Mandatory 2% CSR Spend – The Current Scenario

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.