PSUs prepare to grapple with mandatory CSR

Public sector undertakings find it difficult to contribute to corporate social responsibility projects given accountability concerns. The new mandatory regime will add to the challenge

jasleen

Jasleen Kaur | September 16, 2013


A school supported by ONGC under its CSR initiative.
A school supported by ONGC under its CSR initiative.

Originally, public sector units (PSUs) were driven by socialist goals, but post-liberalisation, they too are forced to compete in the market in what is called state capitalism. However, in line with the Congress party’s preference for the social sector, they too will have to shell out 2 percent of their profits (if they are making any) for health and education, poverty reduction and women’s empowerment.

The new companies bill, passed by the Lok Sabha last year and the Rajya Sabha this August, wants all profit-making corporates, public and private, to spend 2 percent of their profits on corporate social responsibility (CSR) projects.

For PSUs, this means what was so far a matter of only guidelines becomes a legally binding obligation. Since 2010, when the department of public enterprises (DPE) released the CSR guidelines, central PSUs have earmarked – but have not been able to actually spend – a total of Rs 2,700 crore (Rs 300 crore for 2010-11 and Rs 1,200 crore each for the next two years).

The problem, officials say, is that being public organisations PSUs are accountable to parliament, CAG and other organisations, and thus need thoroughly reliable NGOs to undertake CSR projects. Such NGOs, though, are in short supply, say PSU officials.

Hurdles in the way

OP Rawat, secretary, DPE, admitted that only a handful of the ‘ratna’ companies had been able to spend the full amount prescribed by the guidelines, ONGC and Coal India being the most notable ones. While maharatna and navaratna companies had been spending money on CSR, he said the small- and medium-level PSUs were reluctant to spend and largely contributed to the ‘corpus fund’. The main reason, he said, was the lack of options and channels to carry out CSR.

“Middle-level or smaller companies (also) face pressure from NGOs and local people to design spending according to their needs. Besides, they face problem in finding good NGOs.”

This reluctance to spend on CSR projects is due to the fact that all PSUs are answerable for their expenditure and if an NGO handling their CSR work undertakes some dubious activity, intentionally or otherwise, it can land the company concerned into trouble – it can face allegations and questions in parliament.

In contrast, private sector companies operate under no such pressure of accountability. “Private companies can manipulate their profit figures, too. Right now, CAG and CVC (among others) are after the PSUs. Yet, the only CSR (activity taking place) is being done through this sector,” Rawat said.

A senior SAIL official (name withheld on request) at echoed the views: “PSUs are bound by certain rules and regulations. Their operations have to be seen as fair. More than 50 percent of NGOs are in the field just to make money, and most of them do not even have regulations and accounting policies, which makes it difficult for any PSU to judge whether the NGOs are genuine.”

“Not all PSUs are willing to take the risk of taking a decision on an NGO and thus fail to spend on CSR activities,” the official said. “Funding to government bodies or projects is always a safe bet for them.”

The new law would make it mandatory for them to spend. “Now spending for employee benefits, or on communities, would also be called CSR. And we can spend on CSR even through PPP (public private partnership) but of course with only those private companies at which no one can point a finger,” he said. “Alternatively, PSUs can collaborate with state governments to open more schools in rural areas.”

He added that the new law makes it mandatory for companies to show it in their records if they fail to spend on CSR activities. “If they fail to spend, the fund would be transferred to the department. I think PSUs would find it easy to transfer funds to DPE than taking the risk upon themselves,” he said.

Once the law law kicks in, if the CSR funds remain underutilised, the unspent amount will go to a central corpus fund – to be used at the discretion of an apex board on CSR. This board is expected to be constituted soon at DPE, which regulates affairs of central public sector enterprises (CPSEs).

The DPE had issued new guidelines on CSR in April this year, allowing CPSEs to utilise unspent part of the amount earmarked for CSR within two or three financial years. However, the department would soon amend those guidelines according to the law, as they require companies to spend the money within the financial year and explain, in their annual reports, if they fail to spend it.

