

accidents during the course of employment. It is not be used to extort money

from people with whom there is no nexus of employment as provided under

the Act. It is unfortunate that a beneficial enactment such as this, is misused by

some persons. The authorities should be more cautious while discharging their

duties under the Act and deciding the claims.118

117 The Employees’ State Insurance Act, 1948; Section 38. 118 Rengasamy v. Amalraj A. (2002) 4 Lab. J. (Supp.) 852.

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7.8.7 Corporate Responsibilities under the Employees Provident Fund (and

Miscellaneous Provisions) Act, 1952

Provident fund, family pension and deposit linked insurance schemes are

meant to impalement corporate responsibility to take care of workers and their

families in the event of their retirement or pre-mature death. This is a welfare

measure giving tacit acknowledgement to the face that a company is

responsible to take care of the workers and their dependants, not only during

their working life, but even after it. Towards this purpose, the company is to

contribute compulsorily towards the responsibilities under the Act

administered by the State.

Like other labour- legislations, this Act is also base on the principle that the

State is responsible towards the workers and not the company. There is need to

develop a concept of welfare-company like welfare state. Because, if the

company is accepted to be responsible for the workers’ welfare, it will have to

work as welfare company. Then it will have to go beyond the aforesaid

schemes. The present Act fails to make companies totally responsible even

within its very limited scope, as the directors can escape the liability under the

Act, and fine and imprisonment are having no deterrent effect. By litigation,

the company can save a lot of time before paying. So, the litigation proves to

be expensive for workers and economical for the company. But the extreme

calamity befalls workers when the company does not pay lakhs of rupees in

respect of employees for years and lastly sells its business or closes the

activity. With the corporate demise, the unfulfilled responsibility also expires.

7.8.8 Corporate Responsibilities under the Equal Remuneration Act, 1976

The Act is to implement corporate responsibility to equally pay for equal work

to both men and woman regardless of sex. The difficulty with which the

responsibility can be implemented is decided in a lone case under the Act. The

woman victim of the discrimination in the case119

could go to the court under

the Act only after losing the job and not while at it. She had to fight the case at

four levels for ten years. She won the case, but only got difference in wages

and allowances; the company or its directors were not penalized under the Act.

119 M/s Mackinnon Mackenize & Co. v. Audrey D’Costa A.I.R. 1987, SC 2342.

351

The victims not even get the costs. Obliviously, the legislation is symbolic at

the best, and at the worst, it is not only ineffective and counterproductive, but

also gives an illusion of a remedy, thereby precluding need for a realistic

legislation. This issue is only a part of larger struggle of women for equality in

an essentially unequal world.

7.9 Corporate Responsibility under Other Legislations

Corporate always to want to earn profit. Society contributes lot of in their

growth by providing a good man power, resources and environment of

working etc. Industrial Growth is good for economy of our country but

Industries ignore the social interest while earning the profit. Pollution is one of

the main harmful effects of industrialization. Corporate should not evade tax

but they always involve in the bad practices of evading the tax. Corporate

should not involve in business of harmful goods and drugs. The Government

of India has enacted various legislation like the Water (Prevention and Control

of Pollution) Act, Air Prevention and Control of Pollution Act, The

Environment (Protection) Act, Industrial Development Regulation Act,

Essential Commodities Act, Drug and Cosmetic Act and Income Tax Act etc.

to fix the corporate responsibility towards the society.

7.9.1 Corporate Responsibility under Pollution Laws

The Government of India has enacted the pollutions laws to fix the

responsibility of corporate towards the environment.

In this context following three legislations are considered:

- The Water ( Prevention and Control of Pollution) Act,1974

- The Air ( Prevention and Control of Pollution) Act 1974

- The Environmental (Protection) Act, 1986.

The water act, the Air Act and The Environmental Act create following

responsibilities for companies engaged in manufacturing activities:

A limit is put on entry of water pollution in any water reserviour or stream.120

Consent is required to start a new water outlet121

or start any industrial plant in

120 The Water (Prevention and Control of Pollution) Act, 1974; Section 24.

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an air pollution control area.122

A company is to install air pollution equipment

for the plant.123

A company’s emission of air pollutants is statutory limited124

,

and so are the environmental pollutants.125

Hazardous substances are to be

handled by the prescribed procedure126

. Environmental pollution is to be

prevented at the cost of company causing it.

