CORPORATE SOCIAL RESPONSIBILITY (CSR)

CORPORATE SOCIAL RESPONSIBILITY (CSR)

Introduction:
  • CSR is a concept that suggests that it is the responsibility of the corporations operating within society to contribute towards economic, social and environmental development that creates positive impact on society at large.
  • The Companies Act, 2013 is a landmark legislation that made India the first country to mandate and quantify CSR expenditure. The inclusion of CSR is an attempt by the government to engage the businesses with the national development agenda.
  • Section 135(1) of the Act prescribes thresholds to identify companies which are required to constitute a CSR Committee – those, in the immediately preceding financial year of which:
    1. Net worth is Rs 500 Crore or more; or.
    2. Turnover is Rs 1000 Crore or more; or.
    3. Net profit amounts to Rs 5 Crore or more.
  • As per the Companies (Amendment) Act, 2019,CSR is applicable to companies before completion of 3 financial years.
  • Companies are required to spend, in every financial year, at least 2% of their average net profits generated during the 3 immediately preceding financial years.
  • For companies that have not completed 3 financial years, average net profits generated in the preceding financial years shall be factored in.
  • The CSR activities in India should not be undertaken in the normal course of business and must be with respect to any of the 17 activities of CSR mentioned in Schedule VII of the act.
  • Primary objective of CSR: To promote responsible and sustainable business philosophy at a broad level and encourage companies to come up with innovative ideas and robust management systems.

 

Trusteeship Philosophy

Trusteeship is a socio-economic philosophy that was propounded by Mahatma Gandhi. It provides a means by which the wealthy people would be the trustees of trusts that looked after the welfare of the people in general. … Gandhi believed that the wealthy people could be persuaded to part with their wealth to help the poor.

Trusteeship Philosophy

Trusteeship is a socio-economic philosophy that was propounded by Mahatma Gandhi. It provides a means by which the wealthy people would be the trustees of trusts that looked after the welfare of the people in general. … Gandhi believed that the wealthy people could be persuaded to part with their wealth to help the poor.

 

Social Responsibility has a strategic importance for two reasons:

  • A healthy business can only succeed in a healthy society. Thus, it is in the best interest of a company to produce only goods and services which strengthen the health of society
  • If the company wants to succeed in the long term it needs to have the acceptance – or licence to operate – from social actors affected by the company’s’ operations.

 

Implementation:
  • Companies which fall under the law are required to share a report on their activities and spending.
  • Those reports must include information about the company’s CSR policy, the composition of its CSR committee, the amount of CSR expenditures and details on the projects where it was spent.
  • If the company does not spend the required amount, it must publicly disclose it and the reasons for it. Failure to report is punishable under the Act.
  • The implementation was marked by inconsistencies based on nature, size, domain of the companies as well as region wise and sector wise spending.

 

Reasons for poor implementation:
  • The most common reason that companies cited for not meeting the target is that they had undertaken long-term projects. This means that the amount was earmarked for a long-term initiative and the company is carrying forward the spend.
  • Many companies also said that they lacked prior expertise and delay in project identification as reasons for not spending. It is only since 2012-13 that firms have started allocating funds for CSR activities specifically. This was in response to the SEBI circular dated August 2012, which mandated all top 100 listed companies to include business responsibility report as a part of their annual report.
  • Also, reluctance to give money to construct stadiums and other infrastructure because companies did not have much time to vet projects whose impact is difficult to measure at the end of a year.
  • Trust deficit in the not-for-profit sectorSection 135 of the Companies Act allows companies to partner with non-profits to implement CSR initiatives. The idea is that non-profits can bring expertise in various fields of development. However, there are not many such tie-ups seen.
  • Traditionally work regarding social issues by companies started with providing the bare minimum facilities in and around their plants – like educational institutes, vocational training and healthcare for their own employees. New areas introduced had little or no takers among majority companies.
  • Some companies have also taken advantage of unclear definitions. Reliance Industries Ltd included the setting up of the Sir H.N. Reliance Foundation Hospital in Mumbai for Rs.553 crore as part of its CSR activity for ‘eradication of hunger’. It is a multi-speciality tertiary care hospital and has 20% of its beds are subsidised. Technically the money has been categorised under CSR spend in the annual report, but it is an investment. In any case, all private hospitals must offer subsidised beds as a requirement under the law.
2nd ARC 9th Report : Social Capital  – Corporate Social Responsibility (CSR)

  • When a community benefit project is taken up by a corporate entity, there should be some mutual consultation between the company and the local government so that there is no unnecessary overlap with other similar development programmes in the area.
  • Government should act as a facilitator and create an environment which encourages business and industry to take up projects and activities which are likely to have an impact on the quality of life of the local community.

