Corporate Social Responsibility (CSR), Objectives, Framework and Contribution

Context: Total Corporate Social Responsibility (CSR) spending by listed companies has increased by 16% to ₹17,967 crore in 2023-24.

Corporate Social Responsibility (CSR) is now an essential part of corporate governance in India. The regulation of CSR rules under the Companies Act, 2013, was a landmark event, and India became the first nation to enact CSR expenditure by businesses. CSR in India is not just a voluntary activity but is legally required for specific types of companies.

This article discusses the CSR contribution norms in India, their importance, issues, and implications, which are important areas of the UPSC Governance syllabus (GS II) and will be beneficial to the aspirants to know this dimension of governance and business ethics.

What is Corporate Social Responsibility (CSR)?

• Corporate Social Responsibility (CSR) is a concept whereby companies integrate social and environmental concerns into their business operations.
• In India, the Companies Act, 2013 has made CSR contribution mandatory.
• India was the first country in the world to make CSR spending compulsory by law.
• A company must spend on CSR if it meets any one of these conditions:
  • Net worth of ₹500 crore or more,
  • Revenue (turnover) of ₹1,000 crore or more,
  • Net profit of ₹5 crore or more (during any financial year).
• At least 2% of the average net profits of the preceding three financial years must be spent on CSR activities.
• CSR Committee: Companies required to spend CSR amounts must form a CSR Committee.
  • Minimum 3 directors (including at least one independent director).

Recent Trends of CSR Spending (As per 2023-24 Data)

• Total CSR spend: ₹17,967 crore (16% rise over last year).
• Top areas funded: Education (₹1,104 crore), Healthcare (₹720 crore)
• Top companies by CSR spend:
  • HDFC Bank (₹945.31 crore)
  • Reliance Industries (₹900 crore)
  • TCS (₹827 crore)
• Public Sector Units (PSUs) also increased their CSR spending by 19%.

Key Objectives of CSR

• Social Impact: Meeting society’s needs, including education, health, and gender equality.
• Environmental Responsibility: Supporting sustainable behaviours and minimising environmental imprints.
• Community Development: Community engagement to encourage development and well-being.
• Ethical Practices: Promoting equitable labour practices, diversity, and inclusion.

The Legal Framework: The Companies Act, 2013

The Companies Act, 2013, is the major legislation for CSR in India. Section 135 of the Act addresses CSR responsibilities for some companies based on their financial requirements. It was enacted to prompt businesses to give back to the country’s social, economic, and environmental health.

Key Provisions under Section 135 of the Companies Act, 2013:

• Applicability: CSR provisions apply to companies that meet one or more of the following criteria:
  • Net worth of ₹500 crore or more.
  • Turnover of ₹1000 crore or more.
  • Net profit of ₹5 crore or more during the immediately preceding financial year.

  If a company satisfies any of these conditions, it is required to set up a CSR committee and spend on CSR activities as per the specified rules.

• CSR Committee: Companies falling under the CSR criteria are required to constitute a CSR committee of the board of directors. The committee is responsible for formulating and recommending a CSR policy to the board, overseeing the implementation of CSR activities, and ensuring compliance with the law.
• CSR Spending:
  • The companies are required to spend at least 2% of their average net profit during the three immediately preceding financial years on CSR activities.
  • If a company fails to meet the CSR spending target, it must disclose the reasons for the shortfall in its annual report.
• CSR Activities: The CSR activities should align with the 17 categories mentioned in Schedule VII of the Companies Act, 2013. These activities encompass a wide range of initiatives, such as:
  • Eradicating hunger, poverty, and malnutrition.
  • Promoting education, employment, and healthcare.
  • Environmental sustainability and conservation.
  • Gender equality and women’s empowerment.
  • Ensuring environmental sustainability and support for the armed forces, war veterans, and their families.