The Water Act is expected to ensure that only adequately treated water fit for

life is allowed to be discharged into the water courses or reservoirs. The Air

Act is to keep air free from air pollution to make it fit for life. The

Environmental Act is to save life supporting ecological systems. Thus all the

three Acts are to make companies responsible to life by not allowing the

companies to destroy life by pollution. Though the company directors are

personally responsible under three acts, they can pass the statutory personal

liability to an employee of the company. This reduces statutory efficacy to

control pollution as the directors who have ultimate control on the exercise of

corporate power, causing the pollution, can escape personal liability. The three

Acts are providing fairly comprehensive measures to ensure corporate

responsibility against the pollution.

7.9.2 Corporate Responsibilities under the Industries Development and

Regulation Act, 1951

This act is to provide welfare of the economy and the consumers. The means

to achieve these goals are increase in efficiency and productivity of industry,

improvement and development of services; to make products and services

more economical to the community. The Act provides for the Advisory

Council127

and the Development Councils.128

The Advisory Council has

members representating the interests of owners129

, workers, consumers, such

other class of persons, including primary producers, who ought to be

121 Id.; Section 25. 122 The Air (Prevention and Control of Pollution) Act, 1974; Section 21(1) . 123 Id.; Section 21(5). 124 Id.; Section 22. 125 The Environment Protection Act, 1986; Section 57. 126 Id.; Section 8. 127 The Industries (Development and Regulation) Act, 1951; Section (a). 128

Id.; Section 3 (b). 129 Id.; Section 3 (f).

353

represented.130

The Development Councils have member representing owners ,

experts , workers and consumers.131

The Advisory Council is to advice the Central Government in the matters

under the Act.132

A Development Council has to perform a function entrusted

to it by Central Government. Its functions can be either to increase efficiency

or productivity in the scheduled industry133

, or to improve or develop the

service to make it more economical to the community.134

A company owning an existing industrial undertaking135

has to register it.136

A

company can start a new industrial undertaking only with a licence under the

Act.137

A license is also required to produce or manufacture a new article.138

Since the Government while giving licence or registration is guided by the

advice of the Advisory Council and the Development Councils and since these

bodies give representation to owners, workers, consumers and other societal

groups to be affected and the process of the licensing and registration make

companies owning industries, responsible to these societal groups.

7.9.3 Corporate Responsibility under the Essential Commodities Act, 1955

Since the demand for essential commodities is universal and therefore heavy

and continuous one, and because it almost always over strips the supply which

may never be continuous or even sufficient. There is always a temptation to

exploit the demand to maximize profits by hoarding the commodities and

regulating their supply by creating perpetual artificial scarcity. The Essential

Commodities Act, 1955 is to safeguard against such a temptation. The Act is

also to ensure responsibility by companies dealing in essential commodities by

preventing them from exploiting the demand for profit maximisation.

Section 10 of the Act provides as to who are the persons responsible for

compliance of obligatory provisions under Act. This Section is identical to the

130 Id.; Section 5. 131 Id.; Section 6. 132 Id.; Section 5 (4). 133 Id.; Section 3 (i). 134 Id.; Section 6. 135 Id.; Section 3 (bb). 136 Id.; Section 10. 137 Id.; Section 11. 138 Id.; Section 11-A.

354

Section 24 of the Industries (Development and Regulation) Act, 1951. In the

light of the discussion, it is stated that the directors who have ultimate

corporate control in reality can escape liability under the Act by entrusting it

to an employee. For statutory violations, imprisonment up to seven years and

or fine are provided or property, packings or carriers can be forfeited or a

business can be compelled to be closed for at least six months. Apart form

these consequences; a company was made to publish its own misdeeds under

the Act at its own cost. There is no upper limit for fines.

But the court can act only on a written complaint made by public servant. A

consumer cannot move the court under the Act. The Company directors are

able to pass the liability on to an employee. Fine are not payable by the

directors personally, but by the company making penal provisions ineffective.

Bureaucratic handling of the administration of the Act allows violators to get

away with malpractices. Judiciary is used to frustrate the object of the Act.

Administration of the Act further suffers due to bureaucracy’s lack of

technical knowledge while fixing prices of essential commodities.

