A few years back, I was talking to Bhaskar Chatterjee, the then Director General and CEO of the Indian Institute of Corporate Affairs (IICA). Regarded as the father of Corporate Social Responsibility (CSR) in India, Chatterjee was the driving force behind the amendment of the Companies Act in 2013, that made 2 percent (PAT) spend on social causes mandatory for a large number of Indian companies. Back then, the CSR Act had just been passed, and there was much excitement and misgivings in the corporate space.
While we were discussing the various contours and scope of the CSR Act, Chatterjee used an interesting term that stood out in the conversation. Justifying the need to enforce CSR rather than make it voluntary, he said that companies need to be "impelled" for CSR in India. When I asked him to elaborate, he said; "Impelling is slightly a softer word than ‘compelling’. If corporate India were doing so well on CSR, then what is the necessity of passing a bill? Passage of a bill represents the point at which corporate India is being impelled."
CSR Act was meant to be a nudge for India Inc to start spending on social causes. While many in the corporate space likened it an additional tax (more significant than 2 percent as it was PAT), the others painted it as another case of compliance, another reporting norm that the top management would have to sign off.
Not really, the government emphasised. The CSR Bill was meant to bring precision and business-like focus in the social sector. With the corporates driving initiatives in project-mode, there would be much transparency, efficiency, and accountancy, the kinds that is not possible in government outreach. By bringing in the corporates, the objective was to make CSR empirical, rather than just fluffy science. The finance ministry was at pains to state that the idea of CSR was not to foist the corporate sector with social responsibility, but to make them partners. As a reassurance, Sub-section (5) of Section 135 was introduced so as not to put undue pressure on companies.
The second proviso of sub-section 5 of Section 135 of the Indian Companies Act 2013 states: “Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.” This particular provision was appended to allow companies to follow the ‘comply or explain’ philosophy on CSR. Unlike other dour provisions in the Companies Bill, CSR was supposedly much benign, as in companies would be liable to be penalised only in case of non-disclosures.
A "Show and Shame" Policy
Ostensibly, the policy could be summed as "Show and Shame", namely, public scrutiny would propel companies to spend on their social obligations. There was the prospect of punitive actions, but corporates were assured that they would not be greenlighted. With these promises, the CSR act came into force in April 2014.
Every year, since then the number of companies spending money on CSR has been increasing. According to CRISIL’s CSR Yearbook, 2017, of the 4,939 companies listed on BSE and NSE, 1,688 or about one-third met the criteria for mandatory spending. In the fiscal year 2016-17, the number stood at 1186 and for the year before (2015-16) it was 950.
According to latest findings by the India CSR Outlook Report, published by NGOBOX; Reliance Industries, HDFC Bank, Wipro, Tata Steel, NTPC, Indian Oil Corporation and ONGC spent more than their prescribed CSR budgets in FY 2017-18. The report analysed CSR spends of 359 companies, which was supposed to be Rs 9,543.51 crore whereas the actual CSR spend was Rs 8,875.93 crore. This accounted for 3/4th of the total CSR spend in India. The top ten companies together contributed Rs 3,306 crore as part of their CSR fund, while their prescribed CSR spend was Rs 3,160 crore. There is an increase in the prescribed CSR from 6-8 percent in the actual CSR spend from FY 16-17, and the number of projects has also increased by 25 percent from the previous year. The report dubs this trend as an indicator of seriousness among "companies as they strive to match the prescribed CSR requirements with the actual CSR spends".
The total CSR spend by the top 500 companies in the country since the applicability of mandatory CSR in 2014 is likely to cross Rs 50,000 crore by March 2019, said a report.
Government, Companies On Different Pages
This shows that companies are not only conscious of their social obligations but also are taking steps to correct them. Yet, somehow the government does not seem to be too enthused by these trends. Over the past year or so there have been some discreet yet deliberate attempts to harden the regulatory framework. In January this year, the Ministry of Corporate Affairs (MCA) informed the Rajya Sabha that penal action would be initiated against 196 companies for violating CSR norms in the financial year 2014-15. Then in April, the MCA constituted a Steering Committee to review the functioning of CSR enforcement and to recommend a uniform approach for its enforcement. Based on the recommendations, another high-level committee to study the CSR framework and suggest a roadmap for better implementation of its provisions. The 11-member committee will review Schedule 7 of the Act that defines the activities on which companies have to spend their CSR funds. And recently, the law was further tweaked so that companies will now have to consider only their previous year’s net profit for spending on social causes as compared with two per cent of a `three-year average annual net profit’ mandated previously. There was also this talk about the government changing its monitoring of the CSR projects from regional to the central level. Until now, all the 20 Registrar of Companies (RoCs) monitoring CSR projects had the discretion to decide on the cases of non-compliance. Now the scrutiny and prosecutions will be handled by the ministry directly at the central level.
All these tweaks indicate a hardening of government's stance on CSR. In a nutshell, the carrot is slowly transforming into a stick. The trouble with that is that it will be a somewhat negative impact on the CSR space.
Companies, especially the large ones, in India are not new to social responsibility. For ages, the top companies, the Tatas and the Birlas, have been spending on social causes, long before it became mandatory. Primarily driven by ethics and value of the promoters, philanthropy was not uncommon in India Inc. The good thing about the CSR Act was it gave a structure to social spending and made even small and medium companies think about their social obligations, something they would have put off for another day.
Once, the shift happens to a more regulatory and compliant mode; companies will bite the bullet and merely adhere to the norms. They will prefer to go for the lowest hanging fruit, rather than pushing the envelope. I envisage, more cheques will then be written off for the PM Relief Fund, rather than funding a social entrepreneur, as it takes time and effort, in addition to money.
Let's not forget, India is the first and only country in the world to have mandatory CSR. Academicians in the top universities across the globe study not only the contours of the Act but also the impact it has on the ground. In such a scenario, would transforming a social vision and objective into a regulative piece be a right approach?
Impel might have been good in the start, compel is undoubtedly not. While, we all vouch for greater transparency and structure, in the end, corporates must be inspired to think out-of-the-box. For instance, promoting and funding social entrepreneurs can do much more for our society than just writing cheques to fulfil the prescribed spend. Sometimes, carrots are indeed better than sticks.
Shashwat DC is Features Editor at CNBC-TV18. He is closet-activist for sustainability and CSR, when not pondering over the future of humanity or contemplating the launch of the new Android phone.
Disclosure: RIL, the promoter of Reliance Jio, also controls Network18, the parent company of CNBCTV18.com.