CSR 

1. Key Points

• Ever since the establishment of the Corporate Social Responsibility (CSR) regime in India under Section 135 of the Companies Act 2013, CSR spending in India has risen from ₹ 10, 065 crores in 2014-15 to ₹ 24, 865 crores in 2020-21.
• There is no data to verify whether this increase is commensurate with the increase in profits of Indian and Foreign (having a registered arm in India) companies.
• Besides, there were 2,926 companies in 2020-21 with zero spending on CSR while companies spending less than the prescribed limit of 2 per cent 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 FY 2019 to 17, 007 in FY 2021.

2. Unclear CSR rules 

• If a company spends an amount over the minimum 2 per cent as stipulated, the excess amount is liable to be set off against spending in the succeeding three financial years.
• The latter clause in the Act weakens the former provision since the requirement of 2 per cent is only a minimum requirement.
• Ideally, companies should be encouraged to spend more than this.
• Besides, many private companies have registered their foundations/ trusts to which they transfer the statutory CSR budgets for utilisation.
• It is unclear if this is allowed under the Companies Act/CSR rules.

3. Geographical bias

4. Committee 

• A high-level committee observed in 2018 that the emphasis on "local area" in the Act is only a dictionary and that a balance has to be maintained.
• Unfortunately, this ambiguity has left much to the discretion of the boards of these companies in the absence of clear percentages for local spending vis-a-vis another area's spending.

5. Spending over CSR

• Item (iv) of Schedule VII of the Act deals with broader environmental issues to create a countervailing effect.
• An analysis of CSR spending (2014-18) reveals that most CSR spending is on Education (37 per cent) and health and sanitation (29 per cent), and only 9 per cent was spent on the environment even as extractive industries such as mining function in an environmentally detrimental manner in several states.

6. Annual Reports

• Under the existing regulation, monitoring is by a board-led, disclosure-based regime, with companies reporting their CSR spending annually to the Corporate Affairs Ministry (MCA) through the filling of an annual report.
• It is not known if there is a review of these reports and companies taken to task.
• A major issue with this design is that it focuses on output rather than the quality of the expenditure and its impact.
• The Standing Committee on Finance also observed that the information regarding CSR spending by companies is insufficient and difficult to access.

• An auditor can investigate only the details of spending and at most can question the board about its authenticity.
• The auditor is not mandated to qualify the accounts for non-compliance or inadequate CSR performance in the Audit report, a feature which can be instrumental in ensuring its compliance.

7. A pathway to follow

• There is a need to curate 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, of course, 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 such efforts.
• This model would be very useful for supporting deserving projects in the 112 aspirational districts and projects identified by MPs under the Government's Sansad Adarsh Gram Yojana.

8. Recommendations 

• Recommendations by the high-level committee in 2018 should be incorporated into the current CSR framework to improve the existing monitoring and evaluation regime.
• These include strengthening the reporting mechanisms with enhanced disclosures concerning the selection of projects, locations, implementing agencies, etc.,
• Bringing CSR within the purview of the statutory financial audit with details of CSR expenditure included in the financial statement of a company and mandatory independent third-party impact assessment audits.
• 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.
• CSR non-spend, underspending and overspending should be qualified by the auditor in the audit report as a qualification to accounts and not just as a note to accounts.
• 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.

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