Is India’s mandated 2% CSR spend actually working?

[By Annu Mehta]

Corporate Social Responsibility (CSR) is one of the new provisions introduced in The Companies Act 2013 in India – and is a potential game-changer for the business landscape.

With effect from April 1, 2014, every company which either has a net worth of INR 500 crore (US$75m) or a turnover of INR 1,000 crore (US$150m) or net profit of INR 5 crore (US$0.75m), needs to spend at least 2% of its average net profit for the immediately preceding three financial years on CSR activities. These activities should be undertaken as per the activities mentioned in Schedule VII of the 2013 Act.

There is a total of 16,000 companies that fall within the 2% CSR mandate in India- making the total prescribed budget INR 18-20,000 Crore (US$2.7 – $3 Billion). In FY 2014-15 the top 460 listed companies collectively spent INR 6337.36 Crores (US$951m). This is only one indicator that the scope of this mandate is huge.

Company Type Number of Companies Actual CSR expenditure (in INR Crore) (2014-15)
Public Sector Companies 51 2386.60 ($358 Million)
Private Sector Companies 409 3950.76 ($593 Million)
Total 460 6337.36 ($951 Million) 

(INR= Indian Rupee; $= the approximate US Dollar equivalent)

More details including top-spending companies and amounts spent can be found here.

 

The Implications of the 2% CSR Mandate

Many Indian companies have traditionally contributed towards community development. For these companies, the 2% CSR mandate is simply an opportunity to align processes, programs and reporting structures to fit within the guidelines prescribed by the Ministry of Corporate Affairs. It is also an opportunity for these companies to re-evaluate current CSR programs, assess their impact and create a roadmap to scale up successful programs, and shift focus from programs that are not working towards new programs.

For companies that have not done CSR, the implications of the 2% mandate are much more significant. Some who want to do good, but have not had the means or know how to do so, see this as an excellent opportunity to get started. Others have been completely blindsided and don’t know what to do, how to do it, or where to get started.

 

The (inspiring and not-so-inspiring) CSR types emerging in the Indian Market

Based on the decision-makers in the companies that fall within the CSR mandate, there are several distinct brands of CSR that are emerging. I have shed light on some of these brands here:

  • The company that does strategic CSR: when the CSR vision is aligned to the company vision, there is a positive impact on the “triple bottom line”, that is, the company, the community, and the environment all benefit. Strategic CSR is often implemented through multi- dimensional partnerships in which the company, community, nonprofit, government and mediating organisations come together to contribute their core expertise to ensure maximum positive impact per unit cost. This ensures that development is holistic and focused on building evolved ecosystems.ften
  • The company that treats CSR as compliance: for this company type, CSR is just another item to be checked off a list of compliances. As long as a project is within the prescribed framework, the focus area of the project, its relevance, efficiency, and effectiveness are often not a priority. Impact, if measured, is from a reporting rather than a scaling or sustainability perspective. The selection of an implementation partner is more convenience- based than strategic, and ‘Chequebook  Charity’ is a very common here.
  • The company that is suspicious of the NonProfit Sector: this company type is unwilling to route its CSR through an implementing partner, and often wishes to directly implement CSR programs. While this seems harmless on the surface, this company type often has a very narrow understanding of CSR and does not recognise the value a NonProfit brings to the table. 

There is often no dedicated CSR team, and CSR is run by members of another corporate function. Incomplete understanding of development issues leads to superficial solutions that address the effect rather than the cause.

I’ve illustrated an example here: a company builds community toilets, and communities use these toilets as granaries and continue to defecate in the open because they are not sensitised to the risks of open defecation and the benefits of using a toilet. The presence of a NonProfit partner is invaluable here because capacity building and sensitisation is key and needs a dedicated full-time person or team that has a rapport with the community.

  • The company that does CSR for PR: when PR becomes the primary objective, rather than a byproduct of CSR, the focus shifts from impact to brand positioning. This type of CSR tends to be run by marketing or PR teams rather than by a CSR team that understands and works towards sustainable community development.
  • The company that does CSR based on individual ideology: Indians have traditionally been a philanthropic people. Most affluent families extend support to the needy. This support comes in various forms – support with education and health are common examples.

Many CEOs are attached to the causes they have grown up supporting as a family, and wish to continue supporting these causes. While the intent here is genuine, these programs might or might not be relevant to the business and the bottom line and are more philanthropic than strategic in nature.

  • The company that does CSR with a vested interest: this CSR type is by far the most uninspiring. Company Board members use their position to channel funds into NonProfits started by them or people they know. Often, this is an easy way to keep the CSR money within easy reach. Company Boards also channel CSR funds into charities that key business leaders are on the Board of, with the hope of earning the favour of these leaders and influence the course of business.

 

The Verdict

The types of CSR illustrated above are just a subset of a larger global reality and, everything considered, the overall impact of the 2% CSR mandate is positive.

Companies that have never thought beyond the financial bottom line are now in a space where they have to do so.  Definitions of a ‘good’ business are evolving from a business that merely makes high profits to one that is a responsible corporate citizen. Companies that have an ingrained culture of doing good are now evolving their programs further towards sustainable development.

From a compliance viewpoint, there is still a fair amount of clarity needed around the guidelines prescribed by the Ministry of Corporate Affairs. There are many questions about what can be considered CSR, implementing mechanisms, tax implications etc. but the Ministry is working to clarify these questions.

The 2% mandate has set the wheels of inclusive and sustainable growth in motion. The movement is gathering momentum because companies are recognising the fact that a business cannot survive in a vacuum, and needs a thriving ecosystem to succeed.

 

If you recognise your company described here and are struggling to implement the 2%, get in touch and we’ll create a strategy and program with you.

In India: annu@profitwithpurpose.in

In the UK: isabel@profitwithpurpose.co.uk

 

Annu Mehta is Founder of Profit with Purpose India. Annu has worked in the sustainability space since 2009 and was the first Community Engagement Lead for the Salesforce Foundation in India, where she adapted the model to establish locally relevant community development programs.

All views expressed are my own and are based on my observations of the CSR space in India.

3 Comments

  1. Sucheta October 14, 2016 at 3:38 am - Reply

    Interesting insights Annu. And very well written

  2. Shiven June 9, 2017 at 6:37 pm - Reply

    Nice read Annu.

    Is Alstonia working/planning to work with Ministry of Corporate Affairs in developing more concrete guidelines? Does the Ministry of Corporate Affairs have audits to ensure big corporations are following the companies Act of 2013?

    I believe here in USA, it is not a regulation and companies have often used CSR for PR and India is amongst very few countries which have a law. But I think enforcement will be an area of challenge for them.

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