With the introduction of a Corporate Social Responsibility (CSR) section in the New Companies Act, which came into effect on April 1 of 2014, discussions on the concept of CSR has gained prominence in most corporate board rooms. These CSR obligations intend to help remediate poverty and social problems in India. Companies are subject to the CSR requirements if, for any financial year, in India, they have a net worth of at least $80 million, a turnover of at least $160 million, or net profits of at least $800,000. Companies that meet any of these criteria are required by the law to develop a CSR strategy, policy and governing board, devise an implementation mechanism, identify partners and report on these CSR activities. With this clause, the conversation in corporate circles has moved beyond ‘should CSR be mandatory’ to ‘what should we do and how’.
Corporate: A crucial stakeholder
The social development space has always seen the corporate world as an important stakeholder. Corporate funds have been an important source of funding social causes. The introduction of Clause 135 has expanded the scale of funds and the number of companies investing in social causes has increased. Finance minister Arun Jaitley said that companies are expected to pump in as much as Rs 14,000 crore for Corporate Social Responsibility (CSR) activities in 2014-15, and the amount will increase in subsequent years. The clause applies to approximately 800,000 companies, including over 8,000 publicly listed domestic and multinational companies.
Among the social problems in which companies are investing include improving the quality of education in Government schools, extending healthcare services, building community infrastructures, forming partnerships to impart skills to youth to make them more employable , women empowerment and environment conservation. Education, however, has emerged as the most favoured area, followed by community-based development and environment sustainability, surveyed Mercer, global consultancy major.
CSR is quite important to companies as other aspects like marketing or finance. By legitimizing and laying down regulations for CSR spending, corporate funding has been redefined and its role diversified. Corporate funded development programmes are gradually moving from hand-outs to programmes driven by community ownership and innovation. To achieve this, companies are setting up foundations and have partnered with NGOs and social enterprises.
There is no denying that the business sector’s engagement with social development and environment sustainability have increased manifold in the last few years. But with the introduction of the CSR clause this year, companies have to compulsorily spend on CSR, and they want to do it right. This has led to a considerable number of companies undertaking baseline and needs assessment studies in rural India. The studies pave the way for more information generation on social issues prevalent in the country as well as get the business sector thinking on how they can innovate or invest in solving the issues which have been identified by the studies. Earlier, there was no mechanism to track how the money is creating an impact or to check if the money has reached the intended beneficiaries.
Common models of CSR engagement is a model which extends support to local civic organizations and engages with already existing community initiatives. Another model is one where the corporate delivers social or environmental benefits in ways that support its operations across the business value chain.
Attracting development funds
The trends seen in the sector in the past include a host of events and recognition platforms on CSR: an increased know-how and understanding of the topic among managers and social sector professionals, and a surge in the number of CSR consulting firms. In the last few months, companies have gained more clarity about the Clause on details such as supporting Government projects like PM relief fund, Swatch Bharat and Clean Ganga campaigns.
The initiatives identified under Clause 135 are broad enough to accommodate a variety of programmes and social causes. If executed well, they could impact disadvantaged communities and social development projects. But a company must be careful in choosing those that best fit its values and the nature of its business to ensure long-term sustainability of its programmes.
Current CSR spend of 74 companies, out of Top 115 companies, is Rs 2,521 crore annually. Presently, only 10 companies comply with these norms with a spend of 2 percent or more. Most companies do not meet the proposed 2 percent CSR norm. The average CSR spend, as a percentage of PAT for 74 companies, is 1.02 percent. Ernst & Young estimates that the law would cover over 2,500 companies in India, and it will generate over U.S. $2 billion of CSR spending in local communities.
Realistically speaking, the Indian NGOs do not have the capacity to effectively channelize the large amount coming their way. This means that when a company chooses an initiative that fits its values and purpose, it should commit managerial talents to the chosen problem, and address it just as it would its own business situation. It should construct Key Performance Indicators (KPI), select appropriate partners, and ensure there is stakeholder buy in and participation in decision making. A company should be conscious that indiscriminately spending the required amount on CSR is not a strategic way to comply with the CSR clause. CSR must be tailored according to the company’s industry, location, supply chains, in addition to customizing the project to local and cultural nuances and needs.
Creating the law and its many different amendments is only the start. This is the first year of implementation of CSR by companies under the Act. Information on compliance by companies in this regard will be available only after statutory annual returns on CSR are filed by companies, including private sector companies, which are due after September 2015. On the tax front, it has been clarified that expenditure incurred towards CSR activities will not be allowed as deductible business expenditure. Corporates, however, could avail of any tax benefits in respect of such expenditure under other specific sections of the I-T Act, such as section 80G which relates to donations. For instance, contributions to the Prime Minister’s National Relief Fund also qualify as a CSR spend. Donations to these funds are entitled to a 100 percent deduction from taxable income.
The Corporate Affairs Ministry expects around Rs 15,000 crore would be spent in a year on social projects such as environment, skill development, water and sanitation, through CSR activities. Whether the CSR Clause actually encourages more CSR spending or not, it will certainly force companies to seriously contemplate social responsibility or risk becoming a conspicuous non-spender among peers who already invest heavily in it.
To sum up, the future of India seems much brighter with the involvement and attention of the business sector in country’s progress and development.
(Author: Payal Mulchandani, Co-founder, 4th Wheel)