Corporate Social Responsibility or CSR is a way to ensure that companies conduct their business in an ethical way. It shows a company’s commitment towards the community and environment while being accountable to its employee, stakeholders and public. According to a KPMG survey, among the largest 250 companies in the world, 92% produced a CSR report in 2015. India has taken it one step further than any country. With the enactment of the Companies Act in 2013, India became the first country to make CSR mandatory. It mandates a CSR spend on 2% of average net profits for all companies meeting specified financial thresholds. Companies are finding that being socially responsible and treating their stakeholders well makes good business sense and leads to strong financial performance. Consumers and employees are more likely to stick with companies that adopt sustainable practices. So, why has this movement that depended solely on voluntary activity is being mandated through legal rules? The government intervention is primarily because of problems such as companies taking advantage of CSR benefits without actually spending, greenwashing to appear environmentally friendly, and false disclosures. So, how has India fared with its push for mandatory CSR spend? Let’s have a look. State of CSR Spending in India Spending on CSR by India’s largest firms stood at Rs. 7,563.30 crore (around $1 billion) in the financial year that ended in March 2018, according to a survey by KPMG India. This was 47% higher than what it was in 2014 when the company act was enacted and companies now are spending more than the prescribed 2%. In 2018, the average amount spent on CSR stood at Rs. 81 crores, up 9% from 2016. This indicates that although it is legally mandated, large companies are proactively spending on CSR. Companies in the energy and power sector were the top CSR spenders followed by Banking and Financial Services Industry and IT Consulting. Two sectors that have received over 50% of all CSR spend in the last financial year were education and healthcare followed by rural areas and environment-related causes. Positive trends in mandatory CSR spends: It can be observed that the mandatory CSR push has led to many positive outcomes. Firstly, before the legislation many small and a few large companies made little or no investments in social development which has changed now. Additionally, the focus on being socially responsible has pushed companies to relook at their overall vision and policies and how their activities impact the society as a whole. The increase in adherence by large companies can be attributed to their improved ability to surmount the challenge of large-scale interventions and use of implementing agencies such as NGOs. As per CRISIL CSR Yearbook, an analysis of 4,887 companies listed on the Bombay Stock Exchange, 84% of companies with over 10,000 crores in sales and 67% with 500-10,000 crores in sales used implementing agencies. This has resulted in increased efficiency of implementing agencies, mainly the NPOs and helping in creating high impact social organistions. Interventions by Corporates through the mandatory CSR spends has also helped in mitigating conflicts amongst the business stakeholders. The human side of dealing with various societal issues and challenges are now being addressed by the business, This can have a huge win-win results on all sides. Shortcomings of mandatory CSR Spending Legislation According to CRISIL CSR Yearbook, only one-third of the companies met the criteria stipulated in the Companies Act. As per CSR requirements, the amount required to be spent by 1,019 listed companies was Rs. 9,669 crores in 2017. While companies had decided to spend Rs. 9,936 crores, the final CSR expenditure by these companies was Rs. 9,034 crores. The reasons cited for the underspend by companies included inability to identify the right projects, right organizations to partner with or right in-house team for implementation. The high CSR spending on education and healthcare means that other socially important areas such as child mortality and eradicating hunger and poverty are ignored. There is also the issue about geography-based equity. While industrialized states with large corporate presence such as Maharashtra, Gujarat, Karnataka, Andhra Pradesh and Tamilnadu top the list of highest CSR expenditure, the most backward districts of India receive little in terms of CSR spend.

Indian laws related to CSR are also quite vague which also means that they are open for interpretation. For example, a number of companies transfer CSR funds to government programmes such as Prime Minister’s Relief Fund. This ends up becoming a one-time cheque signing exercise rather than proactive engagement with the community. Another issue has been non-compliance by firms primarily due to poor understanding of social needs of the society and lack of implementation capacity or expertise. In 2018, the government sanctioned prosecution proceedings against 284 companies for not fulfilling CSR expenditure norms. A key shortcoming noticed is that while CSR funds are being made available to the projects, not much attention is being paid to earmark funds exclusively for the orgnaisation building of the implementing agencies. Taking care of this crucial aspect will go along way in creating huge impact. In summary, the last few years of mandating CSR has seen active participation, particularly from large corporates. But there are several issues such as lack of clarity on rules, working models and information about collaboration opportunities which if addressed can lead to better participation. If you are a firm that is looking to comply with CSR Spending and need an implementation partner, just give us a shout out.

