India Inc and the challenge of being socially responsible

In the first year of the mandatory CSR regime, most firms have failed to spend on social sector due to a variety of reasons. With corrective steps underway, experts are hopeful

jasleen

Jasleen Kaur | August 5, 2015




It’s been over a year since corporate social responsibility (CSR) was made mandatory for India Inc on April 1, 2014. The provision – for profit-making firms to divert 2% of their profit-after-tax to CSR activities – was expected to change the entire landscape of CSR radically in the country. But it began on a rather disappointing note.

The Companies Act has statutory provisions, making CSR mandatory for companies with net worth of Rs 500 crore or more, turnover of at least Rs 1,000 crore and net profit of at least Rs 5 crore. According to the Indian Institute of Corporate Affairs (IICA), think tank of the ministry of corporate affairs, which played a crucial role in formulating CSR rules and guidelines, 16,352 private and public sector companies fall within the purview of Section 135 of the Companies Act, that mandates companies to spend on CSR.

The companies that have been traditionally active in CSR have not only continued to spend but have also increased their expenditure. Tata Consultancy Services (TCS), which spent 0.48% of its profit-after-tax amounting to Rs 93.58 crore in 2013-14 on CSR activities, increased it to 1.53% amounting to Rs 253.55 crore in 2014-15. Reliance Industries Ltd (RIL) exceeded the mandatory 2% limit. It spent Rs 761 crore, which is 3.35% of the company’s profit-after-tax, on CSR in FY15, which is slightly more than what it spent last fiscal. Infosys scaled up its expenditure on CSR from Rs 9 crore in 2013-14 to Rs 239.5 crore, which is still 1.96% of its profit-after-tax. Such companies just had to streamline and re-strategise their spending in order to fit into the requirements of the law.

But for others, which had to massively multiply their CSR spending, it is proving as difficult to spend money as it is perhaps to earn it. Most of these companies have failed to spend the minimum 2% of their profits on social responsibility activities in the first year. And they are struggling with the procedural and infrastructural requirements.

Not so great expectations

Before the new law came into effect, early estimates had pegged CSR spending at Rs 18,000-20,000 crore. The ministry of corporate affairs (MCA) subsequently slashed its estimates on the corpus to be created through CSR expenditure to nearly one-fourth. At the end of the first year, MCA officials estimate the figure at Rs 5,000 crore.

Public sector enterprises have been spending on CSR activities under the guidelines issued by the department of public enterprises (DPE) since 2010, hence they could put in place the policies and structures needed to ensure proper dispensation for CSR funds. Experts feel it would take some time for private companies to get used to the process before they can successfully spend the mandated percentage of their profits on CSR activities. But they do believe CSR is here to stay.

Companies that are mandated to spend on CSR have to form CSR committees from among their board members; formulate CSR policies; and announce, execute, and monitor their CSR activities. Gayatri Subramaniam, convener and chief programme executive at IICA, says while many have met these requirements, implementation is still a task. “More than 14,000 are small or mid-level companies which are engaging in CSR for the first time. But the big difference has been that CSR has become a boardroom issue. It was never spoken about earlier. But now balance sheets are reflecting CSR. Eventually, it will change the business perspective as well. This year it has not come out well because of many reasons, one of them being that the concept has not been understood properly by companies.” She adds that a major shift is required in the NGO sector as well. Rather than being grant-based, they must open up and connect to the market.

Steps taken to mend the gap

CSR implementing agency hub
IICA’s CSR IA hub seeks to meet the requirements of corporate houses looking for trustworthy and reliable implementing agencies

It is generating a database of implementation partners with information about their geographical presence, area of work and previous projects executed

It has also initiated a continuous online registration process of implementing agencies and is also conducting training and development of comprehensive skill enhancement of trusts or foundations operating within India

The IICA got the NGOs verified from eight ministries and four departments in the central government

Out of 250 NGOs verified in the first year, CSR IA Hub has prepared a list of 114 NGOS after due diligence

Sammaan
A common platform developed jointly by BSE, CII and IICA, has been launched to facilitate corporates to meet the requirement

Expected to be operational by the end of this year, it aims at becoming an intermediary between corporates and NGOs

CSR index
BSE along with IICA is developing a CSR index for the 1,294 companies listed on BSE, which are required to adhere to CSR regulation

The index will help in giving a larger platform to such companies and also a global perspective

Companies will have to volunteer to be a part of the CSR index and this will eventually help them widen their businesses


Those who were hopeful that big money would flow to the development sector from profit-making industries are among those who do not see much change on ground. Vimlendu Jha, executive director of the Delhi-based NGO Swechha, says it is an imposed legislation for corporate houses to accept. And there has not been much improvement since the law has come into effect. “CSR is still stuck between HR and marketing [strategy] for most of the companies. The actual concept of social responsibility is still not understood,” says Jha. Working on environmental issues and promoting active citizenship among youth, Swechha is associated with many big brands and institutions.
Development sector versus government schemes

Though the new provision in the Companies Act is seen as a step in the right direction to promote social development, there are challenges affecting its implementation. Amitabh Behar, executive director of the Delhi-based National Foundation for India, an independent fund-raising organisation, says there is no change in terms of trust deficit. “Whatever change is visible is on the government front.” He explains, “The new government has, in many ways, given an indication to corporate houses that they should put their money in big schemes launched by the government, such as Swachh Bharat Abhiyan or Clean Ganga Mission. These programmes are taking all the money. It is simpler. The government will be happy with the corporate sector and it will be an easier task for the corporate sector as well.”
Behar says IICA has constantly said the money kept for CSR should not be directed only to government schemes; instead the development sector should be supported.

