Is Corporate Social Responsibility Effective in India?

Since some time now, especially after the advent of corporate governance, the corporates have been trying to strike a balance between profitability and the interest of all the stakeholders. It discusses CSR in the difficult times of COVID.
Estimated Reading Time: 10 minutes

Introduction

Corporate Social Responsibility or CSR is a business model which makes the company liable to not only the shareholders but to the environment, society and the other stakeholders as well. It is a tenet of Corporate Governance and is also known as corporate citizenship as it implies duty on the company to act in a responsible manner by ensuring that it does not have a negative impact on the society in any economic, social or environmental aspects.

This paper firstly discusses the provisions pertaining to CSR. Then it comprehensively analyses the effectiveness of CSR under two factors- monetary and qualitative effectiveness. Then it provides the impact of COVID-19 on CSR activities with a brief analysis of the same. It then goes forward to recommend ways in which CSR can be effectively enforced in India along with advantages of enforcing it properly.

Provisions pertaining to CSR

India is one of the few countries, which has mandated CSR for various companies which belong to a certain category. Section 135 of the Companies Act, 2013, which was notified on April 1, 2014, makes CSR compulsory for all companies (whether public, private, listed, unlisted or government), if it falls within any of the following criterions-

  1. If the net worth of the company is Rs. 500 Crores or more; or
  2. If the annual turnover of the company is Rs. 1000 Crore or more; or
  3. If the annual net profit of the company is Rs. 5 Crores or more.

Where the company falls in any of these categories, it has to appoint a CSR Committee which consists three or more directors. It is necessary for one of these directors to be an independent director. Where a company does not have to appoint an independent director as per Section 149(4), it may have two or more directors in the CSR Committee. This provision was inserted by the Companies (Amendment) Act, 2017.

Role of CSR Committee

As per Section 135(3), the role of the CSR Committee includes-

  1. It has to create a policy and inform the board regarding the policy containing CSR activities to be undertaken by the company.
  2. It has to recommend expenditure amount that will be utilized in implementing the policy.
  3. It has to monitor the company policy in CSR regularly.

The Board has to review this policy and approve it. It also has to disclose the contents of the policy to the company and publish the same on the company’s website. It has to make sure that the activities prescribed by the policy are undertaken by the company. The company has the freedom to give preference to conduct such CSR activities in the local areas.

Amount to be utilized

The Board has to ensure that a minimum of 2% of the net profits in the last 3 years has to be utilized for CSR activities. If it fails to do so, it has to inform the reasons for the same in its report. If it exceeds the amount prescribed for CSR activities. The company can utilise the excess to set-off the amount in the successive years for CSR activities. The excess unspent funds have to be transferred to a separate account called ‘Unspent Corporate Social Responsibility Account’.

In case the company does not comply with the provisions, it has to transfer twice the amount to be utilized for CSR activities in the ‘Unspent Corporate Social Responsibility Account’ or Rs. 1 Crore, whichever is less. The directors responsible are also penalised and have to transfer 1/10th of the amount to the aforementioned account under Section 135 for the contravention of this section.

Areas where CSR funds can be utilized

Schedule VII of the Companies Act, 2013 provides a list of activities where the CSR funds can be utilized. The activities are quite broad in nature but also exhaustive. Companies cannot term other expenditures as being utilized under activities unless they are specifically notified under Schedule VII. Some of the activities included in Schedule VII are to eradicate hunger, poverty, malnutrition, to promote preventive healthcare and healthcare in general, to promote sanitation, disaster management, to promote education, etc.

The Companies (Corporate Social Responsibility Policy) Rules, 2014

The Companies (Corporate Social Responsibility Policy) Rules, 2014 were published vide Notification No. G.S.R. 129(E) on 27th February, 2014 and notified by the Ministry of Corporate Affairs on 1st April, 2014. This Act is applicable to all the companies falling within the purview of Section 135 of the Companies Act, 2013. It provides a comprehensive legislation for the implementation of the CSR mandate as provided by Section 135. There have been several amendments in the rules to accommodate the dynamic circumstances. The most recent amendment was introduced on January, 2021, which provides for many modifications, keeping in mind the COVID-19 Pandemic.

