SME approach towards CSR activities
By Poorvi Sanjanwala, Partner, Pearl Boga, Principal Associate and Karen Issac, Associate at Rajani Associates
Due to the mandatory financial thresholds stipulated by the Companies Act, even small and medium enterprises (SMEs) would fall within the ambit of CSR compliance in India.
There is no correlation between the thresholds stipulated for CSR activities under the Companies Act vis-à-vis the investment provided under the MSME Act, for an entity to be identified as an SME. And in so far as SMEs are concerned, limited resources available with them, may place a financial burden to effectively conduct CSR activities.
Consequently, in the process of complying with their CSR obligations, SMEs often face challenges to maintain a balance between environmental and social obligations. Due to such limited resources and with a view to lower the financial burden and reduce operational costs, it has been observed that SMEs have, in tandem ideated a bridge route to fill in the gap to efficiently conduct CSR activities jointly by pooling in their collective resources in the same geographic area by creating a sizable fund to undertake CSR activities.
An alternative for CSR compliance
CSR activities can also be undertaken through third party non-profit organizations which may either be a registered society or trust or a Section 8 company as provided under the Companies Act. Such outsourcing is preferred by and large by companies as it allows non-profits organizations who are specialized in carrying out a particular kind of activity, to undertake it for other companies as well.
This enables the company adoring CSR initiatives to focus on their core business activities and oversee an effective execution of CSR. Such an entity would have to follow the specifications and modalities given by the spending company regarding utilization of funds and such other requirements as the spending company may deem fit.
Corporate governance and ethics
Conducting CSR activities enables a company to undertake continued commitment to balance its growth and contribute to economic development in a socially conscious manner and at the same time contributing to improving the quality of life of the workforce and in turn the welfare of the society at large.
Corporates need to consider the principles of good governance, such as accountability, transparency, responsibility and fairness, while undertaking CSR activities. Since there is no penal provision on companies for failure to comply, CSR in India is one such niche area of corporate governance that needs to be assertively implemented in organizations. India being a developing nation is feeling the need to sensitize corporates towards taking responsibility towards actions undertaken in the course of growth, development and expansion could potentially have a detrimental effect on the environment and the ecosystem, not only on a domestic level but also globally.
Therefore, the need of the day is to more effectively enforce CSR related provisions through a stronger implementation of the CSR process beginning with introduction of suitable consequences in cases of non-compliances of CSR obligations.
Further, the mandatory nature of the provisions can be made more stringent by introducing the concept of parking CSR contribution funds into a separate account so that the amount earmarked towards CSR is not spent towards any other activity other than CSR activities.
Views of the authors are personal and do not necessarily represent the website’s views.
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