Last year, the focus shifted to the Ministry of Corporate Affairs (MCA) when it addressed multiple companies for openly failing to adhere to the required Corporate Social Responsibility (CSR) activities. It fined a pan-India power supplier a whopping Rs 10 crore for failing to spend its CSR budget within the stipulated time period. Additionally, it instructed the company to spend Rs 1,000 crore on CSR projects within six months, failing which it would face an even higher penalty. Let alone private entities, two public sector companies, too, were compelled to shell out huge sums of money for non-compliance, besides their reputation taking a beating.
Traditionally, in India, CSR was seen as philanthropy. However, on April 1, 2014, India led by legally mandating CSR. According to Section 135 of this Act, companies meeting certain financial thresholds must allocate 2% of average net profits over three years. In February, the MCA amended the 2014 Companies (Accounts) Rules, introducing a new CSR-2 form. Besides the Companies Act of 2013, SEBI has introduced new CSR rules for listed firms. SEBI now requires listed companies to share CSR activities in annual reports, increasing transparency and accountability.
Opportunities and Challenges
As a developing economy with one of the world’s largest populations and a multitude of societal intricacies, India offers a unique environment for companies to partake in CSR endeavours that not only contribute to social welfare but also create value for stakeholders. However, compliance with CSR requirements and ensuring their enforcement pose considerable challenges, particularly for smaller enterprises or those operating in less profitable industries.
Some of these hurdles include a lack of financial resources or a limited talent pool. According to findings by the Confederation of Indian Industry (CII) and Indian Institute of Management, Ahmedabad, several smaller companies have reported a lack of clear guidelines, resources, and even time in implementing their CSR mandate. Further, these initiatives can cover a wide range of issues, and there are no universal guidelines for implementation. Consequently, businesses find it challenging to determine the precise areas they could zero in on.
Additionally, companies might encounter conflicting priorities when executing CSR activities. For instance, initiatives aimed at environmental betterment could potentially clash with those focusing on financial performance or the interests of shareholders. Cultural disparities could also present challenges. Thus, it is crucial for companies to stay well-informed regarding the execution of their CSR initiatives.
Positive Developments
A growing number of companies have realised that boosting profits is no longer their sole business performance indicator and that they need to play the role of responsible corporate citizens as they owe a duty to society. According to an analysis published by a leading publication, India Inc’s CSR expenditure in FY 2022-23 was Rs 14,558 crore, up from Rs 4,893 crore in FY 2014-15.
This uptick in compliance can be attributed to push factors – where the MCA and civil society increasingly scrutinise corporate spending and urge India Inc to comply with the law – as well as pull factors, where corporate stakeholders such as investors keep a close watch on CSR activities.
Benefits for Organisations
For companies, these measures do not go unrewarded. According to reports by IIMs and World Economic Forum, companies that are recognised for their efforts in social and environmental spheres tend to receive more favourable perceptions from both consumers and stakeholders. This, in turn, results in heightened brand loyalty and an improved standing among prospective investors. Moreover, adhering to CSR standards fosters a sense of purpose and pride among employees, thereby promoting their retention and fostering loyalty towards the organisation.
In the post-pandemic era, organisations are likely to prioritise CSR initiatives that are aligned with the United Nations Sustainable Development Goals (UNSDGs), such as reducing poverty, promoting gender equality, and combating climate change. Companies will also continue to integrate ESG factors into their CSR strategies to create a more sustainable business model.
Now that the pandemic has highlighted the gaps in our existing public health infrastructure, focus on healthcare, including maternal health, child care, and non-communicable diseases, is likely to be a focus area for CSR activities in the coming years, as there are risks on the gains made so far wasting away.
Within livelihoods, hybrid models for vocational training in sectors such as e-commerce logistics, warehousing, healthcare, etc., could become popular, along with a focus on strengthening small businesses through digitisation, working capital, and training.
On the other hand, with increasing penetration of tech infrastructure and corresponding, IT-enabled services to remote corners, interventions around digital literacy and inclusion, digitization of small businesses, and telemedicine, too, have gained prominence.
With the emphasis placed on evaluating the impact of CSR regulations and the suggestion of social audits, corporate management strategies are becoming integrated into CSR compliance mechanisms. This integration will lead to greater standardisation of financial reporting, impact assessment, and outcome measurement. Third-party evaluations to better comprehend the effectiveness of investments in various social initiatives are also expected to rise.
The future of CSR compliance holds great promise and responsibility. When put to good use, it is a tool that enables organisations to drive transformation and create a sustainable future.
About the Author
Venkatesh Kumar S, Chief Financial Officer, Aparajitha Corporate Services.
