Strengthening the CSR framework is a profitable idea

Source: The post is based on an article “Strengthening the CSR framework is a profitable idea” published in The Hindu on 7^th October 2022.

Syllabus: GS 2

Relevance: CSR funding and problems associated with it

News: Corporate Social Responsibility (CSR) was established under Section 135 of the Companies Act 2013.

Since its establishment CSR spending in India has risen from ₹10,065 crore in 2014-15 to ₹24,865 crore in 2020-21. However, there are other issues associated with it.

What are the present problems with the CSR funding?

Lack of data: There is no data to verify whether this increase in CSR funding is equivalent with the increase in profits of Indian and foreign companies.

Lack of adequate spending: 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.

Participation: There was also a decline in the number of companies participating in CSR from 25,103 in FY2019 to 17,007 in FY2021.

Trusts: Many private companies have registered their own trusts. They transfer the statutory CSR budgets for utilization in those trusts. However, it is not clear whether it is allowed under the Companies Act/CSR rules.

Therefore, there is a need to look at the provisions present in the Act that prevents companies from CSR spending.

What are the problems present in the provisions of Companies Act 2013 for CSR funding?

Local areas: Section 135(5) of the Act says that the company should give preference to local areas/areas around it where it operates.

However, as per the report of a committee in 2018 ‘local area’ in the Act is only directionary and a balance has to be maintained by the CSR companies.

Therefore, local area in the act has caused confusion for the companies which has led companies to use their discretion in CSR fundings.

Location of companies: A report says that that 54% of CSR companies are located in big cities such as Mumbai, Chennai, Tamil Nadu, etc. whereas, Uttar Pradesh and Madhya Pradesh have very little CSR companies. This leads to unequal funding of the CSR.

Environment: Item (iv) of Schedule VII of the Act deals with environmental issues to create a countervailing effect. However, an analysis of CSR spending reveals that most CSR spending is in education (37%) and health and sanitation (29%) and only 9% was spent on the environment.

Reduced spending:  If a company spends an amount more than the prescribed minimum amount of 2%, then that excess amount will help companies to reduce spending in the succeeding three financial years.

This provision of the Act weakens the provision of minimum spending of 2%. Therefore, companies should be encouraged to spend more than this.

Expenditure Quality: The CSR funding companies submit their annual report to Corporate Affairs Ministry (MCA). The problem with the report is that it focuses on output rather than quality of the expenditure and its impact.

Lack of information: The Standing Committee on Finance had also observed that the information regarding CSR spending by companies is insufficient and difficult to access.

Lack of authorization: An auditor can only investigate the details of spending and at most can question the board about its authenticity. However, the auditor is not authorized to check the accounts for non-compliance or inadequate CSR performance in the audit report.

What can be the course of action?

First, there is a need to curate a national-level platform by the MCA where all States could list their CSR-admissible projects. It will help companies to decide where their CSR funds would be most impactful across India.

Second, companies should spend at least 25% of their CSR funding for environment regeneration.

Third, all CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.

Fourth, the committee in 2018 recommended to improve the existing monitoring and evaluation regime. This should be incorporated in the current CSR framework.

Fifth, CSR non-spend, underspend, and overspend should be qualified by the auditor in the audit report as a qualification to accounts and not just as a note to accounts.

Sixth, the MCA and the line departments should exercise greater direct monitoring and supervision over CSR spending instead of only hosting all information on the Ministry’s website.