Effectiveness of CSR in India

There can be two ways to measure CSR in India- one is on monetary terms and the other in the impact it is having towards the society.

In monetary terms, the provisions for CSR may be said to be successful in India as more and more companies are now indulging in CSR activities. As per the CRISIL CSR Yearbook, 2017, 1,505 of the listed companies at Bombay Stock Exchange was eligible under the Section 135 criteria. 77% of these companies reported spending on CSR activities in 2016, in contrast to 75% companies in 2015. The CRISIL CSR Yearbook, 2019, stated that in 2018, 1,913 companies met the criteria under Section 135 of the Companies Act, 2013, of which 1246 companies spent the funds on CSR (more than 2/3rd spent over 2% of their net profits and 153 companies, i.e. 12% spent 3% or more). However, 667 of these eligible companies did not spend the funds on CSR for various reasons. There has been an increase in the numbers as compared to 2017, where 57% companies spent more than 2% of their profits.

The PRIME Database reports that the CSR spend has overall increased by 7% to Rs. 9,034 Crores from 2015-2016 to 2016-2017. However, the spending of CSR funds in the healthcare and sanitation decreased by 18.6%. It was reported in India’s CSR Reporting Survey that there were 76% companies amongst the N100 companies that had spent 2% or more for CSR activities in the year 2018-2019.

However, it is necessary to note that many of the companies also show manipulated figures for CSR by window-dressing the report. Furthermore, many of the companies are not engaging in the CSR activities even though it is mandated by law. Such companies use various excuses and loopholes to justify the non-utilization of funds in CSR activities. Then there are some companies which do not report on CSR activities altogether.

There has also been instances, where before the legislation was introduced and a capping of 2% was put into place, there were some companies which were utilizing more than 2% of their net profits for CSR activities. But after the legislation was introduced such companies reduced their funding to keep it within 2%.

On the other hand, if the effective impact of the CSR legislation is seen, there may be many loopholes in the legislation due to which it is not producing the desired impact. For example, Schedule VII which states the activities for which CSR funds may be utilized is very broad. This allows the corporations to only engage in such CSR activities which are beneficial to the organization. This leaves out many activities which are not beneficial to organizations. For this very reason, most of the funds utilized for CSR activities went to specific sectors only.

Furthermore, the companies undertake such activities blindly which may not produce any long-term benefits for the society. For example, they might give money to the poor people instead of enabling them to produce their income. While this provides them with a short-term solution, it does not provide them with long-term benefit. In this example, if the corporations provide training for skilled work to such people, they might be better off in the long run.

One of the reasons for the ineffectiveness of the CSR legislation in terms of impact is the lack of knowledge in the company regarding social, economic and environmental issues. This leads to the company utilizing the CSR funds in an ineffective manner, by tying up with shoddy NGOs or just throwing away the money at widely publicised social causes in an unregulated manner. This results in non-effective measures.

Furthermore, there is an irony created within the organization in some cases, where the organization is using unethical means and also indulging in CSR activities just because of the legislative mandate. For example, a fashion house indulging in sweat shops with poor working conditions and low wages for the labourers indulging in social causes like providing clothing to the needy. In such cases, the entire purpose of CSR is defeated in a way because the amount of people being exploited for gaining profits are far more than the amount of people benefitting out of CSR activities.

Moreover, there are many issues which are systemic in nature and cannot be solved merely by throwing money at it. Since the CSR legislation only requires organizations to work for social issues in monetary terms, it does not address the issue of systemic problems which require long-term commitment and actual engagement from the people.