More focussed spending

According to Venkatesh Kumar, professor at the national CSR hub of Tata Institute of Social Sciences, lack of interest, informed choice on how to invest, and internal processes are the major reasons for many PSUs not spending enough on CSR activities. He said giving back to the society through CSR has to be a commitment and priority of the top management. “Companies like GAIL, HPCL, and IOC are making a difference through CSR spending. With the guidelines, the government has created a path for these companies. Now it is up to the corporates to decide how to prioritise this agenda.”

Kumar, whose team provides technical support to some 50 PSUs for focused and targeted social interventions, said companies used to spend funds on CSR even before the 2010 guidelines, but in an unplanned manner. The guidelines have helped them plan it better.

“At one point, Coal India and its subsidiaries had large budgets but they were not spending the money. Now they are getting down to focused interventions and are performing well,” he said.

Contributing to cause

A cross-section of PSU officials Governance Now spoke with welcomed the new regime and said their companies are willing to contribute to the cause. Stressing that many PSUs were already doing good CSR work, they also indicated problems they have encountered in the past three years in actually spending for it.

A senior official at NTPC, a maharatna company, said many PSUs performed their social responsibility even when it was not mandated. NTPC has been spending 2% of its net profits for health and family welfare works, and recently took up sanitation works around one of its power projects. The official, not wishing to be named, added, “Philanthropy done by many private companies is completely different from actual CSR done by CPSEs. There they spend so little and talk more, while a lot of PSUs are doing really good work but no one highlights that.”

Emphasising that PSUs had been largely performing their duty towards the society, the official said. “SAIL allocated Rs 64 crore for CSR activities in 2011-12 and utilised Rs 61.25 crore. In 2012-13, Rs 42 crore (in addition to Rs 28.48 crore in spillover) were allocated for CSR, of which Rs 53.29 crore was utilised. And we will continue to do so.”

THE FOUR-MINUTE CAPSULE
2-percent rule
Clause 135 of the companies bill requires companies “having net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore or more during any financial year” to give back 2 percent of their after-tax profits to the society. For this, the company has to appoint a board committee, develop a plan, and monitor it.

Modi tried it, failed
In 2008, Gujarat chief minister asked the state PSUs to contribute 30 percent of their profit before tax as part of CSR. The funds were to go to a newly formed organisation called the Gujarat Socio-Economic Development Society, which was to use the money for social development work. The move, however, failed, as six of these PSUs are listed on the stock exchanges and their shareholder opposed this “forced charity”.

CSR: where to spend
The new companies bill suggests following activities for CSR by public as well as private sector firms:

  • Eradicating extreme hunger and poverty
  • Promoting education
  • Promoting gender equality and empowering women
  • Reducing child mortality and improving maternal health
  • Combating human immunodeficiency virus (HIV), acquired immune deficiency syndrome (AIDS), malaria and other diseases
  • Ensuring environmental sustainability
  • Employment enhancing vocational skills
  • Social business projects
  • Contribution to the prime minister’s national relief fund or any other fund set up by the central government or the state governments for socio-economic development, and relief and funds for the welfare of people from scheduled castes, scheduled tribes, other backward classes, minorities and women
  • Other matters as may be prescribed.

CSR spending must for firms even if group makes net loss

The ministry of corporate affairs proposes to mandate companies to spend 2 percent of their average net profit for the past three years on fulfilling corporate social responsibilities (CSR) even if their group makes consolidated net loss, according to the draft rules of the newly enacted companies bill. The new law, which was recently passed by parliament and has got the president’s assent, will replace the Companies Act, 1956, once the rules are notified. The ministry on September 10 released draft rules, and invited comments by October 8.

The draft rules say that activities meant exclusively for the benefit of employees, or their family members, would not be considered as CSR. All companies will have to report details of their CSR initiatives in the directors’ report and on the company’s website.

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