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.
Mandatory 2% CSR spend set to kick in from April 1.
2 thoughts on “Corporate Social Responsibility in India – Transition from Moral Imperative to Mandatory Expenditure”
No doubt mandatory CSR is a step in the right direction in a country like India where there is a yawning and increasingly growing gap between the haves and the have-nots. Moreover, the rich in India are notorious for their lack of philanthropy, save a few notable exceptions. Hence, this law, or at least the thought behind it, is definitely a right step. It will force corporates to indulge in giving through their heads rather than through their hearts. But so be it. The social disparities in India are so extreme today that we have no choice but to enforce even philanthropy through the law!
I have no problem with the law itself therefore. What I do have a problem with – like most other Indian laws – is its enforcement. You mention that the penalty for not complying with this law is an explanation from the directors in the annual report. How difficult is that? How long do you think will it take the ingenious mind of Indian promoters to come up with 10 or more convincing reasons stating why they could not spend this money? Worse. How much more longer will it take them to figure out creative ways to funnel this money back into their own doors?
The law comes into effect from 1 April 2014. But I am willing to bet you that no one will be in a hurry to comply with it from day one. My guess is that every one will play the waiting game, watching the moves of others. If there is a genuine surge of CSR activity due to this law, we will only see it in March 2015, the last month of the financial year. That is the best case scenario. In the worst case, CSR will be no better off than where we are today.
Let us check back on the actual reality, a year from now!!
Thanks for your observations. Another concern that strikes me in this context is that in order to come up with an effective CSR strategy, companies will require expend to management time and efforts and have dedicated people working on these initiatives to set up mechanisms for effective deployment of funds. Some Large corporate houses are setting up their own establishments to take care of CSR initiatives. They would need qualified professionals to do these jobs, but that will increase the operational expenses.
The question is that even for companies with the intent to take up CSR initiatives, how willing will companies be to deploy qualified professionals on non revenue generating activities. Probably some amount of coordination and overlap between CSR initiatives and corporate branding may provide some impetus to companies for devising effective CSR strategy.