Strengthening the CSR Framework

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    • Recently, the opinion has emerged that Strengthening the Corporate Social Responsibility (CSR) framework is a profitable idea.

    Data of CSR participation of companies

    • Rise in spending:
      • Ever since the establishment of the Corporate Social Responsibility (CSR) regime in India (under Section 135 of the Companies Act 2013), CSR spending in India has risen from ?10,065 crores in 2014-15 to ?24,865 crores in 2020-21
        • But there is no data to verify whether this increase is commensurate with the increase in profits of Indian and foreign (having a registered arm in India) companies. 
    • Zero spendings: 
      • There were 2,926 companies in 2020-21 with zero spending on CSR. 
    • Decline:
      • 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.

    Corporate Social Responsibility (CSR)

    • Rationale:
      • Companies are morally obligated to contribute back to society in addition to their obligations to consumers or shareholders since they rely on societal assets to operate efficiently.
      • Corporate social responsibility enables businesses to participate in a variety of socially responsible initiatives.
    • About:
      • The Companies Act encourages companies to spend 2% of their average net profit in the previous three years on CSR activities.
      • It is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. 
    • Statute:
      • The CSR concept in India is governed by Section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR Policy) Rules, 2014
    • Monitoring and report filing:
      • Under the existing regulation, monitoring is by a board-led, disclosure-based regime, with companies reporting their CSR spends annually to the Corporate Affairs Ministry (MCA) through filing of an annual report. 
    • Key CSR Areas: 
      • Environmental management, 
      • Eco-efficiency, 
      • Responsible sourcing, 
      • Stakeholder engagement, 
      • Labour standards and working conditions, 
      • Employee and community relations, 
      • Social equity, 
      • Gender balance, 
      • Human rights, 
      • Good governance, and 
      • Anti-corruption measures.
    • Significance of CSR:
      • Helps companies to achieve a balance of economic, environmental and social imperatives (“Triple-Bottom-Line-Approach”);
      • Companies can make a valuable contribution to poverty reduction; 
      • Enhanced access to capital and markets, increased sales and profits; 
      • Directly enhances the reputation of a company and strengthens its brand image leading to enhanced customer loyalty.

    Issues with CSR spending

    • Excess spendings:
      • If a company spends an amount in excess of the minimum 2%, as stipulated, the excess amount is liable to be set off against spending in the succeeding three financial years. 
      • The latter provision in the Act weakens the former provision since the requirement of 2% is only a minimum requirement. 
        • Ideally, companies should be encouraged to spend more than this. 
    • Companies’ own foundations: 
      • Besides, many private companies have registered their own foundations/trusts to which they transfer the statutory CSR budgets for utilisation. 
      • It is unclear if this is allowed under the Companies Act/CSR rules.
    • Skewed spendings: 
      • One of the provisions of the Act is that the company should give preference to local areas/areas around it where it operates. 
      • This is logical. However, a private report says that 
        • 54% of CSR companies are concentrated in Maharashtra, Tamil Nadu, Karnataka, and Gujarat (receiving the largest CSR spends) 
        • While populous Uttar Pradesh and Madhya Pradesh receive little.
      • A high-level committee observed in 2018 that –
        • Although the emphasis on ‘local area’ in the Act is only directionary a balance has to be maintained
        • Unfortunately, this ambiguity has left much to the discretion of the boards of these companies in the absence of clear percentages for local spending vis-à-vis other area spending.
    • No focus on environmental spendings:
      • The Act deals with broader environmental issues to create a countervailing effect. 
      • However, 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.
    • Output rather than quality:
      • A major issue with this design is that it focuses on output rather than quality of the expenditure and its impact. 

    Suggestions & way ahead

    • Need of a national-level platform:
      • There is a need to curate a national-level platform centralised by the MCA where 
        • All States could list their potential CSR-admissible projects. 
        • Companies can assess where their CSR funds would be most impactful across India. 
        • Companies can also give preferential treatment to areas where they operate. 
      • Invest India’s ‘Corporate Social Responsibility Projects Repository’ on the India Investment Grid (IIG) can serve as a guide for such efforts. 
    • Combining with other government schemes:
      • 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.
    • Focussing on environmental restoration:
      • Companies need to prioritise environmental restoration in the area where they operate, earmarking at least 25% for environment regeneration.
    • Community participation:
      • All CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.
    • Recommendations by the high-level committee in 2018:
      • These recommendations should be incorporated in the current CSR framework to improve the existing monitoring and evaluation regime. 
      • The recommendations include: 
        • Strengthening the reporting mechanisms with enhanced disclosures concerning selection of projects, locations, implementing agencies, etc.; 
        • Bringing CSR within the purview of statutory financial audit with details of CSR expenditure included in the financial statement of a company, and 
        • Mandatory independent third-party impact assessment audits. 

    Source: TH