Impact of Covid-19 on CSR activities

COVID-19 had a significant impact on CSR activities, from policy changes to diversion of funds towards COVID-19 related issues. The following policy changes were implemented by the government-

  1. On March 23, 2020, Ministry of Corporate Affairs or MCA introduced the first notification which declared COVID-19 to be a notified disaster and allowed the companies to spend the CSR funds under Schedule VII under items (i) and (xii) related to promoting healthcare, sanitation and disaster management.
  2. Thereafter, another notification was issued on March 28, 2020, which specified that companies can indulge in CSR activities related to COVID-19 by donating the money to Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund or PM CARES Fund. This however caused confusion as to whether only this fund was a permissible expenditure under Schedule VII. Therefore, MCA issued another notification on April 10,  2020, clarifying the areas where CSR funds can be utilized and excluded contributions made to the ‘State Relief Funds’ and ‘Chief Minister’s Relief Funds’. It also allowed for 100% tax exemption for the donated funds under the Income Tax Act, 1961.

It is stated by eminent scholars that the COVID-19 pandemic can make way for the increase in CSR activities by the companies as it has led to the realization that the long-term development of the companies requires a balance between the profitability and the interest of all the stakeholder, including the society.

While the changes introduced by MCA has provided for diversion of much-needed funds towards the pandemic, it has diverted the funds from social issues which require long-term attention and funding. For instance, many corporations which were working to promote education and saving the environment have diverted their CSR funds towards COVID-19 related issues which have left these sectors helpless.

Ways to implement CSR effectively in India

The following points can be adopted for better utilization of CSR policies-

  1. There should be greater awareness amongst directors who work for companies which have to comply with Section 135 regarding CSR activities. This can be done by ensuring that these activities are widely publicised as not just being helpful to society, but also to the company.
  2. Companies can tie-up with NGOs or non-governmental organizations which align with the vision of the company or even otherwise. For example, there are many organizations raising funds through the CSR activities of the companies to help the environment and the underprivileged. In this case, if the company does not wish to utilize manpower to conduct CSR activities, it can just provide funds to such organizations which will put the CSR funds to a good social cause.
  3. Companies should engage in those activities which they are familiar with. For example, a company which is dealing with online education can provide such education packages to underprivileged children for free or give scholarships to underprivileged children. Organizations which are in the business of energy, can install power houses in rural areas where electricity is still not available and so on.
  4. There is a need for active participation from the company to focus on not just immediate results but long term commitment towards social causes.
  5. Companies can also provide grants to research institutions which are working for sustainable development.

Advantages of implementing CSR effectively

Implementing CSR effectively provides for the following advantages-

  1. The financial performance of the company improves as there is a better brand image created for the company.
  2. There are more sales and customer loyalty. This is impacted because people prefer to attach themselves to organizations who are also working for the society and not just to gain profit.
  3. It helps the society as a huge sum of money is used to solve social, economic and other issues. Even though the percentage prescribed is 2%, it can lead to a huge sum of money going for charitable causes when large companies contribute to such charities.
  4. It creates greater trust in the company and provides for better brand image of the company.
  5. It also benefits the environment, especially if the corporates target environmental issues, not merely by donating to charities but by imbibing the principles of the recycling, reusing, sustainability, etc. in their day to day operations.
  6. It provides for greater funding for NGOs and research institutions. Since the NGOs and research institutions receive minimal grants from the government in India, CSR provides an opportunity to these institutions to gain funding for charitable causes. This helps in better development and research, thereby lower costs of products in the future.
  7. It provides for better media coverage and marketing of the company, as media houses show a positive light on the company.
  8. It also gives a competitive advantage to the company, due to the cumulative effect of a better marketing impact and better branding of the company.

Conclusion

It is nowadays necessary for corporations to create a fine balance between earning profits and providing value to the society. This not only helps in making the society a better place, but also ensuring a better brand image and providing competitive advantage to the company. While the CSR legislation was introduced with a positive motive of helping the society, there is still a long way to go to effectively implement the provisions pertaining to CSR. Therefore, there is a need to revisit the legislation from the impact perspective rather than the monetary perspective to ensure a better outcome from CSR activities.

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