INTRODUCTION
The concept CSR was implemented in the new Companies Act, 2013 to make sure that more and more entities came forward and participated in the growth and development of the society. The Government of India notified the rules for CSR funding under section 135 on the new Companies Act, 2013 and Companies (Corporate Social Responsibility Policy) Rules. The society is of key importance to these companies as they derive their major resources / inputs from the society and hence it becomes their obligation to act towards the benefit of this very society. However, the number of companies doing this is declining. Companies have found countless ways of dodging their corporate social responsibility.
HOW CSR COMPLIANCE ACTS A BOON FOR THE COMPANY?
Corporate Social Responsibility is no longer a mere slogan or an idea. It has grown to become one of the most important indicators of a company’s responsibility towards the social growth. It has become indispensable for various firms to demonstrate such activities. Compliance to CSR rules does not only benefit the society but is also crucial for the success of an enterprise as it involves more customer engagement. It leads to strong brand positioning, enhanced corporate status, market share/sales, increase in its ability to attract and retain employees, appeal to investors and financial analysts.
As per the 2015 Cone Communication/Ubiquity Global CSR study, 91 % of the Consumers go for those companies who work towards addressing various environmental and social issues[1]. They seek for responsible products. Customers are more inclined towards companies that according to them are not only minting profits but are also making sure that they are ethical and are benefitting the society. The University of Michigan had suspended the purchases of any products endorsed by Coca Cola.[2] This was not done because of the price and the quality they was being offered by the company. The contract was annulled as a response to the environmental and labor issues in India. The fact that the university agreed to revive its contractual relation with the company only if it made audits and worked towards the benefit of the society made it very obvious that today the customers are ready to compromise on the quality and price of the products and services being offered but not on their ethical standards. Non-compliance to the CSR norms acts as a detriment to the companies. However, there are companies that are not one-dimensional and focus on creating an impact. The Tata group, carry out CSR activities aimed at upliftment of the poor strata of the society and empowerment of women, it provides academic scholarships and organizes awareness programs for various health care services like immunization, AIDS etc., UltraTech Cement carries out philanthropic activities across 408 villages in the country, Mahindra &Mahindra’s field of action is promoting education and to extend a helping hand to the economically backward classes in that field.[3] The DHL group as a part of their CSR activity aims to reduce all the logistics related emission by the 2050,to achieve the goal of limiting global warming below 2 degrees as prescribed in 2015 Paris Climate Conference and United Nation’s 2030 Agenda for Sustainable Development.[4] CSR has become an inseparable part of these companies as they themselves benefit from it by creating a good brand image amongst the employees and their customers.
FAILURE OF CSR
Although, CSR is proved to be fruitful yet we cannot say that it has achieved its objects in totality. One of the major reasons for this is the lack of effective enforcement of these provisions. Simply mandating them will not be helpful. One of the major stumbling blocks is finding credible projects that these companies can support under the amit of their CSR requirements.
As per the KPMG report, geographical bias is also one of the major reasons for the failure of CSR.This discrepancy is because of the simple reason that most companies tend to distribute their funds to projects, which are located close to where they are based. This eventually leads to the industrialization of the areas that are already developed or developing. All the resources get diverted from the underdeveloped and poorer sectors of the nation that are in ardent need of these resources to the already developed sectors.
