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 crore in 2014-15 to ₹24,865 crore in 2020-21. But 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 spend 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 — 25,103 in FY2019 to 17,007 in FY2021.
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. The latter proviso in the Act weakens the former provision since the requirement of 2% is only a minimum requirement. Ideally, companies should be encouraged to spend more than this. Besides, many private companies have registered their own 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.
The first proviso to Section 135(5) of the Act is that the company should give preference to local areas/areas around it where it operates. This is logical. 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. A high-level committee observed in 2018 that the emphasis on ‘local area’ in the Act is only directionary 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 spends vis-à-vis other area spends.
Item (iv) of Schedule VII of the Act deals with broader environmental issues to create a countervailing effect. However, an analysis of CSR spending (2014-18) reveals that while most CSR spending is in 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.
Under the existing regulation, monitoring is by a board-led, disclosure-based regime, with companies reporting their CSR spends annually to the Corporate Affairs Ministry (MCA) through filing 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 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.
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As per the ‘Technical Guide on Accounting’ issued by the Institute of Chartered Accountants of India, a company is only required to mention its CSR spends, non-spend, underspend, and overspend in the ‘Notes to Accounts’. Additionally, an auditor can investigate only the details of spending and at most can question the board about its authenticity. However, 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.
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.
Companies need to prioritise environment restoration in the area where they operate, earmarking at least 25% for environment regeneration.
All CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.
Recommendations by the high-level committee in 2018 should be incorporated in the current CSR framework to improve the existing monitoring and evaluation regime. These include strengthening the reporting mechanisms with enhanced disclosures concerning selection of projects, locations, implementing agencies, etc.; bringing CSR within the purview of 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, 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.
The MCA and the line departments need to exercise greater direct monitoring and supervision over CSR spend 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.
Amar Patnaik is a Member of Parliament, Rajya Sabha from Odisha and a former Comptroller and Auditor General of India (CAG) bureaucrat. He is also an advocate