CSR, Corporate Social Responsibility in India: Provisions, Status and Challenges – Explained, pointwise

Introduction

India is one of the first country in the world to impose a statutory obligation of Corporate Social Responsibility (CSR) for corporations through the Companies Act, 2013. India is perhaps the only country that makes both the spending and reporting of CSR obligations mandatory. The Government has also made it clear that CSR spending is not mere charity or donations without any benefits. The Government has also made a conscious attempt to keep the CSR legislation aligned with India’s commitment to the Sustainable Development Goals (SDGs). The CSR landscape in India has expanded significantly; more and more corporations are now engaging constructively realizing their social obligations. Yet, there are several challenges which need to be addressed, to further enhance the efficacy of CSR activities in ensuring sustainable and inclusive development.

What is the meaning of CSR?

According to the United Nations Industrial Development Organization (UNIDO), Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is a way of running the businesses by which corporate houses contribute towards social good. CSR is based on sense of responsibility of the companies towards the community and the environment in which they operate.

It is closely linked to sustainability (creating economic, social, and environmental value) and ESG (Environmental, Social, and Governance). CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (‘Triple-Bottom-Line- Approach’), while at the same time addressing the expectations of shareholders and stakeholders.

Evolution of CSR

In the 1950s, CSR was understood to be an obligation toward society. By the 1960s, the concept shifted to being viewed as a connection between corporate houses and society. During the decades spanning from the 1970s to the 1990s, definitions of CSR expanded to encompass a number of other aspects, including stakeholders, ethics, voluntariness, philanthropy, environmental stewardship, and the Triple Bottom Line i.e. people, planet and profit. The dimensions of corporate social responsibility in the 21st century have a much broader scope; it also includes the improvement of the quality of life of citizens; human and labour rights; environmental concerns; issues relating to corruption; issues relating to transparency and accountability.

What is the CSR framework in India?

Legal Basis: The Corporate Social Responsibility concept in India is governed by Section 135  and Schedule VII of the Companies Act, 2013 and Companies (CSR Policy) Rules, 2014. The Rules provide the criteria for assessing the CSR eligibility of a company, Implementation and Reporting of their CSR Policies etc. The Act and the Rules have created one of the most elaborate CSR mechanism and implementation strategy.

Criteria: The Companies Act has made it mandatory for certain corporations to undertake CSR activities. The Act requires companies with: (a) a net worth of INR 5 billion (500 crore) or more or; (b) An annual turnover of INR 10 billion (1000 crore) or more or; (c) Net profit of INR 50 million (5 crore) or more, to spend 2% of their average net profits of 3 years on CSR. Prior to that, the CSR clause was voluntary for companies, though it was mandatory to disclose their CSR spending to shareholders.

Every company to which CSR criteria are applicable shall constitute a Corporate Social Responsibility Committee. The CSR Committee should consist of 3 or more directors, with at least 1 independent director. The activities to be undertaken under CSR are prescribed by the Government in Schedule VII of the Companies Act.

Penal Provisions: In case a company fails to comply with the provisions relating to CSR spending, transferring and utilising the unspent amount, the company will be punishable with a fine ranging from INR 50,000 to INR 25 lakh. The officers responsible for CSR are liable for imprisonment up to 3 years or a fine between INR 50,000-5 lakh or both.

Amendment in 2019: Before the amendment, if a company was unable to fully spend its CSR funds in a given year, it could carry the amount forward and spend it in the next fiscal, in addition to the money allotted for that year.

The amended Act requires companies to deposit the unspent CSR funds into a fund prescribed under Schedule VII of the Act within the end of the fiscal year. This amount must be utilized within three years from the date of transfer, failing which the fund must be deposited in to one of the specified funds.

Which activities would not qualify as CSR Expenditure?

According to section 135 of the Companies Act, the following activities would not qualify as Corporate Social Responsibility (CSR) expenditure:

1. Activities benefiting only employees and their families: Projects or programs that benefit solely the employees of the company and their families are not considered CSR activities.
2. One-off events: This includes marathons, awards, charitable contributions, advertisements, and sponsorships of TV programs. These are considered as events rather than ongoing CSR efforts.
3. Statutory obligations: Expenses incurred by companies to comply with any Act, Statute, or regulations, such as those related to Labour Laws or the Land Acquisition Act, do not qualify as CSR expenditure.
4. Political contributions: Any direct or indirect contribution to a political party is excluded from being considered as a CSR activity.
5. Normal business activities: Activities undertaken by the company in the course of its normal business operations are not regarded as CSR activities.

What is the current status of CSR in India?

CSR spending in India has risen from INR 10,065 crore in 2014-15 to INR 24,865 crore in 2020-21.

According to the Ministry of corporate affairs, pan India CSR spending in financial year 2020–21 was INR 7490.84 cr.

Source: csr.org. Sector-wise spending on CSR between 2014-2019.

Source: csr.org. State-wise distribution of CSR spending in India between 2014-19.

There were 2,926 companies in 2020-21 with zero spend on CSR while companies spending less than the prescribed limit of 2% rose from 3,078 in 2015-16 to 3,290 in 2020-21. There was also a decline in the number of companies participating in CSR — 25,103 in FY2019 to 17,007 in FY2021.

What are the benefits of CSR?

Sustainable Development Goals: Corporates are seen as the key drivers of SDGs as they can apply their creativity and innovation to achieve sustainable development. CSR and SDGs together have tremendous potential to develop an interconnected model for sustainable growth. Many companies are aligning their CSR focus areas according to SDGs to meet their CSR mandate for example enhancing livelihoods through skill development of women contributes to SDGs like ending poverty and promoting gender equality.