 

Areas of implementation:
  • Eleven areas were identified under the Companies Act, 2013, for corporate social responsibility (CSR) expenditure.
  • The six areas that failed to attract significant interest are slum development; technology incubators at academic institutions; promotion of rural as well as Paralympic and Olympic sports; the Prime Minister’s Relief Fund; preservation of national heritage, art and culture; and welfare of armed forces veterans and war widows
  • The pattern of CSR spending is driven by factors like accessibility to professionals, tangible results, governmental push, brand visibility and traditional pool of social development initiatives.
  • New entrants to CSR might be reluctant to spend on arts and culture or sports as they do not produce immediate visible results.
  • Schemes like building toilets and the Swachh Bharat Abhiyaan are “low-hanging fruit” for companies, they can fulfil targets as well as publicise immediate results.
  • Also, getting clearances, licences and other regulatory requirements for a project from local authorities becomes easy as the government itself is pushing the scheme.

 

CSR Impact Assessment:

Corporate Social Responsibility (CSR) Rules, 2014 have no clear indication or requirement of impact assessment. In the first year of the rules taking effect, most companies were focused on compliance rather than on tracking how their initiatives fared. Following issues were observed in the domain of impact assessment:

  • Evaluating impact may be premature at this stage, as impact is usually achieved over a long term. Many feel that impact can truly be assessed only after a particular activity has been in place for 3-5 years.
  • For most top listed companies, CSR initiatives have been part of sustainability reports for over five years now but for companies undertaking CSR for the first time there is little or no impact to assess.
  • Third party assessments are being done by professional companies in some instances. However, adoption is low and the reports are not made public.
  • Most firms used their own foundations to carry out CSR. Companies preferred this route as it enables better control over the funds and hence, better monitoring of the initiatives.

 

Should government define a Assessment Framework?

  • In the absence of a framework, the assessments have been far and varied. Some feel a structure is needed, which would help streamline the measurement of these social initiatives.
  • However, others believe that CSR is subjective in nature and cannot have assessments or audits like financial accounts. The government should only encourage assessment, not define parameters for it.

 

Smaller vs Larger Firms:
  • Smaller firms with lesser resources at their disposal are less likely to adopt strategic CSR.
  • CSR activities closely linked to the company’s business goals and falling in the purview of strategic CSR (for example–women hygiene classes by fast moving consumer goods majors) have higher payoffs and are mostly done only by larger companies.
  • Hence, positive correlation between profit and CSR expenditure is enhanced as the size of the firm increases. It is advantageous for a large company to spend on CSR, as it strategically differentiates its product, which ultimately pays off in the long run. Strategic differentiation may also spur innovation, which might improve delivery of services.

 

PSU vs Private Sector:
  • Public sector companies spent only 66.7% while private companies spent 82% of the prescribed spend in the first year of mandatory CSR spending, according to the data compiled through research.
  • Earlier, public companies needed to set aside anywhere between 0.5% to 5% of net profits based on the profits of the company, according to the 2010 CSR guidelines issued by department of public enterprises. Hence, effectively state-run companies had a five-year head start with respect to setting aside funds for corporate social responsibility (CSR) initiatives.
  • Under Companies Act of 2013, both public and private companies had to set aside 2% of their net profits.
  • Public companies are mostly in industries where customer perception of the company does not matter (ONGC, NDMC, NTPC, etc.) as much as it does for a private company and this has led to a degree of complacency in meeting the CSR spending target.
  • Public companies outspent private companies in one area in a big way – environment. This may be because many PSUs are natural resource companies and since they have a direct impact on environment, they have taken it up as a cause.

 

Women led Companies:
  • Six women-led companies—State Bank of India, Axis Bank Ltd, ICICI Bank Ltd, Hindustan Petroleum Corporation Ltd, LIC Housing Finance, Apollo Hospitals Ltd – of the 85 of the top 100 companies by market capitalization on the National Stock Exchange saw their CSR spending amounting to 90.5% of what they had to spend.

 

Regional variations:
  • While the increase in CSR budgets has resulted in some companies expanding the geographies they are present in, most choose to spend in areas where they have a business presence.
  • CSR capital is concentrated in developed states with a strong manufacturing presence such as Maharashtra, Tamil Nadu, Gujarat, Andhra Pradesh, Rajasthan and Karnataka. These states are also among those with the highest gross state domestic product.
  • Another reason for these states being favoured by companies is because of the vast network of NGOs that work in them. Maharashtra and Gujarat have the largest number of NGOs working at the grass-roots level.
  • Some states have been very active in wooing firms. Maharashtra and Karnataka asked corporates to contribute to areas such as drought relief and tourism. The Gujarat government even set up a dedicated department called Gujarat CSR Authority
  • The strong presence of manufacturing facilities across the state, in addition to much of corporate India having Mumbai as their headquarters, has resulted in more than 50% of the top 100 companies by market capitalisation on NSE deploying their CSR spends in Maharashtra in one way or the other.
  • Besides developed states, resource-rich locations such as Odisha and Chhattisgarh are also able to attract a fair number of companies due to the overwhelming presence of metals and mining units. All of these companies resettle and rehabilitate those displaced as part of their business.

