On April 1, 2014, India became the first country to mandate corporate social responsibility (CSR) under the Companies Act, 2013. The rationale was to paint the dull socioeconomic canvas of the country with brighter hues of development, steered by the modern growth engine—the corporate world. Two years on, the CSR law has thrown quite a few surprises, and a number of worries, too.
The CSR law requires companies with a net worth of Rs 500 crore and more, or a turnover of more than Rs 1,000 crore or a net profit of above Rs 5 crore in a financial year to spend two per cent of their average net profit in the last three years on social projects and disclose the same in their annual statement. The last two years saw thousands of firms spend Rs 18,625 crore on CSR activities under section 135 of the Companies Act across sectors like education, health care, sanitation and skill development. But, 4,195 companies have not spent a single penny on CSR in 2015-16. And, “the Registrar of Companies has issued show-cause notices to 1,018 companies for not complying with the Act,” said minister of state for corporate affairs Arjun Ram Meghwal, in a written reply to the Rajya Sabha during the recent budget session.
In the last two years, the ministry has had to answer at least 27 questions on CSR in Parliament, but there is little or no mention about the penalty clause in its replies. Erring companies are liable for a penalty of Rs 25,000 to Rs 25 lakh, and the erring company officer faces imprisonment of three years and penalty of Rs 50,000. The companies are taking refuge in the ‘comply or explain’ clause. According to Meghwal, the reasons cited for non-compliance were financial restructuring, loss, delay in board approval for projects and technical difficulties. But, development experts say there’s more to it than meets the eye.
In FY16, 5,097 companies spent Rs 9,822.30 crore on CSR activities. Of these, 4,925 firms were private ones, contributing Rs 6,462.10 crore. In FY15, 7,334 companies spent Rs 8,803 crore, with 7,108 private companies contributing Rs 6,306 crore. While the jump in CSR spending is encouraging, the absence of a system to measure its social impact is worrying as the rise in expenditure is being seen as a result of law coercion. A high-level committee, headed by former Union home secretary Anil Baijal, formed to suggest measures for monitoring and implementation of CSR policies, too, has warned against “the CSR approach being expenditure driven and not outcome or impact driven”.
Manju Dhasmana, lead–philanthropies and CSR, Microsoft India, said making CSR mandatory will not help if we do not have a sound design of the project. “Only the CSR consulting agencies seem to have benefited,” she said. “Many companies are doing good work but it does not fall under CSR or the expenditure is going beyond the prescribed limit.”
Dr R. Balasubramaniam, chairman of Grassroots Research and Advocacy Movement, said many companies are in a hurry to route out the prescribed amount of money to show compliance. “But will this translate to development? Visible manifestation of development like school buildings or hospital wards and equipment does not mean anything if we are unable to work on sound projects, like scaling up learning levels in schools or providing quality and affordable health care to all,” he said.
Though education and health care accounted for 44 per cent of the total CSR expenditure as per data released by Prime Database, it failed to make any visible impact as child mortality rate and child malnutrition, which affects 50 per cent of children in India, got little funding. Hence, CSR funding needs to go into well-thought-out projects to see visible impact. “Call it arrogance, naivete or the pressure to spend the two per cent, many corporates don’t realise development is as specialised as running a company,” said Balasubramaniam.
Another drawback of CSR has been the inability to reach out to underserved regions like the northeast or the less industrialised states. The state-wise distribution of CSR funding in 2014-15 shows developed states like Maharashtra (Rs 1,101.7 crore), Tamil Nadu (Rs 446.9 crore), and Karnataka (Rs 363.05) getting the lion’s share. Whereas, northeastern states like Arunachal Pradesh (Rs 10.46 crore), Manipur (Rs 1.35 crore) and Meghalaya (Rs 1.80 crore) recorded dismal investment.
“CSR is more urban-centric as only 12 per cent of it is ending up in the villages,” said Shrikant Sinha, CEO, NASSCOM Foundation. “Most companies like to do CSR in their backyard, in slums closer to their office as they get a majority of their workforce from the nearby villages.”
But it defeats the purpose of CSR as the need for development is not uniform. Infosys Foundation is an exception though. “Once we got more funds, we reached out to the northeast,” said Sudha Murthy, chairperson of Infosys Foundation. “Our community sabbatical programme has created an opportunity for employees to go on paid leave to contribute to any project. However, all projects are run professionally, and in partnership with credible and capable NGOs.”
Lack of credible NGOs is another problem area. According to Balasubramaniam, like the US, India, too, must have a rating system for NGOs based on their credibility. “Corporates feel even the government is technically ill-equipped to handle projects as there is already a huge burden of unspent money,” he said.
States like Karnataka, Jharkhand, Gujarat and Maharashtra are encouraging corporates to invest in sectors like drought relief, tourism and infrastructure. CSR contributions have been made to flagship projects of the Union government, too, like Swachch Bharat Kosh (Rs 456.57 crore) and the Namami Gange Programme (Rs 78.8 crore till March 2016). But not all corporates are for funding Central projects. Sinha said companies are comfortable investing in long-term projects rather than shifting their focus from one project to another.
Many corporates said the CSR law is a back-door way to increase corporate taxes, which is already at 34.61 per cent, compared to the global average of 24.09 per cent. The Baijal panel, however, notes that the idea behind the CSR law was to rope in companies to discharge social responsibility with their innovative ideas, management skills, efficiency and outcome.
Though the standing committee on finance, headed by Veerappa Moily, has said the CSR figures are “quite disturbing”, the government has been lenient as the first three years are a “learning experience” and aimed at moving towards a “culture of compliance”.