On July 5, 2019, India’s Finance Minister Nirmala Sitharaman announced that the government plans to create a Social Stock Exchange (SSE) where social enterprises and voluntary organisations can raise capital from impact investors. Sitharaman explained the decision using the following words “It is time to take our capital markets closer to the masses and meet various social welfare objectives related to inclusive growth and financial inclusion”. While the finer details of this decision are yet pending, industry experts have welcomed this decision. This is certainly a big and bold step in a country where income inequality and fast economic growth go hand in hand. So, what does this announcement means for India’s social enterprises and what are some of the positives and concerns about it. Background of Impact Investing Impact Investing is about investing in companies, organisations and funds with the intention of generating a measurable, beneficial social or environmental impact alongside a financial return. The difference between a regular stock exchange and social stock exchange is that the latter seeks to invest in social enterprises, which are essentially revenue-generating businesses but with a twist. For social enterprises, the primary objective is to achieve a social objective such as providing affordable healthcare or sustainable energy solutions. Don’t confuse social enterprises with charities. Charities too have a social mission, but depend solely on charities. While generating profits is essential for the sustenance of a social enterprise, it is not the primary objective. Social Enterprises can be highly profitable as well, but instead of distributing their profits to stakeholders they reinvest the profits in their social programmes. For example, ERC Eye Care is a social enterprise that provides inclusive and affordable eye for all by offering eye care services and consulting at Rs. 50 and optical frames starting at Rs. 99. Impact investors such as Ennovent Impact Investment Holding, Ankur Capital, Beyond Capital Fund and angel investor Sadeesh Raghavan have invested an undisclosed amount in the firm. India has been at the forefront on impact investing and is expected to grow to $6 to $8 billion in 2025, according to a McKinsey study. Started in 2001 with the launch of Aavishkar, India’s first for-profit fund, impact investments have generated an IRR of 11% for $4.5 billion in investments between 2010 and 2016 according to the same study. Amul is the best-known example of an impact enterprise with revenues of over $5 billion. Impact Measurement and Management is critical for Impact Investors. According to a Global Impact Investing Network (GIIN) survey, over 90% of respondents reported performance in line with or exceeding both their impact and their financial expectations. About two-thirds of respondents principally target market-rate returns (66%), and the remaining third are split between those targeting returns closer to market rate (19%) and those targeting returns closer to capital preservation (15%). Impact of Social Stock Exchange on Impact Investments The proposed Social Stock Exchange will be an electronic platform where investors can buy shares of listed social enterprises with a social mission aligned to investor’s interests. The exchange will likely be regulated by Securities and Exchange Board of India (SEBI). In a country where access to funds is a big problem for social enterprises and NGOs, this announcement is a welcome move. In recent years, Indian governments have launched a crackdown on foreign funding of not-for-profit organisations which has resulted in massive decline in the fund flow for this sector. Foreign investments are considered as a way to meddle in Indian affairs and hamper growth by successive governments. With a Social Stock Exchange (SSE), social enterprises would have a new source of financing for their social projects, while giving India the opportunity to highlight independence from foreign investments and bolster the newly acquired superpower status. A common platform can make it easy for social enterprises to access capital in an inexpensive way, while making it easy for impact investors to discover worthwhile investment opportunities and also exit them easily. SSE will also ensure standardisation as listing on SSE will provide a stamp of quality and reduces the need for due diligence for investors. An exchange will also promote healthy competition between social enterprises and the best of the lot will attract more investments. Thoughts about SSE First and most important, the government has to clearly define what kind of organisations will fall in the ambit of the exchange. It is unclear whether the exchange will only be for profitable social enterprises and micro-finance companies or for registered or unregistered non-profits as well. The success of the exchange will largely depend on the framework and processes that will be used to decide which companies can list on the platform. It is also an open question whether social enterprises are equipped to comply with the regulations that come with being a listed entity. Most social enterprises are not good at maintaining records and the use of technology to track their finances is also limited. This could impact the organization’s ability to absorb such large funds and government will have to provide preparatory assistance to such firms before listing them on the exchange. Social Enterprises will also have to build processes and systems to track the use of funds raised and also report their performance periodically. They also need to build an objective way to measure and evaluate impact which is validated by external auditors. Government might also have to relax compliance requirements for NGOs. At the same time, government needs to build enough checks and balances to ensure that the exchange is not used as a conduit to convert black money to white money. It is expected that developments bonds and other bonds like Impact Bonds etc will also be listed herein. The exchange should give a fillip to this much needed instrument which can have a multiplier effect in the social sector. Another hitherto ignored category of donors – the individuals across the length & breadth of the country can pool their resources akin to the mutual fund concept. This will enable small contributions which can then be channelled to impact investments. Social Mutual Funds can play a significant part in the development sector. Entities listed on the Social Stock Exchange will henceforth be able to attract and retain talented and experienced professionals which in turn will create world class organisations delivering high impact and ensuring sustainability. Global SSE Examples Many SSEs have emerged globally in the recent years. Brazil was the first country to setup an SSE in 2013 and many countries have followed suit. Singapore’s Impact Investment Exchange which was setup in 2013 boasts of US$126 million capital unlocked. UK’s Social Stock Exchange has helped their member companies collectively raise £400 million. Canada has its own SVX platform which has helped mobilise $100 million in impact capital for the 100 plus ventures in their programs. Therefore, a number of countries have successful examples of SSEs and India has an opportunity to build one in the South Asia region. But, the success of such SSE depends on the framework and processes that the government puts in place so that the mainstream financial community has enough confidence in making impact investments.

Month: July 2019

Mandatory 2% CSR Spend – The Current Scenario