Firming up CSR compliance

Updated: May 9, 2017 6:59:52 AM

The government of India enacted the Companies Act, 2013, which mandates a minimum spending on CSR by large corporations with the objective of engaging large corporations in achieving the social development agenda.

CSR expenditures as defined by this Act refer to expenditures made on projects that benefit society

The government of India enacted the Companies Act, 2013, which mandates a minimum spending on corporate social responsibility (CSR) by large corporations with the objective of engaging large corporations in achieving the social development agenda. The Act has been implemented since April 2014. CSR expenditures as defined by this Act refer to expenditures made on projects that benefit society, including improving educational opportunities, health and sanitation, and the environment. This makes India the first country in the world to require large firms (defined in terms of net profits, net worth or turnover) to set aside at least 2% of their average net profit made during the three immediately preceding years for socially responsible expenditures.

Expenditures on CSR have typically been low in India. In the previous three years prior to the CSR Act, only 7.6% of firms (in the sample of over 7,000 large firms examined) were undertaking any CSR expenditures. Of this, less than 1% of the firms were spending 2% of their profits on CSR. This may explain the need for mandating CSR in India and imposing essentially a tax on profits of large firms. However, this imposition, though mandatory, is not accompanied by any penalties by the government for non-compliance. Non-compliant firms must provide reasons for the lack of compliance in their annual reports; any sanctions they may face are through adverse public opinion.

This Act raises several questions: In the absence of any sanctions from the government, do firms have incentives to comply? Does the Act lead to shifting of expenditures from other philanthropic activities, that do not count towards compliance with the CSR Act, towards activities that do or does it lead to additional socially responsible expenditures? Since compliance diverts financial resources from shareholders to the public, do stakeholders reward or penalise such firms through various market channels?

Data from the annual reports for over 7,000 firms after the first year of implementation of the Act by March 2015, shows an increase in the number of firms doing CSR and in the average per firm expenditure on CSR. The top 20 largest spenders on CSR in absolute amounts in April 2015, included companies like Infosys, ONGC, NMDC, HDFC Bank. It is interesting to note that among these, only six were from the private sector and the remaining 14 were public sector firms, that too, specifically from the mining and energy. Among the top 10 CSR spenders, the CSR expenditure ranged from `243 crore to `114 crore and goes down to `53 crore for the 20th largest spender. The total CSR expenditure of the 14 public sector firms was `1,751 crore, and for the six top private sector firms was `650 crore. The socially responsible expenditures by these firms were largely directed towards health, education, environment and community development. Many firms made these expenditures on building schools, toilets, health care centres, providing safe drinking water, and contributing to skill development by training and educating, women, children, elderly and differently abled persons.

Not all of these large firms were, however, meeting the requirement for CSR expenditures to be at least 2% of their profits. Amongst the top 20 spenders on CSR, the largest CSR to profit ratio was 8% for BHEL and the lowest ratio was 0.8% for ONGC and HDFC. Even after one year of implementation (FY15), only 52% of the firms that come under the purview of the law reported any positive CSR expenditure and about 80% were not fully complying with the Act. Only about 20% of the firms that came under the law were spending the required 2% of their profits on CSR activities. On average, the firms covered by the Act spent only 0.8% of their profits on CSR. If all the eligible firms in our sample had complied with the CSR Act, about `13,200 crore would have been spent on CSR activities. However, the actual CSR expenditure was only 38% of this mandated expenditure in 2016.

The CSR Act is transferring at least some of the responsibility for meeting the sustainable development goals of India to the corporate sector that has the resources and management experience to contribute. The successful implementation of the Act faces several challenges. The first is to ensure compliance. In the absence of penalties or sanctions for non-compliance, firms have incentives to comply only if their stakeholder’s care and their shareholders reward them for being socially responsible. Strong societal pressure and peer pressure from other competitors are critical to provide incentives for firms to comply with the Act.  Second, there is a critical need to ensure that the large funds being mobilized by this Act are utilized effectively. Firms acting in isolation or individually may fail to contribute to meeting the sustainability goals of the country without coordination of the projects on which they are spending the funds. Vision and coordination of firm-level activities are needed by the government to avoid piece-meal projects that fail due to lack of supporting institutions and infrastructure. For example, it is not sufficient to build toilets in an effort to improve sanitation; provision of water supply to the toilets is critical for their use. Thus, projects need to be developed in conjunction with local government and with local community involvement to ensure that they meet the local needs. Third, the CSR Act can create incentives for firms to switch funds from other philanthropic activities to CSR; whether the Act leads to mobilisation of additional resources remains to be seen. The CSR Act is an initial step, but realising its full potential requires concerted action by the government, corporations, civil society and markets.

Sangeeta Bansal & Madhu Khanna

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