CSR Spending: Private Firms Unlikely to meet 2% Target

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NEW DELHI: Private sector companies, which have been working hard to get clarity on the Corporate Social Responsibility (CSR) Rules, 2014, are unlikely to meet the target of spending 2% of their net profit on CSR activities in this first year.

The ministry of corporate affairs (MCA) has slashed its estimates on the corpus to be created through CSR expenditure by half.Early estimates pegged CSR spending at Rs.10,000-12,000 crore; recent estimates put the figure at Rs.5,000 crore.

“There are many queries we receive each day about the CSR rules and, therefore, feel that it will take some time for private companies to get used to the process before they can successfully spend the mandated 2% of their profits on CSR activities” said Pankaj Srivastava, director at MCA.

Government-run businesses have been under an obligation to spend a part of their profits, in a percentage slab inversely proportional to their profits, based on the guidelines being issued by the department of public enterprises (DPE), since 2010. The CSR expenditure ranged from 3-5% of the net profit of the previous year for public sector enterprises (PSEs) making a profit of less than Rs.100 crore, 2-3% (subject to minimum of Rs.3 crore) in case the profit ranged between Rs.100 crore and Rs.500 crore, and so on.

MCA has often stated that the DPE guidelines were used as a sort of a template before extending the mandate on CSR expenditure to other companies. ‘Charity begins at home’  says Bhaskar Chatterjee, director general and chief executive of the Indian Institute of Corporate Affairs and former DPE secretary, explaining why the guidelines for PSEs were initiated in 2010. After the 2014 regulation, the guidelines have been amended to align with current law and PSEs are trying to fit in their existing programmes in the new model.

The key differences between the DPE guidelines and the CSR rules, 2014, include the reporting, monitoring, exclusion of the profits of a branch of a PSE located outside India, and the amount spent on “sustainability” initiatives not constituting a part of CSR. The DPE guidelines had different percentage slabs based on only the previous year’s profit of a PSE, whereas the CSR rules take into account the average net profits of the last three years and require allocating a flat 2% for CSR spending.

According to Navin Agrawal, partner and head (public sector) at KPMG, “This may seem taxing for a PSE which may have posted losses in preceding second and third year, but made profit in the last year.” As the author of the DPE guidelines, Chatterjee played a major role in formulating the 2014 CSR Rules and says the two cannot be clubbed together. “DPE guidelines had a very strict reporting and monitoring model. But we cannot extend that to the private sector, given the sheer numbers,” he explains.

There are 250 PSEs in India, of which just about 70-80 qualify for the CSR expenditure, whereas as there are more than 20,000 private companies, of which 16,000 qualify for the CSR expenditure reporting. India’s largest power producer—NTPC Ltd—has had a CSR policy in place since 2004 and over the years has developed programmes on health, education, skill development, drinking water and even social infrastructure.

It spent Rs.49 crore (0.5% of net profit) in 2010-11, Rs.69 crore (0.5 %) in 2011-12 and Rs.120 crore in 2012-13, which came up to 1% of its profit that year. It has allocated 2%, i.e. Rs.280 crore for the current year. NTPC’s CSR director S.K. Jain says he believes PSEs are way ahead of corporate houses when it comes to CSR. That’s because under the DPE guidelines “some systems were put in place and now CSR is viewed as an integral part of the company’s internal philosophy”

Subhash Bhaskar, additional general manager (CSR) at MMTC Ltd, says he believes the section 135 of the Companies Act, which deals with CSR rules, has streamlined the process.”Under the DPE guidelines, we followed a more top-down model. The CSR performance rating, given by the DPE, was linked to the take-home for workers of the company” he explains. The rankings of companies varied—’Fair’, ‘good’, ‘very good’ and ‘excellent’

If any PSE received a ‘very good’ or ‘excellent’ ranking, the CMD would receive 200% of his basic pay to take home, directors would get up to 150% and the lower-level workers would get only 40-50%. According to him, this created an ad hoc approach to CSR, depending on the interest and willingness of the top officials. “But now with CSR rules, strategic planning and a long-term vision has been made possible” says Bhaskar.

Though MMTC has been running in a loss for the last three years, it has attempted to keep CSR activities going since it first formulated the policy in 2006 and even allotted Rs.45 lakh for construction of public toilets in FY15. Some differences between the DPE guidelines and the CSR rules have worked in favour of PSEs, others not so much. Astha Narang, deputy manager (CSR) at State Trading Corp. of India Ltd (STC), says she believes the current CSR rules have restricted certain aspects of the activities being undertaken by PSEs.

She says when STC made profits (it has been running in a loss for three years), it spent close to 3% of its profits on CSR and now will only be looking at 2%. The DPE guidelines allowed for CSR funds to be carried over to the next fiscal year (with a limit of two years); the current rules have no such provision. “PSEs have had time to put in place the policies and structures needed to ensure the proper dispensation for CSR funds” says Chatterjee, while private sector companies are still grappling with the procedural and infrastructural requirements of CSR rules.

“We had to make a number of changes in the DPE guidelines which were felt to be a bit restrictive in terms of reporting and the specific expenditure instructions to the government companies” The CSR Rules, 2014, according to Chatterjee, have been made more flexible, giving more power to the boards unlike the DPE guidelines where the CSR policy was stricter and closely tied to the ministry agendas.

“Initially CSR policy was designed more in tune with the philosophy of charity. But now it is more strategic in nature” he adds. However, some like Coal India Ltd’s (CIL’s) CSR head and director (personnel and industrial relations) R. Mohan Das feel the DPE guidelines or CSR rules make little impact on expenditure by “earnest” companies. “With or without guidelines and rules, PSEs have been undertaking CSR activities in one form or the other and so we really don’t see that much of a difference”  he says.

According to him, the returns on CSR outweigh the 2% profit required to be spent. “CIL’s CSR initiatives have majorly helped create trust among the communities where we work and considering the land acquisition challenges in India, CIL thankfully has not faced much flak” says Das. In 2013-14, CIL, the world’s largest coal miner, allotted Rs.430 crore for CSR, which has gone up to Rs.470 crore in 2014-15.

(The Article Contributed By Moyna First appeared in The Mint)

 

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