Corporate Social Responsibility Policy in India – Achievements, Challenges and Alternatives

Origin of CSR

India is one of the first countries in the world to formulate a legal framework on Corporate Social Responsibility (CSR). The concept of CSR emanated in India from the Gandhian principles of “Trusteeship” and “Giving back to Society”. The leading industrial legend of global repute, and India’s economic pride Shri Ratan Tata observes that “ Businesses should go beyond the interests of their companies to the community they serve”.

Against this backdrop, the Ministry of Corporate Affairs, Govt. of India introduced one of the world’s largest experiments by enacting the Companies Act, 2013, which has CSR as a mandatory provision, imposing statutory obligation on companies to take up CSR projects towards Social welfare activities. Further, Companies (CSR Policy) Rules, 2014, which came into force in April 2014,  prescribes the manner in which companies shall comply with the CSR provisions of the Act (www.gov.csr.in/csr/global). Section 135 under the  Schedule VII of the Act,  outlines the detailed provisions for CSR.

Subsequently, the Ministry has made a series of amendments to both the Companies Act and CSR Policy Rules, from 2015 until 2023, in order to improve the accountability of businesses towards the development of the environment and community.           In order to make CSR implementation more vibrant, the Ministry created an exclusive CSR Cell in May 2014, to be an effective link between the Companies and the Ministry regarding the utilization of CSR funds. The Ministry also established a National Fund for CSR, in partnership with the chambers, member corporates and the Indian Institute of Corporate Affairs, with the mission of an enabling environment for the corporate sector to work in tandem with the government, Non-Govt.  and Civil Society organizations, as well as with the local community organizations.

CSR eligible Companies

Companies Act 2013 requires all registered companies with a net worth of Rs.500 crore or more, or a turnover of Rs.1000 or more, or those earning a profit of Rs. Five crore or more, to comply with the provisions of CSR.  Each eligible company is required to spend at least Two per cent of the net profit (calculated as an average of the previous three year’s profit, or the net profit of the immediately preceding year, if the company was started during less than two years).

 As of Jan. 2023, a total of 24.02 lakh companies had registered, out of which only 15.17 lakh companies were active ( www.mca.gov.in, Monthly Information Bulletin, Jan.2023). During 2021-22, a total of 25,932 companies registered with the MCA, were CSR-eligible companies. Annual Reports of Indian firms revealed that their CSR spending stood at Rs. 24,865 cr for 2021-22. Ministry’s sources reveal that between 2014-15 to 2021-22, a total of Rs.1,25,955/- cr was spent as CSR expenditure (www.livemint.com/industry).

As per the Finance Minister’s information in the Parliament, a total of 18623 companies had spent Rs.25,933 cr as their CSR funds, on 42,440 projects across 14 sectors during FY (Financial year) 2022 (Economic Times, Aug. 16, 2023).

Eligible activities

Companies/implementing agencies with CSR eligibility, can spend their CSR funds on the following major activities, specified in Schedule VII under section 135 of Companies Act, 2013, and as per the amendments made till 2023:

– Poverty eradication, health care promotion, promotion of education (including special education), gender equality and environmental sustainability.

– Protection of national heritage, welfare of armed force veterans and war widows, and promotion of rural sports including Paralympics and Olympic sports,

– Contribution to the Prime Minister’s National Relief Fund, public funded research and development projects, support to rural development and slum development initiatives, and contribution to the academic and research institutions, including government departments.

– As part of promotion of Education through culture, spending on “Har Dhar Tiranga” campaign, including making National flags, has also been made eligible for CSR expenditure, since July 2022 ( as per an amendment in July, 2022).

Ineligible activities

 Companies Act stipulates that CSR expenditure cannot be incurred on activities beyond Schedule VII of the Act. Companies are not allowed to use CSR fund to cater to their employees or contribute to political parties or venture into any overseas activities. The amended Company Rules disallow CSR expenditure on the normal business activities, market promotion of for their products/services, corpus fund contributions, or for any other statutory obligations of any other law in force in India ( amendment made in Jan. 2022).