CSR for Technology Incubators: In September 2019, the Government expanded the scope of CSR to spur the R&D and innovation ecosystem in India. Contribution to incubators funded by Governments/PSUs or to research and academic institutions has been included under the CSR.

Responsible Business Reputation/Customer Loyalty: Corporate social investment can help to build a reputation as a responsible business, which can, in turn, lead to competitive advantage. Companies often favour suppliers who have responsible policies, since this can reflect on how their customers see them. It has been demonstrated that enhancing a company’s image through CSR may increase consumer loyalty and public trust, which in turn enables firms to profit from these factors.

Costs Savings: By reducing resource use, waste and emissions, will help the environment and save money as well. With a few simple steps, company may be able to lower there utility bills and achieve savings for there business.

Employee Retention: Employees stay in their jobs because of several reasons: job satisfaction, the environment of the company, and good prospects etc. Being a responsible, sustainable business may make it easier to recruit new employees or retain existing ones. Employees may be motivated to stay longer, thus reducing the costs and disruption of recruitment and retraining.

Attracting Responsible Investors: Socially responsible investors (SRIs) seek out businesses that have shared values. The number of SRIs is raising rapidly. Shareholder engagement is also seen to be more prominent in companies with SRIs, as they are more willing to push CSR to the forefront of business strategy.

What are the challenges to CSR in India?

Regional Disparity: Most of the CSR spending is concentrated in States like Maharashtra, Tamil Nadu, Gujarat, Karnataka etc. Between 2014-19, these States accounted for ~32% of total spending. A more recent report by Ashoka University’s Centre for Social Impact and Philanthropy has observed the spending in these 4 States  to be ~54%. Populous Uttar Pradesh and Madhya Pradesh with poor resources and poor population receive much less.

Sectoral Disparity: An analysis of CSR spending (2014-18) reveals that while most CSR spending is in education (37%) and health and sanitation (29%), only 9% was spent on the environment even as extractive industries such as mining function in an environmentally detrimental manner in several States.

Lack of Transparency and Information: Many corporates do not make adequate efforts to disclose relevant information. This becomes a hurdle in trust-building among corporate houses and communities. Transparency is crucial for the success of any CSR initiative. The Standing Committee on Finance has observed that the information regarding CSR spending by companies is insufficient and difficult to access.

Greenwashing: Many companies still view CSR as a statutory obligation only. They engage in superfluous activities not having a direct measurable impact on communities or the environment. However, they offer misleading misleading communication and then try to influence the perceptions of their stakeholders and the general public. This has been termed as ‘greenwashing’. In the absence of coercive enforcement mechanisms, such phenomena is becoming common.

Lack of Consensus and Cooperation: There is a lack of consensus among different local agencies and corporate entities which results in duplication of efforts by the firms in terms of CSR This leads to unnecessary competitive spirit among the firms which go against the main objective of building value for the society.

Lack of Community Participation: Many companies are driving the CSR projects from top with little involvement of the locals who are the intended beneficiaries. This leads to a disconnect. Companies end up taking initiatives which they consider as important, rather than what is beneficial to the communities.

Lack of Strategic Planning: Due to a lack of strategic planning, proper experimentation, innovation, and engagement, companies aren’t able to make a meaningful impact on their CSR They are not able to identify ideal investment projects and therefore cannot provide high impact results. Corporate houses must understand the challenges faced by its citizens and then invest properly.

What steps can be taken to address the challenges?

Centralized Platform: The Ministry of Corporate Affairs (MCA) can curate a centralized national-level platform. All States can list their potential CSR-admissible projects on the platform. With this, companies can assess where their CSR funds would be most impactful across India. Invest India’s ‘Corporate Social Responsibility Projects Repository’ on the India Investment Grid (IIG) can serve as a guide for such efforts. This model would be very useful for supporting deserving projects in the 112 aspirational districts and projects identified by MPs under the Government’s Sansad Adarsh Gram Yojana.

Sectoral Balance: Companies need to prioritise environment restoration in the area where they operate, earmarking at least 25% for environment regeneration. This gains importance as impact of climate change are becoming evident in regions across India.

Community Participation: All CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.

Enhanced Monitoring: The high-level committee’s recommendations from 2018 should be added to the current CSR framework to improve the monitoring and evaluating system. Some of the recommendations are: (a) Making CSR part of statutory financial audits by including details about CSR spending in a company’s financial statement; (b) Making independent third-party impact assessment audits mandatory. It is important to take steps to stop duplication and fraud.

The MCA and the line departments need to exercise greater direct monitoring and supervision over the spending by companies.

Coordination with NGOs: There is a need for pooling of resources and building of synergies by both Companies and Non-Governmental Organizations for more efficient and effective implementation of CSR activities.

Conclusion

More proactive participation by the private sector through Corporate Social Responsibility can have a transformative impact on the challenges facing India today. The contribution has increased manifold since the passage of Companies Act, 2013. Addressing the gaps in the implementation can enhance the efficacy of the spending by the corporates. This can act as a major lever in ensuring that India’s growth story becomes more sustainable and inclusive.

Syllabus: GS II, Government policies and interventions for development in various Sectors and issues arising out of their design and implementation; GS III, Inclusive Growth and issues arising from it.

Source: The Hindu, Ministry of Corporate Affairs