The Hindu Editorial Analysis- 7th October 2022 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Strengthening the CSR Framework is a Proftable Idea 

Context 

CSR spending in India by the companies has risen from ₹10,065 crore in 2014-15 to ₹24,865 crore in 2020-21.

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:
  • Net worth is Rs 500 Crore or more; or.
  • Turnover is Rs 1000 Crore or more; or.
  • 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.

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 sector – Section 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.

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.

Case studies of CSR:

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.