According to the same report more than 52 out of the country’s 100 largest companies failed to spend the required 2% on CSR activities. [5]
State owned ONGC, IT giants like Tata Consultancy Services and Infosys, lenders like ICIC Bank, Axis Bank, HDFC Bank, Telcom major Bharti Airtel are amongst the top business tycoons that have not complied with 2% rule of CSR LAW.[6] According to Media DNA money, companies like Bharti Airtel (22%), Idea (33%), Hindustan Zinc (37%), BHEL(41.8%) and Cairn India(48%) have spent less than half of what they were mandated to spend as earmarked for CSR during financial year 2015-16.[7] It said that about Rs 13,828 crore was spent by over 19,000 companies during FY16, in the subsequent year, only Rs 4,719 crore was spent by 6,286 companies. Over 9,200 eligible companies did not spend a single penny on CSR during FY16 as compared to 346 firms in FY17.[8]The CRISIL and Prime Database analyses show that only a little more than half of the companies (57%) have complied with the 2% stipulation.[9]
The government had warranted prosecution proceedings against 284 companies and sent 5832 notices to company for not having fulfilled the mandatory CSR expenditure rules. [10]
MYRIAD WAYS OF DODGING RESPONSIBILITY
Companies in our country have found ways and means to dodge their responsibility and avoid disbursement of their funds towards CSR activities. To avoid paying towards CSR many companies across industries have convoluted sustainability with their business strategy. They have strategically formulated ways that combine sustainability, their social obligation with their business ideas. The idea behind this is not to accelerate the growth of the society but to simply increase their profit margins. Hindustan Unilever (HUL)[11] was seen following the same strategy to deceive the customers. They spent a lot of money in the underdeveloped rural areas to create awareness amongst them about sanitation and the need of good hygiene. At face value this activity done by them would constitute to be an act that complied with the CSR laws but in reality, it’s a façade. The CSR rules of the Companies Act, 2013 would not take such activities under the purview of CSR. The society outreach activities by HUL were considered to be activities undertaken in their normal course of business and not as CSR activities.It was more of a marketing statergy. The sole driving force behind such activities was profit making. This was because HUL derived direct monetary benefit from such an activity. By creating awareness amongst the targeted consumers, they were indirectly increasing the demand of the products they primarily dealt with – toiletries and detergents.[12] All such expenses would be counted as business promotion expenditure. They would not amount to CSR expense. While considering the case of HUL, it was also decided that the CSR activities undertaken by a department within the company would not qualify as CSR activity under the Companies Act. Moreover, the new act has made it imperative for the companies to spin off the CSR activities carried out by them, internally into a separate distinct entity registered as a trust or a society or a not for profit company. CSR does not allow shared value propositions.[13] Activities that benefit the employees of the company along wit their families cannot be considered as CSR activities in accordance of Section 135 of the Act. Activities like marathons, T.V sponsorship programs, charitable contribution, advertisements would not be qualified as a CSR expenditure.[14] The Finance Act, 2014 provides that any expenditure incurred by a company towards its CSR initiatives mentioned in Article 135 of Companies Act, 2013 shall not be deemed as an expenditure incurred in the normal course of their business.[15]
A very strong argument used by most companies to justify their underspent towards CSR activities is that they are not able to identify the right projects or organization to associate with. However this excuse cannot be taken into consideration after four years of the enactment of the Act in 2014. With the surfeit of specialists and consultancy agencies at their disposal, these problems can easily be solved.
Most companies spend the required CSR amount on NGO’s that they have been associated with. However, this spending has not been transformational, as they do not spend the stipulated amount. This under spending could also mean that they do not make enough efforts to locate worthy projects or try to nurture grassroots level NGOs. In addition to this, most companies that are in dire need to meet with the CSR requirement choose NGOs without exercising proper diligence. This lure of money leads them to unethical practices. CBI had very recently filed a complaint against an NGO, Advantage India, based in Delhi for misusing the CSR funds given to them by a company.[16] Mumbai police had very recently uncovered CSR funding scam wherein the accused had forged the documents of Hexaware Technologies and approached various NGOs and charitable funds across the country with a proposal to provide them CSR funds worth over 100 crores. [17] Such malpractices defeat the whole purpose of incorporating and mandating the CSR provision.
