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Strengthening the CSR framework

  • IASbaba
  • October 10, 2022
  • 0
Governance
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Context: Ever since the establishment of the Corporate Social Responsibility (CSR) regime in India under Section 135 of the Companies Act 2013, CSR spending in India has risen from ₹10,065 crore in 2014-15 to ₹24,865 crore in 2020-21.

  • But there is no data to verify whether this increase is commensurate with the increase in profits of Indian and foreign (having a registered arm in India) companies.

In this regard. Let us know CSR in detail.

What is Corporate Social Responsibility?

  • CSR is a concept that suggests that it is the responsibility of the corporations operating within society to contribute towards economic, social and environmental development that creates a positive impact on society at large.
  • CSR in India is based on the Gandhian concept of Trusteeship.
  • Trusteeship Philosophy is a socio-economic philosophy propounded by Mahatma Gandhi. It provides a means by which the wealthy people would be the trustees of trusts that looked after the welfare of the people in general.

Evolution of CSR in India:

  • Companies Act, 2013 is a landmark legislation that made India the first country to mandate and quantify CSR expenditure. The inclusion of CSR is an attempt by the government to engage the businesses with inclusive growth, welfare and national development.
  • CSR also promotes responsible and sustainable business philosophy at a broad level and encourage companies to come up with innovative ideas and robust management systems.
  • Section 135(1) of the Act prescribes thresholds to identify companies which are required to constitute a CSR Committee – those, in the immediately preceding financial year of which:
    • Net worth is Rs 500 Crore or more or
    • Turnover is Rs 1000 Crore or more or
    • Net profit amounts to Rs 5 Crore or more
  • As per the Companies (Amendment) Act, 2019,CSR is applicable to companies before completion of 3 financial years.
  • Companies are required to spend, in every financial year, at least 2% of their average net profits generated during the 3 immediately preceding financial years.
  • For companies that have not completed 3 financial years, average net profits generated in the preceding financial years shall be factored in.
  • The CSR activities in India should not be undertaken in the normal course of business and must be with respect to any of the 17 activities of CSR mentioned in Schedule VII of the act.

Evaluation of the working of CSR law in India:

  • If a company spends an amount in excess of the minimum 2%, as stipulated, the excess amount is liable to be set off against spending in the succeeding three financial years.
  • The latter proviso in the Act weakens the former provision since the requirement of 2% is only a minimum requirement. Ideally, companies should be encouraged to spend more than this.
  • Besides, many private companies have registered their own foundations/trusts to which they transfer the statutory CSR budgets for utilisation. It is unclear if this is allowed under the Companies Act/CSR rules.

Geographical bias of CSR:

  • Section 135(5) of the Act says that the company should give preference to local areas/areas around it where it operates. However, this creates regional disparity.
    • For example, a report by Ashoka University’s Centre for Social Impact and Philanthropy says that more than half of India’s CSR companies are concentrated in 4 states Maharashtra, Tamil Nadu, Karnataka, and Gujarat while populous Uttar Pradesh and Madhya Pradesh receive little.
  • An analysis of CSR spending (2014-18) reveals that while most CSR spending is in education, health and sanitation, only 9% was spent on the environment even as extractive industries such as mining function in an environmentally detrimental manner in several States.

Monitoring of CSR:

  • Under the existing regulation, monitoring is by a board-led, disclosure-based regime, with companies reporting their CSR spends annually to the Corporate Affairs Ministry (MCA) through filing of an annual report. It is not known if there is a review of these reports and companies taken to task.
  • The Standing Committee on Finance had also observed that the information regarding CSR spending by companies is insufficient and difficult to access.

Recommendations by the high-level committee on CSR (2018):

These should be incorporated in the current CSR framework to improve the existing monitoring and evaluation regime, including measures on:

  • Strengthening the reporting mechanisms with enhanced disclosures concerning selection of projects, locations, implementing agencies etc.
  • Bringing CSR within the purview of statutory financial audit with details of CSR expenditure included in the financial statement of a company
  • Mandatory independent third-party impact assessment audits.
  • CSR non-spend, underspend, and overspend should be qualified by the auditor in the audit report as a qualification to accounts, and not just as a note to accounts.

Way forward:

  • There is a need to curate a national-level platform centralised by the MCA where all States could list their potential CSR-admissible projects so that companies can assess where their CSR funds would be most impactful across India with preferential treatment to areas where they operate.
  • Invest India’s ‘Corporate Social Responsibility Projects Repository’ on the India Investment Grid (IIG) can serve as a guide for such efforts.
    • This model would be very useful for supporting deserving projects in the aspirational districts and projects identified by MPs under the Government’s Sansad Adarsh Gram Yojana.
  • Companies need to prioritise environment restoration in the area where they operate, earmarking at least 25% for environment regeneration.
  • All CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.
  • The MCA and the line departments need to exercise greater direct monitoring and supervision over CSR spend by companies through the line ministries (for public sector undertakings) and other industry associations (for non-public units) instead of merely hosting all information on the Ministry’s website.

The revamped CSR framework in India incorporating above recommendations would usher in a true trusteeship model.

Source:  The Hindu

 

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