Amendment to the Act and Rules

– Central govt. is empowered to give general or specific directions to a company/ies, for CSR compliance ( Sec. 135 (8) as per amendment in Companies Act, 2019).

– Similarly, companies with a CSR fund of less than Rs.50 lakh, need not constitute a CSR Committee, which was earlier capped at Rs.20 lakh ( as per sub-section 135 (9) added since 2020).

– Under CSR, purchase of capital assets, which was earlier disallowed, is now accepted after amendment, to those agencies registered with the Ministry, or held by the beneficiaries, or any public authority (as per amendments in Company Rules, 2021).

– (As per amendment to Company Rules since 2020), the excess of CSR spend in one year can be set off against succeeding financial year ( for a maximum of three years),

– Foreign institutions are allowed to design, monitor and evaluate CSR projects companies in India, in order to bring in the best international practices and capacity building, and

– Companies with more than Rs.10 cr under CSR are required to undertake Impact assessment of projects with an outlay of over Rs. one crore.

Eligible implementing agencies

Institutions eligible to avail CSR funds comprise four types.  Firstly, companies which had established their own foundations, as the social arm of their industry. They had registered their institution under Indian Societies Registration Act, 1860 or Indian Trusts Act, 1882 ( as a Public Trust, as per an amendment made in 2021). Further,  certain non-govt. organisations, registered their institutions/companies under Section 8 of the Companies Act, 2013.  For example, some of the renowned companies in the private sector had registered their social service foundations much before the Companies Act, 2013. TVS, Madurai had established Srinivasan Services Trust (SST), during 1996 and RAMCO cements started Ramco community services in 1996, MRF in 1988, and Sterlite Copper in 1997.

Secondly, companies also provided CSR funds to Non-Government Organizations (NGOs), registered under any of the above three Acts ( viz., Societies Act, Trust Act, and Section 8 companies).  All such NGOs, are required to have obtained 12-A and 80-G certification under Income Tax act, 1961.  In addition, these NGOs should have obtained CSR certification from the Ministry of Corporate Affairs, and should have had at least  three years of track record in implementing similar activities. In addition, any NGO wishing to avail a government grant should have also been registered with DARPAN,  as required by NITI Aayog ( formerly  Union Planning Commission), New Delhi.

Thirdly, similar entities established by the Central and State Governments, and Statutory bodies established under an act of Parliament or State legislature are eligible to avail CSR funds. Finally, Companies (CSR Policy) Rules, 2014 also permit a company to collaborate with other CSR-eligible companies, for undertaking CSR activities, by way of pooling their resources.

NGOs, desirous of availing CSR funds, are required to register their details electronically in the CSR-1 form, maintained by the MCA in its National CSR Portal, with effect from April, 2021.  This would enable CSR eligible companies to scout for suitable implementing agencies from among the registrants.

Areas of operation

While selecting areas for CSR project implementation, the companies are required to give preference to the local geographic areas, and the areas around which they operate.  This clause is only ‘directory’ and not ‘mandatory’.  It is gratifying to note that CSR funds shall also be utilized to improve the socio-economic status of the least developed regions of the country, identified as Aspirational districts, numbering 112 in the country (www.mca.gov.in/compendium).

CSR Expenditure

2022-23 Annual Report of the Ministry of Corporate Affairs reveal that the CSR eligible companies have so far contributed a sum of Rs.1.26 lakh crore towards CSR activities since April 2014-15 to 2020-21(www.mca.gov.in/A-R/2022-23).  Region-wise expenditure reveals that states like Maharashtra ( Rs.18,472 cr), Karnataka (Rs. 7097 cr), and Gujarat (Rs.6056 cr ) have incurred the maximum expenditure, comprising one-fourth of the total CSR funds.  Tamil Nadu spent Rs.5370 crore under CSR. Lakshadweep was the last in the list, with a paltry Rs.2.97 crore, during this period. For the FY 2022-23, Maharashtra, Karnataka, Gujarat, Tamil Nadu and Uttar Pradesh were the biggest gainers, who made up 43% of the total CSR spending.

