Date: 08/10/2022

Relevance: GS-2: Development Processes and the Development Industry — the Role of NGOs, SHGs, various groups and associations, donors, charities, institutional and other stakeholders.

Key Phrases: Corporate Social Responsibility (CSR) regime, Companies Act 2013, Geographical biasness in CSR funding, Corporate Social Responsibility Projects Repository

Why in News?

• CSR spending in India has risen from ₹10,065 crores in 2014-15 to ₹24,865 crores in 2020-21 since the establishment of the Corporate Social Responsibility (CSR) regime in India under Section 135 of the Companies Act 2013 although there is no data to verify whether this increase is proportionate with the increase in profits of Indian and foreign companies.

Key Highlights:

• There were 2,926 companies in 2020-21 with zero spending on CSR while companies spending less than the prescribed limit of 2% rose from 3,078 in 2015-16 to 3,290 in 2020-21.
• There was also a decline in the number of companies participating in CSR from 25,103 in FY2019 to 17,007 in FY2021.

What are the issues with the functioning of CSR activities under the act?

1. Provision to set off excess spending amount:
   • If a company spends an amount in excess of the minimum 2%, as stipulated, the excess amount is liable to be set off against spending in the succeeding three financial years.
   • This provision weakens the whole rationale behind the act since the requirement of 2% is only a minimum requirement.
   • Instead, the companies should be encouraged to spend more than this.
2. Transfer of CSR funds to self-owned foundations by the companies:
   • Besides, many private companies have registered their own foundations/trusts to which they transfer the statutory CSR budgets for utilisation and it is not clear if this is allowed under the Companies Act/CSR rules.
3. Geographical biasness in CSR funding:
   • The first provision to Section 135(5) of the Act is that the company should give preference to local areas around it where it operates.
   • However, a report by Ashoka University’s Centre for Social Impact and Philanthropy says that 54% of CSR companies are concentrated in Maharashtra, Tamil Nadu, Karnataka, and Gujarat (receiving the largest CSR spends) while populous Uttar Pradesh and Madhya Pradesh receive little.
   • The ambiguity in the absence of clear percentages for local spending vis-à-vis other area spending has left much to the discretion of the boards of these companies.
4. Skewed funding pattern in the different sectors:
   • An analysis of CSR spending (2014-18) reveals that while most CSR spending is on education (37%) and health and sanitation (29%), only 9% was spent on the environment even as extractive industries such as mining function in an environmentally detrimental manner in several States.
5. Output-oriented rather than quality-oriented expenditure:
   • Under the existing regulation, the companies report their CSR spending annually to the Corporate Affairs Ministry (MCA) through the filing of an annual report.
   • A major issue with this design is that it focuses on output rather than quality of the expenditure and its impact.
   • The Standing Committee on Finance had also observed that the information regarding CSR spending by companies is insufficient and difficult to access.
6. Accounts not qualified for non-compliance or inadequate CSR performance:
   • An auditor can investigate only the details of spending and at most can question the board about its authenticity but the auditor is not mandated to qualify the accounts for non-compliance or inadequate CSR performance in the audit report.
   • This is a feature that can be instrumental in ensuring its compliance.

Way Forward:

• National-level platform listing potential CSR-admissible projects:
  • There is a need to design a national-level platform centralised by the MCA where all States could list their potential CSR-admissible projects so that companies can assess where their CSR funds would be most impactful across India with preferential treatment to areas where they operate.
  • Invest India’s ‘Corporate Social Responsibility Projects Repository’ on the India Investment Grid (IIG) can serve as a guide for the purpose by supporting deserving projects in the 112 aspirational districts and projects identified by MPs under the Government’s Sansad Adarsh Gram Yojana.
• Priority to environment restoration:
  • Companies need to prioritise environment restoration in the area where they operate, earmarking at least 25% for environmental regeneration.
• Active cooperation of all stakeholders:
  • All CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.
• Improving the existing monitoring and evaluation regime:
  • Recommendations by the high-level committee in 2018 should be incorporated in the current CSR framework which includes strengthening the reporting mechanisms with enhanced disclosures concerning selection of projects, locations, implementing agencies, etc.;
• Bringing CSR within the purview of statutory financial audit:
  • The details of CSR expenditure should be included in the financial statement of a company, and independent third-party impact assessment audits should be made mandatory.
  • CSR non-spend, underspend, and overspend should be qualified by the auditor in the audit report as a qualification to accounts, and not just as a note to accounts.
• Greater direct monitoring and supervision over CSR spending by companies:
  • The MCA and the line departments need to exercise greater direct monitoring and supervision over CSR spending by companies through the line ministries (for public sector undertakings) and other industry associations (for non-public units) instead of merely hosting all information on the Ministry’s website.
  • Since the Government itself has begun separate schemes for sanitation, water supply and education (listed in Schedule VII), steps to stop duplication and fraud are essential.

Source: The Hindu

Mains Question:

Q. There has been a decline in the number of companies participating in CSR from 25,103 in FY2019 to 17,007 in FY2021. In this context, discuss the issues with CSR funding in India as well as suggest the way forward for reforming the process. (250 words).