Whose responsibility is CSR?

CHENNAI: Corporate social responsibility (CSR) is gaining a lot of attention in today’s business world, thanks to increasing desire among corporates to make an impact on the society they belong to and also the legal implications of not doing so.

The origin of CSR from ISR

Let’s trace the origin of CSR in corporate life: essentially, CSR emerged from ISR (Individual Social Responsibility) meaning, individuals started contributing to society in a big way in the last 5 decades – both financially and otherwise. The consciousness of individuals to give back to society went up substantially, driven by what we saw from the West.

Giving back to the educational institutions from where one got educated is common in the West, especially the US since the 1950s. Many wealthy individuals established Chairs/Scholarships in their own Universities and also helped build solid infrastructure in these institutions for furthering education.

Caring for the society in uplifting healthcare is another solid example of ISR. Anyone will get inspired when he/she reads the story of 'The Rockefeller Foundation' established in the early part of the 20th Century, which revolutionised the healthcare industry and contributed immensely to the well-being of human beings.

India saw the ISR concept gaining traction over the last few decades with wealthy individuals leading the way in terms of contributions to education and healthcare. Still, we are a long way to go to match our western counterparts on ISR.

The Evolution of CSR

Howard Bowen, the famous Economist / Professor coined the word CSR in early 1950s and stimulated the thoughts in the minds of corporate leaders towards contributing back to the society. It took another 40 years and during the early 1990s, the real face of CSR started surfacing in the US and the West. CSR became an essential part of corporate governance.

In India, Dr Bhaskar Chatterjee took the initiative in 2010 to give a framework to CSR and helped pave the way for legal intervention by way of specific provisions in Companies Act 2013. Even though CSR was made a compulsive agenda of the corporate via legal requirement, the essence of CSR in its purest form is yet to percolate.

Today, thanks to heightened awareness and desire to contribute to society, CSR has attained the key status in the agenda of the corporate world. Of course, the enactment of CSR provisions in the Companies Act has further jettisoned the momentum.

Indian Law on CSR

In India, the CSR provisions, as mandated in Companies Act, applies to companies meeting the requirement – on revenue front of Rs 1,000 cr and more, on Networth front of Rs 500 cr-plus, on profit front of Rs 5 cr-plus.

When CSR is applicable, it calls for compulsory spending of min 2 per cent of the company profits (average of last 3 years) on well-defined CSR activities as per the corporate CSR policy.

On the governance front, the Board is required to appoint a CSR sub-committee of the board to review and recommend actions to the Board. The CSR spend thereafter gets approved by the Board, which also monitors the efficacy.

The Indian Law demands that corporates spend the committed CSR budget every year in their own identified CSR projects. If they fail to identify the projects, the CSR allocated money must be transferred to any of the government designated funds – whereupon the responsibility of spending shifts to the government of India. The Law gives a good four years (year of project kick off plus max 3 years) for the corporate to spend the allocated CSR Budget.

Essentially, the annual allocated CSR budget must be spent on relevant projects to uplift the society and through this the whole economy gets a boost. The cost of not complying with CSR provisions of the Act is too high to impact financially and the reputation. These deterrents are essential to discipline the corporate world.

The ‘financial’ side of CSR:

Going by the legal requirement on CSR and the applicable companies and their current estimated profits, the approximate CSR spend in India in the year 2024-25 is around Rs 20,000 crore. The top 100 companies contribute almost 40 per cent of the total. Data shows that in the year 2023-24 the unspent CSR amount was close to 12 per cent of the total Budget. This signifies the need to regulate, broad base and monitor closely the effective outcome of CSR spends.

With growing profits of Indian corporates, the CSR kitty is bound to swell. Also expanding the base of companies will further help flow more funds into CSR for the ‘nation building’ theme. Post-COVID, the CSR spends are growing at 8-9 per cent and given the expected healthy GDP growth of 6-7 per cent over next decade, the CSR Budget will keep doubling every six years.

The ‘Responsibility’ side of CSR:

This is like two sides of a coin – On the one side, we have the corporate and on the other side, we have the Law (Governance). The corporate- which spends CSR needs to view the responsibility from the lens of ‘genuineness’ of projects. Often we have seen CSR projects are camouflaged to help prosper the business. Some of the essential business development expenses are brought under CSR projects by one pretext or other. While the Law explains clearly what is not CSR, often the interpretations are left to one’s imagination. Here is where the Board is expected to play a major role. The CSR committee of the Board should sit straight on the projects to satisfy the ‘genuineness’ filter.

The Law makers on the other side needs to frame/modify the legal framework on CSR in tune with changing times. The intention of the Law makers is clear – make the corporates (making profits) contribute to the well-being and development of the society. Nation building is the responsibility of everyone in the system. Perhaps linking CSR commitments to the Income tax payment is one simple way to make everyone who earns and pays Income tax – including corporates, individuals and others – contribute to nation building. Also on the Governance of CSR, the Law makers need to tighten the belt. Perhaps Independent Audit systems can help here to make everyone accountable.

Road ahead for CSR:

It is clear for both corporates and Lawmakers.

Corporates to focus on ‘Genuine’ projects with a professional team handling the execution. Project management process needs to be robust at corporates to ensure on-time, on-cost execution of CSR projects. Also, the habit of ‘D0-this-year-forget-next-year’ needs to go away. Every year, CSR projects must be continued to be monitored post-implementation for ensuring real benefits flow to the concerned members of the society. There are many CSR projects which are done for the sake of complying with Law and later turn out wasteful expenditure.

Lawmakers to try and widen the net by including all tax payers, more corporates (everyone who makes profits), HNIs etc to increase the quantum of CSR spends. Also, lawmakers need to strengthen the monitoring mechanism through digital modes for effectiveness.