7.9.4 Corporate Social Responsibility under the Drugs and Cosmetics Act, 1940

The Drugs and Cosmetics Act, 1940 empowers the Central Government to ban

import of certain drugs. Companies cannot import such drugs.139

Companies

cannot manufacture for sale, sell or stock, exhibit for sale or distribute drugs

and cosmetics of sub-standard quality, misbranded drugs or cosmetic or

adulterated drugs. A company has to display in the prescribed manner , the

label or container of any proprietary or patent medicine, the true formula or

list of ingredients contained in it in a manner readily intelligible contained in it

in a manner readily intelligible to the medical professionals. A company

cannot manufacture for sale, etc. any drug that purports or claims to prevent

cure or mitigate any disease or ailment. A company cannot manufacture for

sale etc. any unsafe or harmful cosmetic. A company cannot sell or stock, etc.

any drug or cosmetic imported against the Act. A company can sale any drug

or cosmetic only under a licence under the Act.140

The section 8 cast a

vicarious liability. But the relationship between the two persons should be

139 The Drugs and Cosmetics Act, 1940; Section 10. 140 Id.; Section 18.

355

regular or viable that casual.141

The expression “himself or by any other person

on his behalf” must imply that the person contemplated is the master or the

principal and not the servant.142

The Act is expected to ensure that nothing is used in cosmetics which may

have deleterious effects on the health of the people. The Act is also expected

to prevent sub-standards in drugs, presumably for maintaining high standard

of medical treatment. The Act is mainly concerned with standard and quality

of drugs manufactured. Thereby, the Act is expected to make companies

socially responsible in the area of health of human beings and animals.

7.9.5 Corporate Responsibility under the Income Tax Act, 1961

The Income Tax Act, 1961 provides for the responsibility in its incentives to

the companies, among other persons, to save the Income Tax. A company can

save the tax if it performs following deeds of social welfare:

Donations to charitable funds and institutions.143

Donations for scientific research for rural development.144

To set up industrial undertakings and hotels in certain backward areas.145

To set up small-scale industries in certain rural areas.146

To set up projects outside India.147

Exports148

To start an industrial undertaking, or a ship, or a hotel business.149

To receive royalty, commission or fee from a foreign enterprise.150

Promotion of scientific research.151

These incentive-provisions are capable of misuses. A general potential built in

among these provisions is to launder black money into the white one.

141 State (Delhi Administration) v. I.K. Nangia AIR 1979 SC 1977. 142 Bhagwandas v. State, AIR 1962 Punj 419: (1962) 2 Cri LJ 400. 143 The Income Tax Act, 1961; Section 80 G. 144 Id.; Section 80 GGA. 145 Id.; Section 80 HH. 146 Id.; Section 80 HHA. 147 Id.; Section 80 HHB. 148 Id.; Section 80 HHC. 149 Id.; Section 80 I. 150 Id.; Section 80 O. 151 Id.; Section 35.

356

According to information from a related Income-Tax officer, there are many

cases pending before various courts involving the misuses.

The Act provides checks to avoid misuse of its provisions. Income-tax officers

can go behind the audit report. These provisions pre-suppose bureaucratic

alertness, pressure of work or corruption might tell upon it. The Act provide

the penalties from 100% to 300% of the tax sought to be avoided.152

The Act

provides for prosecution through courts and consequent fine without statutory

limit and imprisonment from 6 months to 7 years.153

7.9.6 Corporate Responsibility under the Cigarettes and Other Tobacco

Products (Prohibition of Advertisement and Regulation of Trade and

Commerce, Production, Supply and Distribution) Act, 2003

Tobacco is universally regarded as one of the major public health hazards and

is responsible directly or indirectly for an estimated eight lakh deaths annually

in the country. It has also been found that treatment of tobacco related diseases

and the loss of productivity caused therein cost of the country almost Rs

13,500 crore annually, which more that offsets all the benefits accruing in the

form of revenue and employment generated by the tobacco industry. The

Cigarettes and Other Tobacco Products ( Prohibition of Advertisement and

Regulation of Trade and Commerce, Production, Supply and Distribution)

Act,2003 has been passed to prohibit the advertisement of , and to provide for

the regulation of trade and commerce in , and production, supply and

distribution of , cigarettes and other tobacco products.