Sector-wise spending regarding the maximum amount of CSR expenditure during the last eight years (2014-15 to 2020-21) shows that nearly 30.0 per cent has been on Education (Rs.36,564 cr.), about 10.0 per cent on Health (Rs.25.133 cr.), and about 10.0 per cent on Rural Development projects (Rs. 12,254 cr.),  6.2 per cent on Environmental sustainability (Rs. 7763 cr) and 5.2 per cent on Poverty, eradication of hunger and malnutrition ( Rs. 6520 cr).

PM’s National Relief Fund (Rs.3579 cr.)  other Central government funds (Rs.4527 cr.),  Swachh Bharat Kosh (Rs.1204 cr), and Clean Ganga Fund (Rs. 451 cr) have attracted Rs.9761 cr, which constitute around 7.75 percent of the total CSR expenditure, during this period.

As per the Minister’s information in the Parliament (Aug.2023), Health overtook Education, and Environment and Rural Development came third and fourth in order during FY 2022. With a CSR spending of Rs. 9987 cr on Health, Education trailed with Rs. 8382 cr, Environment with Rs. 2837 cr, and R.D. projects with Rs. 1801 crore.

Modes of Implementation

An analysis of CSR expenditure by India CSR Outlook Report 2023 by companies/implementing agencies, reveals that  45% of the total CSR expenditure have been incurred by the companies directly, (4 per cent directly and 41 % by CSR Foundations) promoted by the companies.  The remaining  55% has been spent by the non-government implementing agencies. (www.csrbox.org/media).

The Report outlines the following problems in the implementation of CSR projects by companies:

1. Insufficient reporting/Communication of impact

2. Lack of Sustainability plan

3. Insufficient technical expertise

4. Constrained relations with the government

5. Inability to meet Project timeline

Non-compliance of CSR

Violations of CSR  under Section 135 (5), and (6) are made a ‘Civil wrong’ ( as per the amended Act since 2020). Any default by a company attracts a penalty of Twice the amount of money, to be transferred to the CSR Fund, and one-tenth of the amount to the defaulting official(s) from the company. Using this amendment, the Ministry has imposed fines on hundreds of companies for various CSR-related violations – both to the company and to the defaulting official/s individually, ranging from a few lakh rupees in each case, upto Rs.one crore (to RHI Maganasita India Ltd for instance).

Rise and Fall in Expenditure

– Indian firms spending on CSR stood flat in 2021-22 (www.primeinfobase.com), based on CSR-eligible Companies’ Annual Reports. The combined expenditure by 1205 Listed companies that were required to spend under the law, stood at Rs.14,801 cr, similar to Rs.14,763 cr in 2020-21.

– The actual spending was around Six percent more. However, the surplus came not only from the increased spending but also from the ‘unspent’ amounts of previous years that companies put to use. (www.livemint.com.cdn.ampproject.org).

– The number of companies spending on CSR initiatives during Covid period, which reached the maximum at 25,181 (2018-19), came down to 18,623 in 2021-22. However, CSR expenditure increased from Rs 20,217 cr in 2017-18 to Rs.25,932 cr during 2021-22.

– Similarly, the percentage of companies spending more on CSR than the prescribed limit, has gone up from 22.97 % in 2017-18, to 56.08 % in 2021-22.

– During FY 2022, a total of 10433 companies ( 69.20 % ) spent more than the prescribed CSR limit, and 3065 companies ( 20.33 % ) spent less than the prescribed level. While those who spent the prescribed amount accounted for 1186 (7.87 %), 392 companies (2.60 %) had only a zero spending .

– Reliance Industries Limited (RIL) stands on top of all other companies spending more than Rs.500 cr. every year since 2017-18.

