Baba’s Explainer – Revisiting Corporate Social Responsibility

  • IASbaba
  • December 27, 2022
  • 0
Economics, Ethics
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  • GS-3: Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

Context: In developing economies like India, Corporate Social Responsibility (CSR) is seen as part of corporate philanthropy in which corporations augment the social development to support the initiatives of the government.

  • India became the first country to legislate the need to undertake CSR activities and mandatorily report CSR initiatives under Section 135 of the Companies Act, 2013.
  • However, the current CSR frameworks have some flaws, such as transparency, lack of community participation in CSR activities, and lack of timely audits.
  • In order to achieve sustainable development, India should streamline its CSR framework and focus on collective betterment through shared responsibility.
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.

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.
What are the Activities Included under CSR Category?

Schedule VII of the Companies Act 2013 mentions the activities that can be considered as CSR. Some major activities include:

  • Eradicating hunger, poverty and malnutrition
  • Promoting health care including preventive healthcare and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government
  • Promoting education, including special education and employment enhancing vocational skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.
  • Promoting gender equality, empowering women, setting up homes and hostels for women and orphans
  • Setting up old age homes, day care centres and such other facilities for senior citizens.
  • Measures for reducing inequalities faced by socially and economically backward groups.
  • Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
What are the Challenges Related to CSR Activities in India?
  • Shrinking Role of Government: Governments used to deliver social and environmental objectives in businesses through Public Sector Enterprises. Due to increasing focus on CSR activities to fulfil these objectives, there is fear that the role of government will shrink.
  • Absence of Clear CSR Guidelines: There are no clear principles and directions about the CSR in India. Also, the level of CSR depends upon the size of organisations, which means bigger the organisation, bigger the CSR programs. This is also a barrier for the small organisations that want to contribute to this field.
    • 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.
  • Duplication of CSR Activities: There is a lack of consensus & collaboration amongst local agencies regarding CSR projects. This often results in duplication of activities by corporate houses in areas of their intervention and results in a competitive spirit between local implementing agencies rather than building collaborative approaches on issue
  • Lack of intent making them dependent on NGOs: Corporations generally don’t have the expertise to carry out the mandated social activities. Therefore, they often depend on NGOs and fund them without accountability, just to gain visibility and brand recognition, not realising that CSR serves a more important purpose.
  • Unavailability of Well-Organized NGOs: The lack of well-organised NGOs in remote and rural areas makes it difficult to identify real needs of the community and ensure successful CSR implementation.
  • Lack of Time Bound Audits: The lack of time-bound audits causes many Indian companies to not disclose information about CSR activities they take part in, including funds used for the projects. Also, as a result, these companies fail to create a sense of belonging and connect with society.
What Should be the Way Forward?
  • Monitoring CSR Compliance: Government should conduct regular reviews of CSR activities of companies and put in place measures for a more professional approach. They should also set clear objectives and align all stakeholders with them. It is equally important to let their NGO partners know of their business needs.
    • Artificial Intelligence and Machine Learning tools can be used by the government to mine data from mandated reports in order to maintain regular audits.
  • Project Repository Interface: A national platform, centralised by the Ministry of Corporate Affairs, is needed where all states can list their possible CSR-admissible projects so that companies can determine where their CSR funds would have the most impact. Corporate Social Responsibility Projects Repository on the India Investment Grid (IIG) can serve as a guide for such efforts.
  • Awareness: Governments should also address the issue of non-availability of NGOs and raise awareness about the importance of CSR in society.
  • Linking CSR with Research Institutions: Innovative Projectscan be enabled through CSR funding and led by higher education institutions that would accelerate the transition from laboratory to actualisation and serve communities in effective ways.
  • Aligning CSR with SDG: With India prioritising and achieving Sustainable Development Goals, NITI Aayog has made this mainstream to the national agenda, and now is the time to tie CSR and SDGs together. In this way, India can improve accountability of CSR at the same time moving towards green and sustainable growth.
  • Aligning Circular Economy with CSR: Corporate social responsibility should replace end-of-life concepts for products with technologies and regulations that facilitate recycling and reusing. In this way, the life cycle of products can be extended, wastage can be minimised, and pollution reduced. In line, India can transition towards a circular economy.

Main Practice Question: How far do you think that enacting a legislation for Corporate social resposibility has yielded results?

Note: Write answer his question in the comment section.

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