No person engaged in the production, supply or distribution of cigarettes or

any other tobacco products is allowed to advertise and no person is allowed to

take part in any advertisement which directly or indirectly suggests or

promotes the use or consumption of cigarettes or any other tobacco

products.154

No person is allowed , directly or indirectly to produce, supply or

distribute cigarettes or any other tobacco products unless every package of

cigarettes or any other tobacco products bears thereon, on its label, the

152 Id.; Section 271. 153 Id.; Section 277. 154 The Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade

and Commerce, Production, Supply and Distribution) Act, 2003; Section 5.

357

specified warning including a pictorial depiction of skull and cross bones and

the prescribed warning.155

Any person who produces or manufactures

cigarettes or tobacco products, which do not contain, either on the package or

no their label, the specified warning and the nicotine and tar contents, shall in

the case of first conviction be punishable with imprisonment up to two years,

or with fine up to five thousand rupees, or with both, second and subsequent

conviction is punishable with imprisonment up to five years and with fine up

to ten thousand rupees.156

Where an offence has been committed by a

company, every person, who, at the time the offence was committed, was in

charge of, and was responsible to, the company for the conduct of the business

of the company, as well as the company, shall be deemed to be guilty of the

offence and shall be liable to be proceeded against and punished accordingly.

No such person shall be liable if that person proves that the offence was

committed without his knowledge or that he had exercised all due diligence to

prevent the commission of such offence.157

7.9.7 Corporate Responsibility under the Competition Act, 2002

No enterprise or association of enterprises or person or association of persons

shall enter into any agreement in respect of production, supply, distribution,

storage, acquisition or control of goods or provision of services, which causes

or is likely to cause an appreciable adverse effect on competition within India.

All such agreements entered in to in contravention of the aforesaid prohibition

shall be void.158

No enterprise or group] shall abuse its dominant position. There shall be an

abuse of dominant position if an enterprise or a group directly or indirectly,

imposes unfair or discriminatory condition in purchase or sale of goods or

service; limits or restricts the production of goods or provision of services or

market there for or technical or scientific development relating to goods or

services to the prejudice of consumers; and indulges in practice or practices

resulting in denial of market access in any manner; makes conclusion of

155

Id.; Section 7. 156 Id.; Section 20. 157 Id.; Section 26. 158 The Competition Act, 2002; Section 3.

358

contracts subject to acceptance by other parties of supplementary obligations

which, by their nature or according to commercial usage, have no connection

with the subject of such contracts and uses its dominant position in one

relevant market to enter into, or protect, other relevant market.159

No person or enterprise shall enter into a combination which causes or is

likely to cause an appreciable adverse effect on competition within the

relevant market in India and such a combination shall be void.160

It shall be the

duty of the Commission to eliminate practices having adverse effect on

competition, promote and sustain competition, protect the interests of

consumers and ensure freedom of trade carried on by other participants, in

markets in India.161

If any person makes a statement which is false in any

material particular, or knowing it to be false or omits to state any material

particular knowing it to be material, such person shall be liable to a penalty

which shall not be less than rupees fifty lakhs but which may extend to rupees

one crore, as may be determined by the Commission.162

7.10 Drivers of CSR

The process, form and content of globalization, privatization and liberalization

created pressures on companies to perform according to internationally

compatible trade practices. CSR is recognized as the vital backbone of the

business. The following factors are taken into account for understanding the

importance of CSR:

Globalization and the associated growth in competition.

Increased size and influence of companies.

Retrenchment or repositioning of government and its roles.

War for talent; companies competing for expertise.

Growth of global civil society activism.

159 Id.; Section 4. 160 Id.; Section 6. 161 Id.; Section 18. 162 Id.; Section 44.

359

Increased importance of intangible assets.163

7.11 Stake Holder Engagement and Corporate Social Responsibility

Stakeholders and their engagement is a subject increasingly being talked about

in the business domain. Indian businesses have played such a role to a certain

extent in the past, in an environment where state had the primacy in both

business policy dispensation and arbitration as well as in social policy

formulation and delivery. However, with the onset of global investment and

trade processes bringing with them multilateral rule system, the capability of

the state to assert this primacy is being continually challenged. On the other

hand, business are also being challenged to respond to new business drivers

associated with an uncertain business environment and reordering of societal

claims from the state to the business which among other things also demand a

leadership response that takes cognizance of stakeholder perceptions.164

7.11.1 Stake Holder Engagement

Stakeholder engagement comprises the formal and informal ways of staying

connected to the parties who have an actual or potential interest in or effect on

the business. Engagement implies understanding their views and taking them

into consideration, being accountable to them when accountability is called

for, and using the information gleaned from them to drive innovation.

