Mandatory spending on Corporate Social Responsibility is the new reality for Corporate India. The enforcement of this provision from April1, 2014, has shifted focus from the debate on whether CSR is a moral imperative or not to how companies can put the mandatory CSR expenditure to effective use.
The provision of the Companies Act 2013, mandates that any company with a net worth of at least Rs 500 crore or a turnover of Rs 1,000 crore or a net profit of at least Rs 5 crore would have to spend at least 2 per cent of its average net profit of the immediately preceding three years. According to the norms, the CSR activities will have to be within India wherein companies can choose from a range of activities such as promoting preventive health care and sanitation, setting up homes and hostels for women and orphans and livelihood enhancement projects. If a company is unable to spend the amount, an explanation will be required in the director’s report.
As a result of this provision, many corporate enterprises are stepping up their CSR efforts. However, as a matter of fact, many companies still lack the processes to channelize the allocation of these funds. For instance, in its report on CSR activities of Coal India, the parliamentary panel on coal and steel mentions that “Of the allotment of Rs 553.33 crore in 2011-12, Coal India and its subsidiaries could spend only Rs 82 crore (14.8 per cent). Coal India sources said the failure to meet the target was more on account of procedural delays rather than lack of funds and initiative on its part.
Corporate entities will now have to reorient their CSR spending under the provisions of the Companies Act 2013.and set up processes and mechanisms to ensure that CSR funds are directed to productive uses and prevent unethical and inappropriate funneling of CSR funds for private purposes.
Additionally companies will need to expend management time and resources to set up processes for:
- Creating transparency and accountability in the utilization of CSR funds.
- Identifying CSR initiatives that are synergistic with company strategy.
- Conducting due diligence for effective utilization of funds in creating value for society. For example when the funds are earmarked for towards projects for creating some new facility (say a medical center) it makes sense to check if there are pre existing facilities in the area that can be augmented effectively instead of creating new facilities.
- Gathering knowledge of similar/ duplicate initiatives that other companies might be launching concurrently.
- Collaborating with other organizations that can effectively utilize CSR funds for socially relevant purposes.
Industry bodies can help in the coordination of CSR activities by sharing information about CSR initiatives shepherded by different NGOs or companies. This could also lead to setting up of social enterprises with expertise to undertake CSR initiatives for companies or funds fund to pool CSR resources for a fee and make sure the corpus is spent intelligently.
Undoubtedly, CSR gaining traction in the corporate sector is a step forwards towards corporate participation to bring about inclusive growth and sustainable development to aid India’s transition from a developing to a developed nation.