– CSR expenditure for the period from 2014-15 to 2020-21, stood at Rs.1,25,955 cr. of which, PSUs spent Rs.27,930 cr (22.17 %), whereas the non-PSUs spent more than three times, at Rs. 98024 cr (77.83 %).

– Number of companies spending on CSR from Public Sector Undertakings (PSUs), which was at 541 in 2017-18 stood at 313 in 2021-22. However, CSR spending by non-PSUs has gone up from 78.65 % in 2017-18 to 83.37 % in 2021-22, despite their number falling from 20,984 in 2017-18 to 18,310 in 2021-22.

– While almost one-fifth of the companies have not reported their spending on the National CSR Data Portal, zero-spending companies have recorded a sharp fall from 54.0 per cent in 2017-18 to 21.1 in 2021-22, and further down to 2.60% in FY 2022.

– Company-wise CSR scenario reveals that Reliance, Tata Consultancy Ltd. and Infosys occupied the first three slots. Reliance Industries Ltd has made the highest CSR spending of Rs.1271 cr during 2022-23.

– Ten major corporates contributed nearly one-fifth of the total CSR spending, during 2017-18 to 2021-22. RIL’s spending stood above Three percent during this period.

– Data for FY 2022 shows that Reliance topped other companies with Rs.812 cr as CSR expenditure. HDFC ( Rs.8382 cr) and Tata Consultancy Services ( Rs.2837 cr) occupied second and third places, while ONGC (Rs. 436 cr) and NTPC took fourth and fifth slots, in their order of CSR spending.

– TCS paid the highest of Rs.704 cr to Health, ONGC gave the maximum of 213 cr to Education, and Infosys made the highest spending of Rs. 157 crore on Environment. Contribution by other companies to the above three sectors were much lesser.

Major challenges

– It causes concern that the CSR fund-generating companies themselves have spent more than two-thirds (41%) of their CSR funds. More CSR funds can be allotted to community development agencies such as NGOs, community-based organizations (CBOs) such as women self-help groups (SHGs), Farmer Producers Organizations (FPOs), Universities engaged in community-outreach activities, and progressive Gram panchayats.

– The CSR committee, mandatory for every company, with a CSR fund of more than Rs.50 lakh, is empowered to design and decide the anatomy of CSR spending. CSR spending directly by the company-established implementing agencies is likely to be narrow, biased and selective, since the professional team is largely oriented to ‘profit’ than ‘service’. By and large, CSR spending in such industrial settings is more likely to be ‘company-friendly’ rather than ‘community-friendly’.

– Further, the process of selecting implementing agencies by the companies has been made more an ‘internal process’ which is bound to be more subjective, and subservient to their business interests.  These implementing agencies could be presumed  to play to the tunes of CSR granting companies, rather than the grassroot realities, confronting the communities around.  Hence, the process  of selecting NGOs, and other implementing agencies needs to be made more transparent, competitive, and qualitative.

– Imposition of Fines on the CSR Committee/independent Directors who were at default of CSR violations amounts to be dissecting the committee and the company as if both are independent. This sounds strange because these Directors largely operate under the wishes and aspirations of the company. Imposing fine on the company, now at twice the amount of CSR fund, seems to be suffice.

– Most of the companies entrust CSR responsibilities to their Human Resources division, which gives priority to their company personnel rather than the common people. Wherever the company is implementing CSR, suitably trained professionals in Rural development / Social work are not engaged.

Strengthening CSR component

– In order to rectify the human resource deficiencies, Ministry of Corporate Affairs may design short-term training programmes for the existing CSR staff, to those desirous of joining the CSR projects. Broad areas may include conducting baseline surveys,  feasibility studies, formulating project proposals, preparing Project implementation plans, conducting project monitoring and evaluation, including impact assessment studies, training in capacity-building, and documentation and reporting.

– Companies Act allows international organizations for two activities viz., designing, monitoring and evaluation of CSR programmes, and providing capacity-building training programme to the personnel engaged in CSR activities. In fact, both these tasks require an understanding of local field realities and knowledge requirements, and hence,  can be better performed by Indian experts, rather than foreigners.

