In FY 2021 the CSR spent was Rs. 26,210 crore, but the impact of the CSR funds is not widely felt and there is a need to enhance the visibility as well as impact of these invested funds
Doing business in an unpredictable world can get problematic and cumbersome as climate change, dwindling natural resources, and ever-increasing demands on energy and food supply, disrupt business operations and supply chains in unexpected ways. It has become necessary for private and public organisations to fundamentally rethink the way they function. Transforming into a successful sustainable business requires new levels of resilience and agility, rooted in responsible practices.
Corporate sustainability essentially refers to the role that companies can play in meeting the agenda of sustainable development and entails a balanced approach to economic progress, social progress and environmental conservation. While sustainability is about factoring the social and environmental impacts of conducting business, that is, how sustainably profits are made, Corporate Social Responsibility (CSR) focuses on what is done with the profits made and whether they are utilised for the greater good of the society. Hence, the practice of CSR is an important component of sustainability or responsible business.
In the present times, CSR has shifted from traditional philanthropic activities to community development through various projects. It has evolved from a peripheral aspect of business to a strategic imperative. By mandating CSR through statutory obligations, India became one of the first countries in the world to create a legal framework on CSR and statutorily direct companies to report on the same. Section 135 of the Companies Act, 2013 is the foundation of this regime. The government's intention to make CSR more robust is quite evident in the initiatives undertaken, such as the need to certify the utilization of CSR funds by a Chartered Accountant if the implementation is done through a third party.
To measure and evaluate the effectiveness and outcomes of the CSR initiatives, the Ministry notified the Companies (CSR Policy) Amendment Rules, 2021 ('Rules') vide notification dated 22.01.21 through which the tool of Impact Assessment was introduced. It requires specified companies to undertake impact assessment through an independent agency. To maintain accountability and transparency such reports are to be placed before the Board as well as annexed to the annual report on CSR. Further it mandated that companies with unspent CSR funds to constitute a CSR committee irrespective of its obligation amount.
From the analysis of CSR data, it is seen that education, healthcare, and rural development are the top three development sectors receiving the CSR funds. Since the enactment of the CSR provisions, these three sectors have always attracted major CSR funds given their importance and potential impact on society. Looking at the numbers from the last seven years, i.e 2014-15 till 2020-21, based on the filings made by the companies in the MCA21 registry, education sector received nearly Rs. 47187.68 crore (including education, livelihood enhancement projects, special education and vocational skills), which amounts to approximately 37 per cent of the total CSR expenditure. The health sector (including health care, poverty, eradicating hunger, malnutrition, sanitation and Swachh Bharat Kosh) comes next with 30 per cent of the CSR expenditure amounting to Rs.38011.49 crore. More than Rs. 12,300 crore was spent on rural development projects which accounted for 9.6 per cent of the total CSR expenditure. The three sectors together accounted for nearly 76.6 per cent of the total CSR expenditure incurred in the country in seven years. One of the reasons behind the focus on these sectors could be their alignment with the country's sustainable development goals. However, for the country's overall development, it would be better if the companies incur CSR expenditure over all the development sectors.
The nature of CSR being dynamic, the expenditure can vary each year based on multiple factors. However, what is commonly understood with the data of MCA21 registry is that some states in India have received significantly more portion of CSR funds due to various factors such as the presence of major corporations, industrial development, and social development needs. This disparity however, is common in other aspects also, such as state-wise distribution of net proceeds of union taxes and duties as well.
Data shows that in FY 2020-21, over 44 per cent of the CSR funds went to ten states. These top ten beneficiary states include eight of the largest state economies by their FY20 GDP- Maharashtra, Gujarat, Andhra Pradesh, Karnataka, Uttar Pradesh, Tamil Nadu, Rajasthan, and Madhya Pradesh. These states are the financial and industrial bases, and are major hubs for technology companies and startups which is why they are known for their business-friendly environment. This could be one of the reasons for them attracting a significant amount of CSR funds. It is seen that the companies tend to spend the CSR funds in the areas where it operates to gain the goodwill of the local community given that the support of the local community is just as important for the running of their business smoothly. It is seen that Maharashtra, Gujarat and Karnataka, received the largest share of CSR funds, with Maharashtra alone receiving 13.21 per cent of the total during FY 2020-21.
In contrast, the northeastern states of Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, and Tripura received a mere 0.91 per cent of the funds in FY 2020-21. Some other reasons could be the lack of infrastructure and resources for implementing CSR projects in the region, lack of awareness about the importance of CSR among companies operating in the regions receiving lower funds. This is concerning, as the smaller regions are the most socio-economically and culturally diverse in the country and have a high incidence of poverty and underdevelopment. It is imperative that there is a balance of local area preference with national priorities to avoid any concentration of CSR funds in specific regions. The board of the corporation may on their own initiative be required to take measures needed to augment the CSR funds for areas where development is needed.
The potential reason for such disproportion could be that, Section 135(5) of CA13 provides that the companies shall give preference to the local area and areas around it where it operates. However, it's not mandatory to do so as the world has become too intricately close with the advent of digitalization and it is difficult to define what the local areas of operations are.
In FY 2021 the CSR spent was Rs. 26,210 crore which is almost twice in comparison to FY 2016 where Rs. 14,542 crore were spent, which indicates an upward trend in the CSR expenditure. However, the impact of the CSR funds is not widely felt and there is a need to enhance the visibility as well as impact of these invested funds. To ensure that the impact of CSR is deeply felt, it is imperative that the companies take a long-term comprehensive approach to yield productive results. For increased effectiveness and efficiency, it is important to execute CSR efforts strategically with the right balance of capital investments and operational expenses. Moreover, it is also essential to ensure that the initiatives undertaken are self-sustaining, so that the programmes run seamlessly and efficiently, without them being a burden on the company. The emphasis should be on creating an appropriate structure for CSR, ensuring that the funds go towards the well-being of the community. Further, highest quality of risk management framework needs to be adopted, so as to make the CSR projects sustainable.
For yielding high results of CSR initiatives, the entire chain involved in the execution should be in consensus. One of the recurring issues for companies has been the identification of suitable Implementing Agencies (IAs). The introduction of the National CSR Exchange Portal in 2022 is a step towards answering this obstacle. The National CSR Exchange Portal serves as an emarketplace hosting PAN India social welfare projects where stakeholders such as Implementing agencies can put up their ongoing projects and companies can select projects for CSR Spending as per their preferences and vice versa.
India's philanthropic landscape has undergone major changes over the past years. Mandating CSR helped the corporate sector transition from a voluntary and unsystematic approach to a structured way of contributing to social welfare. Although the law has infused capital into the social sector, the impact and effectiveness of the programs needs to be measured to help identify gaps and solutions. Lastly, instead of a narrow perception of CSR, one needs to understand the holistic view of it. The Government of India is willing to take measures to facilitate Ease of Doing Business by making an effective and receptive CSR legal framework. This will inculcate social consciousness in a company. This way, CSR expenditure can even more meaningfully contribute towards achievement of Sustainable Development Goals.
Source: MCA