 

Data about CSR Activities:
  • Indian Institute of Corporate Affairs (IICA) released data about CSR activities which shows grim side of the picture.
  • Poor states generally received least funds as compared to rich states.
  • Jharkhand, Chhattisgarh, Uttar Pradesh, Bihar, Madhya Pradesh received only 9% funds during 2014-15 and 2017-18. Surprisingly these states have 55% districts of 115 Aspirational Districts.
  • Maharashtra, Gujarat, Karnataka, Andhra Pradesh, Tamil Nadu, Delhi have only 11% Aspirational Districts but received 40% of the funds during the same period.
  • 70% companies do not have strategies put in place to implement CSR activities.
  • About 55% funds are spent on human development and social welfare. For this Indian Institute of Corporate Affairs studied 104 companies. Of the total 104 companies, 74 companies are public while remaining 30 are private companies.
  • 66% funds are spent on health, differently abled, education, hunger, sanitation, drinking water, malnutrition and livelihood generation. Whereas 9% funds are spent on environment, conservation of resources and animal welfare.

 

Case studies of CSR:

 

 

Dabur India Ltd:

 

·        Water harvesting, water conservation, recharging of tube wells and plantation in Rajasthan. This initiative made available water in 6 villages of Rajasthan round the year.

·        1200 farmers’ families have been benefited by increased income and crop yields.

 

Tata Steel Ltd:

 

·        They have worked to control neonatal mortality in Jharkhand for which they are working in 167 villages.

·        In 2009, Saraikela (Jharkhand), neonatal mortality was 96%. Tata Steel invested in awareness generation and healthcare services. This helped brought down neonatal mortality rate to 32.7% and infant mortality rate upto 26.5% within 3 years.

Toyota Kirloskar Motor:

 

Green Me Project was launched by the company. This project introduced activity based environmental learning curriculum in 35 government schools.

 

Recent developments:

Recently, the report of a High-Level Committee (HLC) on Corporate Social Responsibility, set up under Injeti Srinivas in 2018 to review the existing framework submitted its report.

Companies Amendment Act 2019:

  • The Act mandates that companies transfer unspent CSR money in a financial year to an escrow account meant for CSR for three years, after which any unspent amount must be transferred to a fund specified by the government.
  • Strengthening enforcement provisions that enable the SFIO (serious Fraud Investigation Office) to ensure speedy and more effective enforcement, including actions of disgorgement.
  • Act also highlights the importance of companies having verifiable registered physical addresses and makes it mandatory that companies have a physical address.
  • The Act aims for declogging the National Company Law Tribunals (NCLTs) through the shifting of routine matters, from the NCLT to the central government.
  • The Act also recategorises 16 compoundable offences, such as failure to file returns and issuance of shares at a discount, as civil defaults where adjudicating officers of the central government may levy penalties.

 

Key recommendations:

  • CSR Activities in Local Areas: The emphasis on local area in the Act should not be treated mandatory in nature. Companies should engage in CSR activities by balancing local area preference with national priorities.
  • Schedule VII of the Act: It should be mapped and aligned largely with SDGs and some important items such as senior citizens’ welfare, disaster management, and heritage be additionally included to develop an SDG+ framework.
  • Contribution to Central Government funds: This provision should be discontinued as CSR spend. However, a specific designated fund may be created for transfer of unspent CSR funds lying with the company beyond the proposed 3-5year time limit.
  • Issues related to Reporting for CSR: Enhanced disclosures should be made for better information dissemination with respect to selection of projects, locations and implementing agencies to facilitate better monitoring.
  • CSR Audit: CSR may be brought within the purview of statutory financial audit, by making details of CSR spending as part of the financial statement of a company.
  • Creation of ‘Social Impact Companies’: To express object of pursuing social outcomes, while being permitted to achieve conditional profit which can be distributed.
  • Tax Benefits for CSR Activities: All activities listed under Schedule VII to enjoy uniform tax benefits.
  • Third party assessment of CSR Projects: 5% of CSR mandated companies be identified on a random basis for third-party assessments on a pilot basis.