From UPSC perspective, the following things are important :
Prelims level : CSR
Mains level : corporate governance
- Since the establishment of the Corporate Social Responsibility (CSR) regime in India under Section 135 of the Companies Act 2013, CSR spending in India has risen from RS.10,065 crore in 2014-15to Rs.24,865crore in 2020-21.But there is no data to verify whether this increase is commensurate with the increase in profits of Indian and foreign (having a registered arm in India) companies.
What is Corporate Social Responsibility (CSR)?
- Voluntary spending: Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically oriented practices.
- Ministry Corporate Affairs: The National Corporate Social Responsibility Data Portal is an initiative by Ministry of Corporate Affairs, Government of India to establish a platform to disseminate Corporate Social Responsibility related data and information filed by the companies registered with it.
- Companies Act, 2013: The Corporate Social Responsibility concept in India is governed by Section 135 of the Companies Act, 2013 (‘Act’), Schedule VII of the Act and Companies (CSR Policy) Rules, 2014 wherein the criteria has been provided for assessing the CSR eligibility of a company, Implementation and Reporting of their CSR Policies.
- Sustainable Goals: India having the most elaborated CSR mechanism and implementation strategy has started its journey to set a benchmark in attaining sustainability goals and stakeholder activism in nation building.
- Corporate philanthropy: company donations to charity, including cash, goods, and services, sometimes via a corporate foundation.
- Community volunteering: company-organized volunteer activities, sometimes while an employee receives pay for pro-bono work on behalf of a non-profit organization
- Socially-responsible business practices: ethically produced products that appeal to a customer segment.
- Corporate social marketing: Company-funded behaviour-change campaigns, Company-funded advocacy campaigns, donations to charity based on product sales.
Why there is need to review the CSR?
- Declining number: There was also a decline in the number of companies participating in CSR 25,103 in FY2019 to 17,007 in FY2021.
- Flaw in the law: If a company spends an amount in excess of the minimum 2%, as stipulated, the excess amount is liable to be set off against spending in the succeeding three financial years. Ideally, companies should have been shown courage to spend more than this.
- Own trusts: many private companies have registered their own foundations/trusts to which they transfer the statutory CSR budgets for utilisation. It is unclear if this is allowed under the Companies Act/CSR rules.
- Geographical bias: The first proviso to Section 135(5) of the Act is that the company should give preference to local areas/areas around it where it operates. This is logical. However, a report by Ashoka University’s Centre for Social Impact and Philanthropy says that 54% of CSR companies are concentrated in Maharashtra, Tamil Nadu, Karnataka, and Gujarat(receiving the largest CSR spends) while populous Uttar Pradesh and Madhya Pradesh receive little.
- Spending on environment: Item (iv) of Schedule VII of the Act deals with broader environmental issues to create a countervailing effect. However, an analysis of CSR spending (2014-18)reveals that while most CSR spending is in education (37%) and health and sanitation (29%), only 9% was spent on the environment even as extractive industries such as mining function in an environmentally detrimental manner in several States
- Incomplete information: The Standing Committee on Finance had observed that the information regarding CSR spending by companies is insufficient and difficult to access. As per the ‘Technical Guide on Accounting’ issued by the Institute of Chartered Accountants of India, a company is only required to mention its CSR spends, non-spend, under-spend, and overspend in the ‘Notes to Accounts’.
What are the suggestions to improve the mechanism of CSR?
- Centralized platform: There is a need to curate a national level platform centralised by the MCA where all States could list their potential CSR admissible projects so that companies can assess where their CSR funds would be most impactful across India with, of course, preferential treatment to areas where they operate.
- India Investment Grid: Invest India’s ‘Corporate Social Responsibility Projects Repository’ on the India Investment Grid (IIG) can serve as a guide for such efforts. This model would be very useful for supporting deserving projects in the 112aspirational districts and projects identified by MPs under the Government’s Sansad AdarshGram Yojana.
- Increase environment spending: Companies need to prioritise environment restoration in the area where they operate, earmarking at least 25% for environment regeneration.
- Public participation: All CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.
- Transparency: Recommendations by the high-level committee in 2018 should be incorporated in the current CSR framework to improve the existing monitoring and evaluation regime. These include strengthening the reporting mechanisms with enhanced disclosures concerning selection of projects, locations, implementing agencies, etc.; bringing CSR within the purview of statutory financial audit with details of CSR expenditure included in the financial statement of a company, and mandatory independent third party impact assessment audits.
- Monitoring by government: The MCA and the line departments need to exercise greater direct monitoring and supervision over CSR spend by companies through the line ministries (for public sector undertakings) and other industry associations(for non-public units) instead of merely hosting all information on the Ministry’s website.
- Corporate social responsibility is an effective tool to address the social and income inequality. Present legal arrangements are toothless and based on voluntary actions. For an effective change CSR spending should be made more transparent and accountable.
Q.Present arrangement of CSR is not yielding the desired result. Enlist the current weakness in CSR spending Suggest the changes needed for efficient implantation of CSR.