Stakeholder engagement spans a continuum of interaction that reflects the

degree of influence stakeholders have in decision making. At one end,

businesses simply inform stakeholders of their plans. At the other,

stakeholders are deeply involved from early in the decision-making process. In

between are varying degrees of consultation and participation.165

There are various techniques of stakeholder engagement like issue, interest

and power matrices, applied to different situations quoted in literature.

Keeping as a corner stone, interactions between business and stakeholders’

163 Maliha Elahi and Shazia Nauman,"Role of Corporate Social Responsibility and Sustainability in

Organization’s Excellence within Virtual Project Management", http://www.biz-

essentials.org/research/role_csr.pdf, Date:- 19th of January 2012, Time:- 11:47 AM. 164 CV Baxi and Ajit Prasad , “Corporate Social Responsibility Concept and Cases: The Indian

Experience”, (2005) , p. 31. 165 http://www.ic.gc.ca/eic/site/csr-rse.nsf/eng/rs00138.html, Date:-19th of January 2012, Time:-12:20

PM.

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vis-à-vis their impacts on the poor we have attempted using diverse

approaches including participatory ones ( generally used in the development

sector) in analyzing stakeholder engagement processes of businesses.

For understanding the relationship between their business activity and

vulnerable people, businesses need to

have a better understanding of political, historic, social and cultural

environment( including its complexities) in which business operates and

brings commercial benefit to business.

have an awareness that engagement with “voiceless” or marginalized

stakeholders can have significant commercial benefit.

asses vulnerability to ensure that the possible negative impacts of business

are minimized.

attempt to ensure that their activity is seen to be part of a wider

development process and not viewed in isolation.

clarify the roles and responsibilities of other actors. It is increasingly

apparent that it is in the interest of business to monitor and influence other

actors in the discharge of their duties.

invest resources in overcoming the challenge of physical isolation and

ensure effective communications. In this way they can minimize the risk of

ineffective management information system(MIS), ensure that policy is

implemented and that appropriate staff are recruited.

Recognize that stakeholder engagement effectively presents a major

challenge to business. Creating an internal cultural that is able to respond

to these challenges is vital.166

To engage stakeholders effectively, business need fulfill the following

requirements

7.11.1.1 Policy Formulation

Effective engagement of vulnerable groups requires a clear policy statement

and commitment on the part of the company. This policy should evolve out of

166 Supra n. 164 p. 34.

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the understanding gathered earlier. Staff should be engaged in its design and

the policy should be disseminated to all levels of the organization.167

7.11.1.2 Policy Execution

The ability to engage effectively with vulnerable groups is dependent upon

institutional capacity to implement policy decisions. An awareness of

institutional strengths and weakness can help to fashion an engagement

strategy that is sustainable and effective. Getting the right staff in the right

positions to manage a process of engagement are crucial to the success of the

process. Use of external support agencies can be invaluable but care should be

taken to ensure that quality support is attained. Encourage imaginative and

innovative management responses. Successful engagement strategies often

require individuals creating imaginative solutions to very complex

problems.168

7.11.1.3 Information and Communication

To overcome the problems of geographic remoteness and institutional

weakness, effective MIS systems are vital to ensure that good information of

the reality on the ground is available at all levels of the organization. Simplify

indicators and ensure that they reflect social dimensions. Ongoing, appropriate

and effective communication is vital to ensure that vulnerable groups are

effectively engaged, e.g. , use local languages and culturally appropriate

means; maximize human contact.169

7.11.1.4 Recognise the Stakes

Unless a business incentive is clearly established, the commitment of

sufficient resources to ensure that business effectively engages stakeholders is

unlikely. This must be disseminated and supported by senior management.

Unless stakeholders see a clear benefit from engaging with the company they

will not invest the resources (time, money and goodwill) to build the

relationship necessary. Encourage stakeholder “ownership” in the project.

167 Id. at 35. 168 Id. at 36. 169 Ibid.

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Involvement in design and benefit from its success is vital to maximize the

chances of a project’s success.170

7.11.1.5 Verification

Transparency and credibility are vital to sustain effective dialogue and

engagement with vulnerable groups. Seek external verification of company

performance. Social investment can form an important part of a strategy to

engage vulnerable groups. It is , however, not an alternative to engagement.

