Some time back I attended a two-day international conference in Mumbai to commemorate the World CSR Day. Being one of the delegates in the conference, I could easily understand the magnitude of importance which the corporate world outside India is giving to the CSR initiatives.
Delegates from most developed and developing nations like the USA, Finland, Philippines, Sri Lanka, Hungary, etc. presented their CSR success stories and concepts which have translated corporate philanthropic activities into an organized CSR sector in the rest of the world.
It was very impressive to listen to one of the foreign speakers, Director of Japanese bathroom equipment maker, LIXIL Corporation, talking about their social commitment.
She talked about her company’s commitment to take leadership in tackling waste management problems in various Asian and African countries where the waste is collected and often dumped into rivers which pollutes drinking supplies.
It was interesting to listen to a Sri Lankan delegate that ‘waste is not garbage, but a resource for growth’.
Amid a range of international speakers unanimously debating strengthening of CSR initiatives, I could see a ray of hope for my region – Jammu & Kashmir.
If a corporate based in Europe eyes communities in India for its CSR activities aiming to mitigate their sufferings, why Indian corporate or for that matter global corporate cannot bring J&K under the ambit of their CSR programmes.
I fervently believe, J&K region is the most deserving geography to have a significant share in the CSR budget of the corporate world.
Globally, the roots of the CSR lie in the welfare activities like philanthropy, donations, charity, relief work etc which have now evolved to include concepts of corporate citizenship, strategic philanthropy, shared value, corporate sustainability and business responsibility. Companies integrate social and environmental concerns in their business operations with their stakeholders.
In India, CSR was purely a philanthropic activity, but not deliberated and documented. It got a new facelift when the Companies Act 2013 brought the idea of CSR to the forefront through its disclose-or-explain mandate with community at the centre point of all activities.
This way, India became the first country to bring CSR activities under the legal framework and made it mandatory for the companies to spend a portion of their profits for the benefit of societies.
Notably, the society is of key importance to the companies as their growth and earnings contain major shares from the society. On this premise, it becomes obligatory on part of the companies to spend a portion of their profits for the benefit of this very society.
Precisely, the government notified the rules for CSR funding under section 135 on the new Companies Act, 2013 and Companies (Corporate Social Responsibility Policy) Rules.
According to Section 135 of Companies (CSR) Rules, 2014 and Schedule VII of Companies Act 2013:
Every company with a net worth of Rs 500 crore or more or turnover of Rs 1,000 crore or more or net profit of Rs 5 crore or more during the immediate preceding financial year, must have a CSR committee and spend at least 2 percent of average net profits earned during three immediate preceding financial years to CSR activities. Remarkably, CSR provisions under companies law came into effect from April, 2014.
According to official data, around 8,300 businesses spent Rs.20,360 crore in over 25,000 CSR projects in the financial years 2021 (FY21). Major contributors have been Reliance Industries Ltd, Tata Consultancy Services Ltd, Tata Sons Pvt. Ltd, HDFC Bank Ltd, Oil and gas Corp. Ltd and Indian Oil Corp. Ltd. Overall, the Indian Inc has spent over Rs 1 trillion on CSR projects since the mandatory CSR law came into effect.
Over 50 per cent of the spend came in the last three years. The Covid-19 pandemic has emerged as a major focus area in the last two years. The Ministry of Corporate Affairs (MCA) has been working overtime to expand the horizon of CSR activities. In view of the extreme medical emergency arising out of the Covid-19 waves, the ministry allowed the companies to use CSR funds for “creating health infrastructure for Covid-19 care, establishment of medical oxygen and storage plants, manufacturing and supply of oxygen concentrators, ventilators, cylinders and other medical equipment for countering Covid-19”. Even the amount spent by companies on setting up makeshift hospitals and temporary Covid care facilities was included under the ambit of CSR activities.
The relaxation in CSR rules in the last couple of years has encouraged the companies falling under CSR net to spend a good portion of their CSR budget on raising healthcare infrastructure. Notably, changes in CSR Rules notified from time to time also introduced significant changes to monitoring and evaluation of CSR activities, and utilisation of CSR expenditure.
Remarkably, from today’s business point of view, those companies spending money on public welfare through CSR initiatives have a direct influence on their customer base.
A ‘socially responsible’ company is a point of attraction for customers and the company’s effective CSR initiatives garner customers’ loyalty for the company. A loyal customer base is a guaranteed bright future for a company. So it makes sense for companies to tailor their CSR initiatives in these tough times, when Covid-19 is yet to end and Russia-Ukraine driven geopolitical tension is hovering around us, in such a way that extends immediate and long term relief to the general public.
In other words, a useful CSR initiative in the prevailing situation would be fuelling power to a company to stand out in today’s saturated market. It’s the CSR arm which a company can use to ensure long-term loyalty and potentially even brand advocacy.
However, while building and improving its brand, the company should observe sincerity and should not lie to its customers. The acts of the company should speak for it being truthful and devoted to a cause in real sense.
There is another side of the CSR story. Even as companies have been funding infrastructure projects, especially in the health sector, acts of misuse of the CSR-funded infrastructure have been found in various surveys. Here compliance is not an issue. The problem is that some non-governmental organizations implementing the CSR projects of the companies don’t show honesty on the ground.
Let me quote an EY Forensic & Integrity Services’ report. The report said, “Companies could see frauds in their Corporate Social Responsibility (CSR) programs as they may not have the bandwidth to conduct due diligence or monitor these amidst Covid-19 pandemic.”
Experts have pointed out loopholes in the CSR law which the unscrupulous elements exploit to siphon the funds and commit frauds in CSR projects. “Often, these for-profit companies do not have bandwidth to have a dedicated team in place to implement and monitor their CSR projects as they have for their business operations. This gap has given a chance for many middlemen to enter the field in the garb of CSR consultants and encourage the CSR funds to be spent on fake CSR projects,” reads an expert opinion on why frauds happen in CSR funds.
Meanwhile, the Report by EY Forensic and Integrity Services titled Corporate Social Responsibility in India: re-engineering compliance and fraud mitigation strategies has endorsed the experts’ view.
The report said, Lack of due diligence on implementation partners, weak governance and limited management involvement are contributing to ethical lapses and fraud in corporate social responsibility (CSR) programs.
According to the report, there is a high dependence on third parties to execute CSR programs, 65 percent of the companies that participated in the research sample of the report, did not have a clear due diligence policy and only 45 per cent admitted to checking the past record of implementation partners.
So, in the emerging situation where CSR funds are misused that too under the nose of a given legal framework, there is a need to revisit the mechanism of implementation and monitoring of CSR projects through third parties. The government as well as the companies need to plug the loopholes so that there is no such scope for unscrupulous elements to commit frauds.
(The views are of the author & not the Institution he works for)
Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.
The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.