– The companies Act may therefore, open up the doors for Management professionals with indigenous expertise in training, project monitoring and evaluation.

Govt intervention

Since the doors of foreign aid have been closed to  a  large number of NGOs in India, due to Covid-19, severe restrictions by the Govt. of India, and the impact of on-going Russia – Ukraine, and now Israel – Palestine war, the communities are bereft of welfare or development intervention by the NGOs.  The Government of India may intervene in this regard, in various ways.

– MCA may enhance the two per cent profit allocation to CSR, fixed a decade ago ( 2013), to at least Three per cent of their net profit.

– Moreover, companies with ‘in-house’ implementing machinery, may be exhorted to share at least two-thirds of their CSR funds, for implementation by NGOs, outside the purview of these companies.

– Further, although CSR Policy rules are emphatic about the manner in which the ‘unspent amount’ should be maintained every year, there is no clarity about how these funds are finally retrieved for re-use by the companies or implementing agencies or the government.

– MCA may permit transferring the unspent CSR fund to the NGOs in the subsequent financial years, after retaining a sum required for continuity of the on-going projects.

– Companies which did not utilise the CSR fund properly, are required to pay a Fine of twice the unspent amount of CSR, to be transferred to the CSR account (to the company), or Rs. one crore, whichever is less. Similarly, the officials in default are also required to pay one-tenth of the unspent CSR amount or Rs. Two lakh whichever is less. There is no data in the National CSR portal, on such penalty amount remitted by the erring companies.

– Finally, there is no clarity on how certain companies join together and pool their CSR funds, and how they allocate the fund to implementing agencies. In the recent past, we witness certain non-government Nodal agencies,  have sprung up in major cities in south and central India. They are reported to mobilise CSR funds from companies, invite proposals from NGOs in the respective regions, assess their organizational strength, allocate funds, monitor their programmes, and report to the CSR-granting companies. In the process, they have been alleged to collect huge amount as processing fee from the aspiring NGOs. Companies (CSR Policy) Rules, 2014 makes no mention about such initiatives.

– The government of India, has been on a soft course, in respect of Corporates. Initially, non-compliance with CSR Act and Rules was treated as an offence which attracted imprisonment of the defaulting official, for up to three years, besides a penalty . Since corporates are a ‘cash cow’, and CSR offers abundant resources, the government subsequently softened its stand, and non-compliance of companies is now treated only as ‘civil wrong’.

Conclusion

CSR serves as an excellent gateway to promote Corporate-Community connectivity. Community development programmes, as the CSR initiatives, serve as an effective  ‘social lubricant’, and erases any possible rift between the corporate and the communities around. Conflict between a company and the border communities hamper industrial peace, which in turn cut into the production and productivity of the company. Ultimately, this also reduces the profit of the company, and naturally the CSR fund, intended for the nearby communities. Greater the conflict between the company and communities, slower the industrial progress and peace. Based on the confrontations between certain companies like NLC and CPCL in Tamil Nadu with the neighbouring communities, and its consequent negative economic impact, the government may allow 75 percent of their CSR to be spent on the neighbourhood and stakeholder communities and local organizations, rather than broad basing it.

Views of the author are personal and do not necessarily represent the website’s views.

Dr. M.P. Boraiyan, a retired Professor from Gandhigram University, Tamil Nadu, brings over four decades of expertise in Rural Development. His illustrious career includes serving as the Nodal Officer for National Level Monitoring, extensive consultancy for NGOs, and being honored with a United Nations ILO Fellowship. Recognized for his outstanding contributions, he received the ‘Best Outreach Faculty Award’ from Gandhigram Rural University. A prescribed author by the University Grants Commission, Dr. Boraiyan’s influence extends to post-retirement, engaging in impactful Corporate Social Responsibility programs for ONGC, RAMCO, Azim Premji Foundation, and Sterlite Copper, showcasing his enduring commitment to community development in India.