CSR: Is India Increasing spending responsibly?

Context

Companies can bring meaningful changes in society through the huge Rs 13,624 crore corporate social responsibility funds.

Background

• The idea was brought into a legal framework in 2014 when CSR was introduced as a statutory obligation under Section 135 of the Companies Act, 2013.
• Under this, every company with an annual net worth of over Rs 500 crore, turnover of over Rs 1,000 crore, or net profit of over Rs 5 crore, must spend at least 2 per cent of its net profit on CSR.
• Latest data with the Union Ministry of Corporate Affairs (MCA) shows expenditure on CSR activities has increased from Rs 10,066 crore in 2014-15 to Rs 13,624 crore in 2017-18.
• These companies divert a major chunk of the CSR funds towards human development.
• A 2019 study by the Indian Institute of Corporate Affairs (IICA), a government think tank that provides holistic advice on issues related to corporate affairs, shows 55 per cent of the CSR funds in the country are spent on human development and social welfare.
• However, the focus on economic development and environment sustainable development is relatively poor, the report states. The reason for this is the nature of these sectors.
• “Traditionally, sectors such as health and education have a clear blueprint and are easy to undertake.
• Moreover, these activities are easily quantifiable which gives companies ready numbers.
• But companies have not focused much on environmental activities.

Corporate Social Responsibility in India

• India is the first country in the world to make corporate social responsibility (CSR) mandatory, following an amendment to the Companies Act, 2013.
• Businesses can invest their profits in areas such as education, poverty, gender equality, and hunger as part of any CSR compliance.
• Prior to that, the CSR clause was voluntary for companies, though it was mandatory to disclose their CSR spending to shareholders.

CSR amendments under the Companies (Amendment) Act, 2019

• Until now, 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 CSR amendments introduced under the Act now require 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 into one of the specified funds.
• The new law prescribes for a monetary penalty as well as imprisonment in case of non-compliance.
  
  

Philanthropy from a distance

• In the initial years of the CSR Act, the MCA observed that companies would execute projects far from their area of operations.
• According to the Act, companies should choose local areas for CSR activities, but 73 percent companies were found to be engaged in areas beyond their area of operations.
• Maximum expenditure was in industrialised areas, while the least-developed states received the least funds.
• The phrase “local area preference” in the Act may have been interpreted as mandatory and not a directory.
• Considering this, MCA issued a directive in 2018 for all companies to follow the law in letter and spirit.
• State-wise analysis of expenditure reveals the low concentration of CSR activities in poor states.
• Jharkhand, Bihar, Chhattisgarh, Madhya Pradesh and Uttar Pradesh received only 9 per cent of the total expenditure from 2014-15 to 2017-18.
• These states account for more than 55 per cent of the 117 aspirational districts identified by NITI Aayog.
• However, Maharashtra, Karnataka, Andhra Pradesh, Gujarat, Tamil Nadu and Delhi, which account for only 11 per cent of the aspirational districts, received 40 per cent of the total expenditure.
• “Companies usually undertake CSR activities in areas where work can be done without any hardship.
• This may be the reason that aspirational districts, with their poor infrastructure and development level, are not in the focus of companies.
• Further, aspirational districts are not aware of corporates’ responsibility towards them.
• CSR activities are similarly scarce in the Northeast.
• An MCA assessment identifies infrastructural gaps here in basic minimum services such as rail, road, and water and air connectivity.
• However, data shows a tiny portion of the funds was spent in the North-East between 2014-15 and 2017-18.
• Among the states here, Assam spent the maximum with Rs 653.19 crore. While Manipur spent Rs 24.78 crore and Meghalaya Rs 24.11, Tripura, Nagaland and Mizoram spent as low as Rs 5.88 crore, Rs 3.35 crore and Rs 2.41 crore respectively.
• On the other hand, Maharashtra spent a huge Rs 8,468.28 crore during the period.
• Five years after the Act was enforced, 70 per cent of the companies still do not have a strategy to implement CSR activities.
• According to the law, companies should set up board-level committees, which draw plans for the effective implementation of their projects.
• According to the IICA study, if a firm has a CSR policy and committee in place, but does not have an implementation strategy, supports the conclusion that companies are more focused on complying with the law and spending CSR funds rather than making a serious initiative.
• Such behaviour could be due to lack of capacity or experience in the development sector.
• CSR has a huge potential to improve the lives of a large number of people in the country.
• Its Rs 13,624 crore corpus can bring change in a wide variety of sectors.
• Therefore, it is crucial that companies do not relegate it as a perfunctory exercise, but make a meaningful contribution to society.

How funds flow in chronological order?

• Human development, social welfare get a big bite from the CSR pie, the environment is left with a small share.
• Education, differently-abled, livelihood generation
• Health, eradicating hunger, poverty and malnutrition, safe drinking water, sanitation
• Rural development
• Environment, animal welfare, conservation of resources
• Nature of projects not mentioned
• Prime Minister’s National Relief Fund, any other government fund
• Gender equality, women empowerment, old age homes, reducing inequalities
• Heritage art and culture
• Encouraging sports.