Companies in India in order to avoid paying money for CSR activities, follow poor disclosure standards when it comes to revealing the details of their spending on the CSR initiatives. This was confirmed by a report made by the Institutional Investor Advisory Services.[18] According to the report, 51 companies listed on the Bombay Stock Exchange’s Sensex defaulted under this category. The report says that in order to spend less than what is required on CSR initiatives, the companies are not very forthcoming when it comes to sharing the details of their CSR spending. For example, Bajaj Auto followed the same strategy. It did not only conceal the amount spent on CSR activities but also did not mention whether the amount unspent in the given financial year was carried forward in the next year. The Companies (Amendment) Bill 2019 introduced a few rules to tighten the CSR laws of the country.[19] The proposed Amendment required the companies to transfer the unused funds meant for CSR activities in a specific year towards a fund set up by the government. The fund is set up for a better and an efficient utilization of resources for public welfare. The main aim of the amendment was to increase accountability and make the entire procedure more transparent.
CSR money is being diverted towards the pursuit of individual growth rather than fulfilling the wider goals of society. Governmental officials and senior staffs in PSUs have constantly been engaged in laundering of CSR money for their own benefit. Such practices have been well documented before the CSR provision was made mandatory. Embezzlement of CSR funds become easier as there is very little oversight on CSR spending. Redesigning projects to make them look CSR friendly by abusing the power of position, facilitates the act of dodging the CSR provisions. Examples of this would be the NALCO case in 2012 where crores of money was diverted towards a private university, accusation made against the former Steel Minister Beni Prasad Verma for having misused SAIL’s CSR funds.[20] Most of its CSR funds were utilized for hiring choppers for the ministers and for their advertisements activities. Disclosure of financial accounts is a very rare occurrence for the PSUs.
Non-compliance to the CSR laws does not only happen when the funds are misused. It also happens by misgoverning and misdirecting funds. A perfect example of this would be donations made to the Prime Minister Relief Fund and any another similar central government funds. Such donations are apparently considered as a part of CSR. For most companies diverting funds towards any such scheme becomes an easy way out through which they can be on the right side of the CSR regulations. It gives them a green card without even devoting extra time and investment in taking up actual CSR projects of their own and internalizing its true concept.
Companies in order to fabricate CSR spending make use of charitable trusts. The money donated is funneled back to the company. Modus operandi for this is very simple. The company in order to comply with the CSR law writes a cheque in favor of the trust that works in any of the ten important field of activities (Healthcare, education, environmental protection) as prescribed by the law[21]. The trust, after deducting its commission, reverts the money directly to the company or its promoters or directors, in cash. At that very instance, white money is converted to black money, the impact of which is adverse on the economy. Most of the times, politicians and rich businessmen establish these trusts so that it provides them with an escape mechanism for all the unaccounted CSR fund. Money flows into these trusts through legitimate banking channels but are eventually returned to the company in cash. This is the most favored route to launder CSR funds, as it is not very meticulously monitored by the government and there exists a lack of a centralized repository that could administer the activities of such trusts. All this is done with the sole intention of deceiving its customers and evading the CSR law requirements.
In 2017-2018, the mandatory CSR expenditure under Section 135 of The Companies Act was rupees 10,000 crore, according to the PRIME Data Groups Analysis of 1627 NSE listed companies. The companies did not meet such a requirement.[22]
To dodge CSR laws, most companies advance money towards any major project started or a scheme implemented by the political party in power. These funds are made available for the extra budgetary spending of the government. The underlying motive behind this to make sure that the government provides these companies a protective shelter against any proceedings that might get instituted against them for non-compliance of the CSR law. It’s basically a give and take policy that is being practiced by these affluent business tycoons and the governmental officials. It leads to a flagrant misuse of the CSR funds. This practice can be understood by going through the report analyzed by Goodera[23], a CSR sustainability management platform. As per the report, in FY16, only 46.51 crores were spent, where as 2107 saw a sudden shoot in the spending to Rs 155.78 crores. This happened because five of the most important PSUs – ONGC, HPCL, BPCL, IOCL and Oil India Limited, together contributed Rs 146.83 crores towards BJP’s pet project, the Statute Of Unity in Gujrat. Theses funds were designated for CSR under the preservation of national heritage category. In addition to this, 14 other companies from Gujarat also contributed to this project, in the name of CSR. [24]
Former Steel Minister, Beni Prasad Verma was accused for misusing CSR funds by investing more than half of it in two Uttar Pradesh districts under him.