Recent Amendments to CSR Rules

The Companies (Amendment) Act, 2019, made significant changes to CSR rules. Some of the major amendments include:

• Inclusion of Unspent CSR Amount: If a company is not able to utilise its CSR amount, the unused amount should be credited to a separate bank account to be spent within three years. Once three years have elapsed, the amount is credited to a fund earmarked under Schedule VII.
• Compulsory Impact Assessment: Large business houses are now made compulsory to conduct an impact study of their CSR activities, particularly where there is heavy expenditure involved. It is to ensure that the CSR programs prove effective and are instrumental in bringing positive changes to society.
• Online Portal for CSR: There is a special online portal made available to ensure transparency and better tracking and management of CSR funds.

CSR Contribution and Its Implementation

• Strategic Contribution to National Development: CSR in India plays an important role in advancing national goals, including sustainable development, poverty reduction, and education for all. CSR is a strategic tool through which private firms work with the government to advance social welfare according to the country’s development agenda. It contributes to inclusive growth by filling gaps in infrastructure, health, education, and the environment.
• Reporting and Disclosures: Companies shall disclose the following under the CSR rules in their annual report:
  The CSR policy encompasses the activities carried out.
  • The makeup of the CSR committee.
  • Overall, CSR spending and where it has been utilised.
  • If the target spending is not achieved, the reasons thereof should be clearly stated.
  • These revelations help to ensure accountability and transparency in the spending of CSR funds. Non-compliance with CSR provisions or disclosure can invite penalties in the form of fines and imprisonment of the company officers.
• NGO and Third-Party Implementation Role: The use of CSR projects by companies is permissible through the implementation via Non-Governmental Organisations (NGOs) or Non-Profit Organisations (NPOs). Involvement with authentic organisations aids in tapping their experience in the different social development fields. Nevertheless, the companies are still expected to exercise some control and ascertain that funds are being used according to the planned purpose.
• Regional and Sectoral Differences in CSR Expenditure: Indian CSR expenditure is not evenly distributed geographically. Developed states with infrastructure and business centres such as Maharashtra, Gujarat, Karnataka, and Tamil Nadu receive more CSR investment because of improved NGO access, government assistance, and an established business environment. Backwards states such as Uttar Pradesh, Bihar, Chhattisgarh, and Madhya Pradesh tend to fall behind in getting CSR investments.

Challenges in CSR Contributions and Implementation

Despite its noble intentions, CSR in India faces several challenges:

• Failure of Effective Monitoring and Impact Evaluation: Most firms lack monitoring of long-term CSR effects. There are no specific impact assessments and measurement systems in place, and this results in no clear end uses for the money. A missing unified framework for measuring the performance of CSR activity in various industries also exists.
• Misuse of CSR Funds: Certain companies misuse the guidelines and direct CSR funds into activities that are technically within the scope but not in the spirit of CSR. For example, expenditure on infrastructure projects for the benefit of the company or its employees may not qualify as genuine CSR.
• Limited Involvement of SMEs: Small enterprises with fewer resources cannot engage in CSR as actively as large businesses. Implementation costs, lack of expertise, and ill-defined regulations could deter SMEs from adopting CSR to its fullest potential.
• Geographical Disparities: CSR expenditure tends to be centralised in developed areas while excluding underdeveloped and rural regions. This widens regional disparities in the allocation of social welfare and development.
• Public Perception: CSR activities can certainly enhance the public image of a company, but they are usually viewed as a means of brand building and not as an earnest attempt to resolve social problems. This perception demeans the authenticity of CSR activities.

Conclusion

Indian CSR, although still in a nascent stage, has gone a long way since its advent through the Companies Act, 2013. The government’s initiative to make CSR expenditure obligatory has prompted the inclusion of social responsibility in companies’ business strategies. Yet challenges like monitoring the impact, area-wise disparities, and the absence of an integral evaluation framework still exist.

For the proper application of CSR and to ensure it is aligned with the objectives of national development, it is of prime importance that the efforts of companies, government departments, and NGOs are united. As India progresses towards a sustainable and inclusive future, CSR will be a vital tool in filling the gaps between economic development and social welfare.

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