07 Oct The need to strengthen CSR framework in India

Strengthen CSR Framework in India

The topic tells how Strengthen CSR Framework in India impacts on Economic & Social Development of India

CONTEXT

The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022 were recently introduced by the Ministry of Corporate Affairs. The rules make certain changes to the Corporate Social Responsibility Policy (CSR) regime in India.

WHAT IS CORPORATE SOCIAL RESPONSIBILITY (CSR)

• Mahatma Gandhi advocated the concept of Trusteeship wherein wealthy people set aside that part of their wealth that is in excess of their needs for the benefit and welfare of society. The concept of CSR is inspired by this. 
• Every company has a moral responsibility to look after the social, economic, and environmental development of society and give back to society since it profits from its money. Hence, they have a duty to be good corporate citizens
• CSR takes a ‘stakeholders approach’ rather than a ‘shareholders approach’. A company should protect the interest of all stakeholders like employees, customers, and the community in which it operates. It goes beyond the traditional view that the sole aim of a company is to earn profits for its shareholders
• India became the first country to legislate the need to undertake CSR activities and mandatorily report CSR initiatives under the new Companies Act 2013. 

LEGAL PROVISIONS ON CSR 

• The concept of CORPORATE SOCIAL RESPONSIBILITY was introduced in India through Section 135 of the Companies Act, of 2013. Companies satisfying the below-mentioned criteria are required to spend at least 2% of their average net profit of the immediately preceding three financial years on CSR activities: a) a net worth of Rupees 500 crore or more b) a turnover of Rupees 1000 crore or more c) a net profit of Rupees 5 crore or more
• CSR is also applicable to foreign companies having a registered arm in   India
• Companies that come under the above category are required to establish a CSR committee. The committee will have the following functions: (a) formulate a CSR policy and recommend it to the Board of Directors (b) recommend the amount of expenditure to be incurred on the activities (c) monitor the Corporate Social Responsibility Policy of the company from time to time.
• The board ensures the implementation of the policies recommended by the CSR Committee.
• CSR must be undertaken in any of the 17 activities mentioned in the Schedule VII of the Companies Act
• A company failing to comply with the provisions of CSR attracts a penalty of up to Rs.1 crore and an additional amount of Rs.2 lakh for each defaulting Officer

Pic: Strengthen CSR Framework

CURRENT STATUS OF CORPORATE SOCIAL RESPONSIBILITY IN INDIA

• CSR spending in India has risen from ₹10,065 crores in 2014-15 to ₹24,865 crores in 2020-21
• 2,926 companies in 2020-21 did not spend any amount toward CORPORATE SOCIAL RESPONSIBILITY
• The number of companies spending less than the prescribed limit of 2% increased from 3,078 in 2015-16 to 3,290 in 2020-21.
• There was also a decline in the number of companies participating in CSR- 25,103 in FY2019 to 17,007 in FY2021.

ISSUES WITH THE WORKING OF CORPORATE SOCIAL RESPONSIBILITY

• Bare minimum: If a company spends an amount over the minimum 2%, as stipulated, the excess amount is liable to be set off against spending in the succeeding three financial years. This above provision works as a deterrent as 2% is only the minimum limit and ideally companies should spend more than this.
• Geographical Bias: There is a geographical bias. Section 135(5) of the Act states that a company should give preference to the local areas around it where it operates. However, this leads to regional disparity. a recent report by Ashoka University’s Center for Social Impact and Philanthropy noted that since the majority of CSR companies are located in the states of  Maharashtra, Tamil Nadu, Karnataka, and Gujarat, states like U.P and M.P are left out from availing benefits of CSR
• Sectorial Bias: There is also a sectorial bias. An analysis of CSR spending (2014-18) reveals that while most CSR spending is on education (37%) and health and sanitation (29%), only 9% was spent on the environment. This is a problem since the operation of industries leads to pollution and more needs to be done to curb environmental degradation. 
• Lack of Community Participation: This is due to a lack of awareness and interest in activities relating to CSR. No plan can be successful without community engagement.
• Incomplete information: According to the Standing Committee on Finance, the information on spending by companies on CSR is insufficient and difficult to access.

WAY AHEAD 

• Centralized Platform: a national-level centralized platform should be created by the Ministry of Corporate Affairs where all States could list potential CSR projects. Companies can check this platform and assess as to where the CSR funds would be most impactful.
• Environmental restoration: At least 25% of funds of CORPORATE SOCIAL RESPONSIBILITY should go towards the restoration of the environment. 
• Active Community Participation: All CSR projects should be taken up with active community engagement so that benefits can reach the grassroots.
• Recommendations by the high-level committee on CORPORATE SOCIAL RESPONSIBILITY (2018): These should be incorporated into the current CORPORATE SOCIAL RESPONSIBILITY framework to improve the existing monitoring and evaluation regime, including measures on (a)Strengthening the reporting mechanisms with enhanced disclosures concerning the selection of projects, locations, implementing agencies, etc. (b)Bringing CORPORATE SOCIAL RESPONSIBILITY within the purview of the statutory financial audit with details of CORPORATE SOCIAL RESPONSIBILITY expenditure included in the financial statement of a company (c)Mandatory independent third-party impact assessment audits.

CSR aims to push India towards the achievement of sustainable development goals and public-private partnerships in transforming India. The above reforms should help India achieve these goals.

SOURCES

•  The Hindu (Strengthening the CORPORATE SOCIAL RESPONSIBILITY framework is a profitable idea)

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