Introduction:
In the intricate landscape of modern Indian corporate sectors, the emphasis on development as a tool to combat poverty through the Corporate Social Responsibility (CSR) model is becoming increasingly prevalent. Beyond the conventional avenues of donations to NGOs or trusts, CSR has emerged as a modern instrument with a substantial impact on fostering India’s growth and development. The Indian government, recognizing the pivotal role of CSR in nation-building, has recently intensified its efforts to promote it. The regulatory framework surrounding CSR not only enhances accountability and transparency but also underscores the moral duty of corporations to contribute to society.
Objective:
The evolution of the primary motive for top corporations extends beyond the traditional pursuit of wealth and profit maximization. The contemporary corporate ethos places a significant emphasis on maintaining ethical standards and responsibilities. CSR becomes the vehicle through which corporations leverage their resources to build economic value while simultaneously creating social value. It goes beyond mere profit-driven motives, encouraging entrepreneurs to actively contribute to economic growth. In the global context, India, as the world’s fastest-growing economy, stands as a unique player, mandating CSR for companies and fostering a model where businesses actively self-regulate and contribute to social and environmental improvement projects.
Applicability:
The legal framework governing CSR is outlined in Section 135 of the Companies Act 2013, in conjunction with the Companies (Corporate Social Responsibility Policy) Rules 2014. Applicability is determined based on specific financial criteria, with companies falling under the ambit if their turnover exceeds INR 1000 crore, net worth surpasses INR 500 crore, or net profit exceeds INR 5 crore. Notably, the definition of net profit excludes income received from outside India or dividends from a company covered under the CSR provisions. Once a company falls under the CSR provision, it is obligated to comply for three consecutive years. Non-compliance for three consecutive financial years necessitates a company to provide reasons in the Board Report.
CSR Activities:
The spectrum of CSR activities encompasses various modalities:
- Charitable Contributions: Companies have the option to donate to charitable trusts, societies, and NGOs.
- Contracts with NGOs: Collaborative efforts can be established through contracts with NGOs to perform CSR activities on behalf of the company.
- Establishing Own Trusts: Corporations also have the autonomy to create their own trusts dedicated to CSR activities.
CSR actively contributes to social welfare, technological growth, healthcare, rural infrastructure, and poverty alleviation. Its multifaceted impact extends to promoting quality education, skill-based employment, gender equality, women empowerment, and supporting initiatives in nation-building, preservation of national heritage, technological innovation, scientific research, environmental protection, and health.
During the pandemic and lockdown, CSR funds played a pivotal role in constructing Covid vaccination centers and contributing to the Prime Minister’s funds.
Activities Not Treated as CSR:
Certain growth and development activities conducted in India are exempted from being treated as CSR.
CSR Committee Composition:
Efforts to streamline management include the formulation of CSR Committees:
- Listed Company: Comprising three directors, one of whom must be independent.
- Unlisted Public or Private Company: Mandating at least two directors, with additional directors if the provision of an independent director doesn’t apply.
- Foreign Company: Comprising two individuals, one of whom must be an Indian resident.
CSR Committees play a crucial role in monitoring the implementation of CSR policies, with recommendations on expenditure presented to the Board of Directors.
CSR Policy:
Companies are mandated to formulate a comprehensive CSR policy, allocating at least 2% of the average net profit of the three preceding financial years. The computation of net profit follows the guidelines outlined in Section 198 of the Companies Act, with a preference for local area initiatives.
Concept of Impact Assessment:
A pivotal addition to the CSR landscape is the introduction of Impact Assessment. This entails a comprehensive evaluation mechanism for projects with an outlay of 1 crore and a budget of 10 crore, ensuring performance and transparency.
Challenges in CSR Implementation:
The initial years post the enactment of the CSR Act witnessed companies executing projects beyond their operational areas. Despite regulations emphasizing local area preferences, a staggering 73% of companies were found to be engaged in projects outside their operational zones. Industrialized areas received the lion’s share of funds, with less-developed states receiving minimal allocations. A directive issued in 2018 emphasized adherence to the law’s letter and spirit, reiterating the importance of local area preferences.
State-wise analysis reveals a concentration of CSR activities in economically prosperous states, neglecting aspirational districts and regions like the Northeast. Aspirational districts lack awareness of corporate responsibility, and there is limited corporate presence due to accessibility issues.
Five years post-enforcement, a substantial 70% of companies lack a formulated strategy for CSR implementation. This indicates a prevalent focus on compliance rather than a dedicated effort towards impactful CSR activities. The IICA study suggests that this behavior may stem from a lack of capacity or experience in the development sector.
CSR Expenditure and Trends:
The combined CSR expenditure by 1,205 listed companies stood at 14,801 crores, a figure similar to the previous year despite a 6% rise in the net profit benchmark. Notably, companies have consistently surpassed mandated expenditure since 2019-20 at an aggregate level.
India emerged as one of the pioneering countries globally by establishing a legal CSR framework, mandating reporting on CSR activities. Since the enactment of CSR provisions in April 2014, companies have collectively spent nearly 1.27 trillion rupees or 1.27 lakh crore rupees over seven years. This data, available on the National CSR Portal based on disclosures made by companies, reflects a diverse allocation across 29 sectors such as health, education, environment, welfare, and development, among others. The CSR expenditure in India has shown a substantial increase, from over Rs. 10,065 crores in 2014-15 to Rs. 25,715 crores in 2020-21, registering a 2.5-times surge over seven years.
CSR Distribution Challenges:
A critical examination of the data highlights a skewed distribution of CSR expenditure, favoring sectors like healthcare, education, and rural development over others such as gender equality, socio-economic inequalities, minority empowerment, and natural resources conservation. Furthermore, certain states contributing more to the GDP receive a disproportionate share of CSR funds compared to other states.
A new disclosure framework, introduced in 2022 by the government, mandates a detailed report for 2020-21. This report includes insights into ongoing and new projects, creation of capital assets, impact assessment, etc. The effective utilization of CSR funds holds immense potential for fostering social, environmental, and economic development, provided it is deployed judiciously. The coming years will reveal whether there will be a shift in the distribution of CSR spending.
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