Thus stakeholder engagement is a complex process dealing with “balancing

the continually changing aspirations from business of the stakeholders”. This

of course assumes that investors and shareholders are also a part of the

stakeholders. Company should learn from their subsidiaries to learn about

local corporate social responsibility dilemmas in order to understand the

impact of their policy in the local context.171

7.11.2 Strategic Community Involvement

The very fact that we position community involvement as strategic thrusts a

responsibility upon us to bring out the strategic connections. Let us define

what we mean by communities. To us, communities are residents of society

who qualify to be considered as stakeholders to business on one or more of the

accountability, management or ethical perspectives. Thus they could be

persons on whose lands manufacturing plants get located or whose lifestyle is

changed due to the fact that a business is located there, etc. Their strategic

interest to the business may be in the form of maintaining harmonious

relations, exhibiting a just behavior by recognizing that their productive

resources need to be fairly compensated for, etc. Then there are other

communities need to be engaged to migrate to other stakeholders as

consumers which therefore provide the strategic link. In the cases of many

MNC, as a part of reputation building in host countries, they need to invest in

communities which provide the other strategic link. Thus one sees that there is

more than one strategic association between business and communities.

170 Ibid. 171 Id. at 37.

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Having recognized this, there is need to articulate an approach that can serve

the purpose of bringing out these links as well as unifying them. One such

model is the London Group Benchmarking Model. The LBG seeks to develop

and expand the reporting of company activities in the community so that they

are more transparent and can be judged by the impact they achieve.172

7.11.3 NGO Perspective

The engagement of NGOs with Business173

comes in various hues. A

systematic investigation into such engagement presupposes a prior

understanding the motives behind such engagement. There is range of motives

both in the business and the NGO universe to engage with each other. The

motives of NGOs are often determined by factors that operate upon them.

They are listed below:

- Ideological underpinning of Promoter.

- Constituency whose interests the group represents.

- Extent to which business interfaces with groups primary interests.

- Position of group in local-global chain.

- Interpretation of the subject by its stakeholders.

- Survival and other operational compulsions of the group itself.

- Societal context in which CSR is to be interpreted. In a typical developing

country context, the major issues confronting development groups vis-à-

vis markets appear to be.

Making markets work for their constituencies.

Place the relation in a sustainable mould.

- Learning and evolutionary instinct of the group.

- Resources at command.

- Nature of work of the group-people centric and /or program centric.

Similarly, factors governing the motives of business also get established. A

proper understanding of the motives and factors can lead to the foundations of

a systematic stakeholder engagement strategy.174

172 CV Baxi and Ajit Prasad , “Corporate Social Responsibility Concept and Cases: The Indian

Experience”, (2005) , p. 41. 173 Business in general would include private and public sector. 174 Supra n.172 p. 44.

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7.12 Corporate Social Performance

Corporate Social Responsibility has received increased attention from

business, the media and researchers. Stakeholders are becoming more and

more concerned about the corporate social performance175

of firms’

operations. CSP can be defined as a construct that emphasizes a company’s

responsibilities to multiple stakeholders, such as employees and the

community at large, in addition to its traditional responsibilities to economic

shareholders.176

More and more organizations are now aware that in pursuing

their economic objectives, they should also contribute to the society at large.

Organizations now realize that in order for them to survive and stay

competitive in this complex business environment, they must bridge the

economic and social systems. The concept of corporate social performance

introduced to analyze how well an organization performs its corporate social

responsibility. It measures the overall performance of the organization towards

its social surroundings such as employees, environment, customers, suppliers

and others. Besides bridging the economic and social systems, it is also very

important for the organization to capitalize on its competitive advantage in

order to survive in this complex business environment.177

7.13 Measuring the Impact of Corporate Social Responsibility

Some aspects are amenable to quantification while others are not.

Nevertheless, measurement tools are needed to be developed. Since CSR can

be operationalized in so many different ways, there are no reliable aggregate

numbers available on CSR activity at the present time. The ‘Global Reporting

Initiative’, a key coalition of corporations, NGO’s accountancy organisation,

business associations, and other stakeholders from around the world convened

by the United Nations Environment Program, confirmed in 2001 “there is a

175 Corporate Social Performance herein after referred as CSP. 176 Chien-Ming Chen, “Measuring Corporate Social Performance: An Efficiency Perspective