KK Upadhyay, head, Aditya Birla CSR centre at FICCI, says most of the companies are first-timers and they have not spent money on CSR. He says the spirit behind CSR has also changed. “The spirit behind the provision of CSR was that companies had to decide what they will spend on to contribute to the development sector. But the new government launched schemes and asked corporate houses to spend their money on those. That was not the original spirit of the concept. This has created a lot of confusion among companies.”

Behar says only those companies which had robust CSR structures and were spending money on CSR activities have continued to do so in the first year while others are still struggling with the procedural and infrastructural requirements. “Most of the companies never had the intent to spend on CSR. So in terms of getting approvals from their board for spending on such activities, there is a change. But operationalising the programme is still a task for them,” he says.

He adds that such companies are still unsure about how it will work and while they want to comply with the law, they have not imbibed the spirit of the Act. “Companies were sceptical about mandatory spending on CSR, which is clearly showing. The change in political environment has further given them the opportunity to find an easier way,” he adds.

No penalty

The key difference between the DPE guidelines and the CSR rules, 2014, is in reporting and monitoring of CSR activities. The DPE guidelines had a very strict reporting and monitoring model.  While the Act provides for penal provision in case the company does not disclose the reasons in the board’s report for not spending money on CSR activities, there is no penal provision for non-compliance on the means of spending or in reporting. If a company fails to spend the money, it only has to report this along with reasons. The new law does not specify punishment for failure to spend on CSR activities.

The government is aware of the ambiguity and the need for clarity. It set up a high-level panel in February to suggest a framework to assess CSR activities carried out by companies. The committee, headed by former home secretary Anil Baijal, is expected to present its report by the end of August.

 “There is little handholding mechanism in the country. Also, not much has been done to bridge the trust deficit between the corporate sector and the development sector. Though it is not a voluntary compliance, but still there is no penalty. Such compliance of the Act really needs to be revisited,” says Jha.

Bridging the gap

The one recurrent complaint of several top-notch companies is how to spend the money. There are an estimated 20 lakh NGOs operating across the country. For a population exceeding 1.2 billion, this means one NGO per 600 people. Despite the huge number of active NGOs, finding an eligible partner to work has been a difficult task. Experts say “trust deficit” between the two sectors on the aspect of transparency and in designing the programme is the major reason.

ICAI norms for CSR accounting
The Institute of Chartered Accountants of India (ICAI) has issued a guidance note which will help Indian companies in accounting for its CSR expenses

The note requires a company to debit its profit and loss account with the CSR expenses incurred by it during the year

Such expenses are to be shown as a separate line item

It has also addressed issues of a shortfall by a company in meeting with the minimum CSR expenditure criteria and also those instances where a company has spent more than the minimum requirement


To work on these aspects and to mend the gap, many steps have been taken in the last one year.

IICA has set up a CSR Implementing Agency (IA) hub, which seeks to meet the requirements of firms looking for trustworthy and reliable implementing agencies.

The CSR IA hub is generating a database of implementation partners with information about their geographical presence, area of work and previous projects executed. It has also initiated a continuous online registration process of implementing agencies and is also conducting training and development of comprehensive skill enhancement of trusts or foundations operating within India. The IICA gets the NGOs verified from eight ministries and four departments in the central government.

“Out of 250 NGOs verified in the first year, we have prepared a list of 114 NGOs after due diligence,” says Gayatri Subramaniam of IICA. “We checked the authenticity based on the information available. We would further check them based on the demand we receive from the companies,” she says. The IICA is also working on building capacity of these NGOs and helping build synergetic relationships between NGOs and corporate houses.

“Almost 80% of the companies are spending money on CSR activities for the first time and they are looking for good implementing partners. CSR in a structured way is a new concept in the corporate sector. First [step] is to ensure they comply with the Act, bringing them to give money is the next step,” added Subramaniam.

Also, ‘Sammaan’, a common platform developed jointly by the Bombay Stock Exchange (BSE), Confederation of Indian Industry (CII) and IICA, was launched in April to facilitate corporates to meet the requirement. Expected to be fully operational by the end of this year, Sammaan aims at becoming an intermediary between corporates and NGOs.

As of today, 1,294 companies listed on BSE are required to adhere to this regulation. BSE along with IICA is developing a CSR index, which will help in giving a larger platform and also a global business perspective to such companies. These companies will have to volunteer to be a part of the CSR index and this will help them widen their businesses eventually, says Nikhil Pant, chief programme executive, national foundation for CSR at IICA.

jasleen@governancenow.com

(The article appears in the August 1-15, 2015 issue)

 

 

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