CSR funds are being used to further the political goals of the government in power. There has been a recent trend where the companies have been seen diverting their CSR funds towards animal welfare. The PRIME database report shows that 41 listed companied have made 73 separate donations between 2015-2018 to cow based activities and for the establishment and administration of Gaushalas.[25] Companies like Genus Power Infrastructure and Paisalo Digital have spent around 19.5 million towards activities aimed at protection and well being of cows.[26] The Schedule VII of the Companies Act, though mentions animal welfare as one of the categories on which the CSR money can be spent, it does not explicitly talk about the protection of cows. This is used a tool to duck the CSR laws. The statutory provisions of CSR rules has made it mandatory that the activities undertaken by the companies should be in pursuance to the subjects mentioned in Schedule VII of the Companies Act, 2013. Though the topics mentioned in the schedule are meant to be read liberally and are made broad enough to cover a wide range of activities, the main motive behind the said provision should not get lost amidst all this. It’s amusing to see how these companies neglect more pressing concerns in the society and channelize all their resources towards the protection of cows and other animals. They are cynically aligning their activities to suit the political concerns of the government negating the true objective of the Act.
Most companies often justify their non-spending or underspending towards CSR activities by claiming that they have already spent the required amount while hiring personnel exclusively for implementing the CSR activities. The CSR Policy Rules, 2104, disregarding all these claims made it vey clear that the salaries paid to the CSR staff would be a part of the Administrative overheads of the company. This expenditure should not exceed 5 % of the total CSR expenditure as per Rule 4(6) of CSR policy, Rules 2014.[27]
The fact that no tax exemptions have been extended to CSR expenditure as per Finance Act, 2014, further discourages the companies from undertaking activties that would comply with the CSR laws.The attitude that most companies have towards CSR laws is not very favorable. They are averse to its provisions. For them it’s just an extra burden in addition to the income tax that they pay every year. There is no specific tax exemption for any CSR expenditure, but there are certain subjects mentioned in the VII Schedule like scientific research, rural development projects, skill development projects, agricultural extension programs that enjoy exemptions under different sections of the Income Tax Act, 1961.[28]
CONCLUSION
CSR has been reduced to a mere accumulation of projects without creating any social impact, the main reason for which it was formulated and mandated in the first place. The aim of the act was to inculcate business responsibilities towards every individual that is stakeholder in the business. Social responsibility should not be equated with monetary contributions only. The way these companies are making profits is as important a consideration as they are spending the profits made by them is. Companies have been seen behaving irresponsible in this front in addition to their non-compliance with the CSR laws. Companies are using the scarce resources of the economy, therefore they ought to behave responsibility towards its development. Instead of focusing only on financial contributions they should also be mindful of providing client value that will serve the society in a longer run.
It is the duty of the companies to realise and comprehend that their activities paly an integral role in the development of the nation. The government should be make policies that will ensure stricter implementation of the CSR laws. Initiatives should be taken to make sure that all the areas are benefitted from the social activities undertaken by these companies, so that there is no disparity and bigotry between different regions of the country. There exists a lack of knowledge about the CSR provision in the rural areas and the penalizing provisions all over the country. The penalizing provision should be a pocket burn to these companies. However, all this is only possible, when to contribute towards the development of the society comes for one’s inner conscience and not because of the fear of getting sanctioned in case of non-compliance. Just like you can only bring a horse to the pond but cannot make it drink water, Government efforts are going to be futile unless and until companies themselves willingly come forward and shoulder the responsibility to serve the community by honestly complying with the CSR requirements.
[1] Jafri, Qamar Ali. “Triumphs and Failures of Corporate Social Responsibility in India.” iPleaders, July 25, 2018. https://blog.ipleaders.in/csr-triumphs-failures/.
[2] Hoffman, Andrew. “Coca-Cola Learns a Tough Lesson about Corporate Sustainability.” Grist. Grist, September 5, 2006. https://grist.org/article/hoffman1/.
[3] Supra note 1
[4] Fernandes, Kasmin. “’The Future of CSR in India Will Be Defined by How Efficiently CSR Funds Are Used’: R S Subramanian, Country Manager, DHL Express India.” The CSR Journal, June 17, 2019. https://thecsrjournal.in/the-future-of-csr-in-india-will-be-defined-by-how-efficiently-csr-funds-are-used-r-s-subramanian-country-manager-dhl-express-india/
[5] Supra note 1
[6] “Large Indian Business Failing on Spending 2% Profit on CSR.” India CSR Network, July 24, 2018. https://indiacsr.in/large-indian-business-failing-on-spending-2-profit-on-csr/.
[7] Id
[8] Id
[9] “Five Years After CSR Became Mandatory, What Has It Really Achieved?” The Wire. Accessed September 7, 2019. https://thewire.in/business/five-years-after-csr-became-mandatory-what-has-it-really-achieved.
[10] ) ET Bureau. “284 Companies May Face Prosecution for CSR Non-Compliance.” The Economic Times. Economic Times, December 19, 2018. https://economictimes.indiatimes.com/news/company/corporate-trends/284-companies-may-face-prosecution-for-csr-non-compliance/articleshow/67154509.cms?from=mdr.
[11] CSR: Help Others, Not Yourself.” Business Today, May 6, 2014. https://www.businesstoday.in/opinion/new-in-the-new-companies-act/csr-help-others-not-yourself/story/205918.html.
[12] Id
[13] Id
[14] Wpsadmin. “About MCA.” Ministry Of Corporate Affairs – FAQ on CSR cell. Accessed September 10, 2019. http://www.mca.gov.in/MinistryV2/faq on csr cell.html.
[15] Id
[16] “CBI Files FIR against Corporate Lobbyist, NGO over Misuse of CSR Funds.” Hindustan Times, November 17, 2017. https://www.hindustantimes.com/india-news/cbi-files-fir-against-corporate-lobbyist-ngo-over-misuse-of-csr-funds/story-278i8W6UCK8l2hIdl8lr0M.html.
[17] Assainar, Raina. “Police Uncover CSR Funding Scam.” The Hindu. The Hindu, May 1, 2019. https://www.thehindu.com/news/cities/mumbai/police-uncover-csr-funding-scam/article27006141.ece.
[18] “Companies Follow Poor Disclosure Norms on CSR, Says Proxy Advisory Firm.” Business Today, December 4, 2013. https://www.businesstoday.in/current/corporate/companies-follow-poor-disclosure-norms-on-csr-says-proxy-advisory-firm/story/201206.html.
[19] Prasad, Gireesh Chandra. “Companies Will Have to Pay Unused CSR Money into State Corpus.” https://www.livemint.com. Livemint, July 17, 2019. https://www.livemint.com/companies/news/companies-will-have-to-pay-unused-csr-money-into-state-corpus-1563381925491.html
[20] Pti. “Misuse of CSR Funds:PIL in HC Seeks Action against Ex-Minister.” India Today, October 23, 2015. https://www.indiatoday.in/pti-feed/story/misuse-of-csr-fundspil-in-hc-seeks-action-against-ex-minister-499817-2015-10-23.
[21] Narayanan, Dinesh. “How Indian Companies Are Misusing Public Trusts to Launder Their CSR Spending.” The Economic Times. Economic Times, October 21, 2015. https://economictimes.indiatimes.com/news/economy/finance/how-indian-companies-are-misusing-public-trusts-to-launder-their-csr-spending/articleshow/49474584.cms.
[22] ) “Using CSR Funds for Political Gain.” The Wire. Accessed September 1, 2019. https://thewire.in/business/modi-government-csr-political-gain.
[23] ) Id
[24] ) Id
[25] ) Id
[26] ) Id
[27] “About MCA.” Ministry Of Corporate Affairs – FAQ on CSR cell. Accessed September 9, 2019. http://www.mca.gov.in/MinistryV2/faq on csr cell.html.
[28] Id
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