Mandatory Corporate Social Responsibility Spending - A Trap or Requirement
Mandatory Corporate Social Responsibility Spending - A Trap or Requirement
Mandatory Corporate Social Responsibility Spending - A Trap or Requirement
A PROJECT REPORT ON
Name Roll no
Table of Contents
Introduction 2
Conclusion 10
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
INTRODUCTION
CSR defines the guidelines to the way businesses should be managed to bring an impact on the
communities, societies, and environments in which they operate. The structure of CSR has gone
through several changes and revision and has morphed itself into a statutory provision in India. But
there exists a growing concern with respect to the penal provisions and sanctions introduced by the
Government in 2019, with respect to non-compliance of CSR obligations of companies, currently
operating in India. Ina country like India, companies have no shortage of CSR opportunities or issue
areas to address, as the needs in India are immense. Although we see a few companies, in India, have
been performing the CSR activities for some time however there are immense areas of opportunity
that can be filled. Hence the government of India in 2013, Companies Act made it mandatory for the
“capable” companies to contribute towards social development activities.
According to Section 135 of the Companies Act 2013 requires that companies having a
a. net worth of Rs. 500 cr. or more, or
b. turnover of Rs. 1000 cr. or more, or,
c. net profit of Rs. 5 cr. or more, during the immediately preceding financial year
To set up CSR board committee, which must consist of at least three directors, one of whom must be
independent. That committee must ensure that the company spends “at least 2 per cent of the average
net profits of the company made during the three immediately preceding financial years” on “CSR”
activities. If any firm fails to spend this amount on CSR, board must disclose why in its annual
report.
The board committee is responsible for reviewing, approving, and validating the company’s
investments in CSR. Prior to each annual meeting, the board must submit a report that includes
details about the CSR initiatives undertaken during the previous financial year. The board’s
independent director helps ensure the credibility of this process. The roles of the committee would
be
a. The committee will issue an annual report on the various CSR activities undertaken.
b. CSR policies should be placed on the company’s official website, in the form and format
approved by the committee.
The board of directors is bound to accept and follow any CSR related suggestion put up by the
aforementioned committee. The committee must regularly assess the net profits earned by the
company and ensure that at least 2 percent of the same is spent on CSR related activities.
Schedule VII of the Companies Bill, requires the CSR policy created by the CSR Committee to
involve at least one of the following focus areas:
i. Eradicating extreme hunger and poverty,
ii. Promotion of education
iii. Promoting gender equality and empowering women
iv. Reducing child mortality and improving maternal health
v. Combating HIV, AIDS, malaria and other diseases
vi. Ensuring environmental sustainability
vii. Employment-enhancing vocational skills
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
viii. Social business projects Contribution to the Prime Minister’s National Relief Fund or any
other fund set up by the Central government.
Let’s have a look at how CSR spending evolved over the years
Ever since the passing of the new act, there has been a heavy debate on whether this will have
positive or negative implications for India. A summarized analysis of both sides - positive impact
(Arguments For) and negative impact (Arguments Against) - is presented below.
While the law mandates a minimum spending cap on CSR activities, it is important to analyse how
the CSR activities of companies are actually impacting the society. The actual effectiveness of the
CSR initiatives should be gauged based on the value addition towards each of these social causes.
While the amount spend on CSR activities is one of the driving factors, another important factor that
drives the impact of CSR initiatives is the philanthropic or visionary mind-set of great leaders driving
the organizations.
Based on our study, we have shortlisted the following 3 industrial cases, analysed their CSR spending
and activity trends and have tried to gauge the effectiveness of such initiatives. The objective of this
section is to illustrate that well planned CSR initiatives are often a true “Requirement” that adds
tremendous value to various layers of our society.
1. Tata Chemicals :
One of those best companies who are ranked top 20 for their CSR activities is Tata Chemicals.
Established in 1939 in Mithapur (Gujarat), Tata Chemicals Limited (TCL) is a part of the US$ 110
billion Tata Group. Improving the quality of life and fostering sustainable and integrated
development in the communities where it operates is considered as the corporate philosophy of the
company. To take forward the Corporate Social Responsibility (CSR) plans of the company, Tata
Chemicals has formulated the CSR policy and also established Tata Chemicals Society for Rural
Development (TCSRD) in 1980 as a society and trust. The principle aims and objective of the
TCSRD, as written in the memorandum of association, is that TCL is a principle promoter to
undertake, carry out, promote, sponsor, assist or aid directly the activities carried out by the trust.
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
Prescribed
CSR 11 12 13 19
16
Spending .6 .3 .9 .8
.8
(Rs. In 6 4 2 6
Crores)
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
Araku valley, which, besides contributing towards the environment, also paved the way for
livelihood support of tribal farmers for
growing coffee in this region.
Promotion of Education
Ensuring environmental sustainability.
Promoting gender equality and empowering women.
For each of the areas, it is evident from the illustrations mentioned above that M&M had made a very
good impact on the Society as a whole, which justifies its CSR spending as a true “Requirement”.
Few major changes ACF has made so far with their CSR activities: -
Their CSR activities on skills development increased income of cotton farmers by 22%.
The Infrastructure and Agro-based livelihood projects increased overall production under
system of rice intensification by 30%.
ACF made 100% toilet coverage in 146 villages through their initiative of sanitization a way
of life.
ACF multiplied social return of their investment by – 13X at Kodinar in Gujarat ,5X at
Rabriyawas in Rajasthan) and 8X at Darlaghat in Himachal Pradesh.
Their contribution on skill development activities increased the overall income of SEDI (Skill
and Entrepreneurship Development Institutes) graduates by 2403 million INR.
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
Despite mandated lower limit, ACF has spent more than its prescribed CSR budget in past 5 financial
years (as shown below) which implies this company involves in CSR activities with a vision of
creating sustainable, socially prosperous rural communities, which is evident from above illustration.
After the First World War, a new era of corporate philanthropy arose that drew business leaders into
the political fight for independence. In the period forthwith after Independence, the role of the Indian
State expanded greatly, and the corporate sector took a backseat in development efforts. During
(1950 – 1970s) period two philosophies guided namely mixed economy and socialistic pattern of
society. During this era the state ownership and legal requirements decided the corporate
responsibilities. After some time, the failures of the State to end poverty and support economic
growth led to dissatisfaction. The liberalisation of the Indian economy in 1991 ushered in a new
globalised economic environment, with rapid growth in overall wealth and it also triggered
inequality. The soaring gap between the wealthiest Indians and those at the bottom sparked
innovation in efforts by the corporate sector to address social problems. This also led the State to re-
think about how to pull in more support from the booming business world.
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
During 1990s because of realisation that with growing economic profits, businesses also have certain
societal roles to fulfil. This expected companies to perform according to “triple bottom line”
approach. i.e., 3Ps of sustainability - People, Planet, and Profit. In present times, CSR Matrix Model
(2015) focussed on Spread plus Spend is promoted by Government of India. Thus, CSR has been
coined recently in legal format via Companies Act 2013, but it has a beautiful history and an
embedded journey of philanthropic India.
1. TATA Trusts :
Tata Trusts, a pioneer entity in corporate social activities, was established in 1892 with Jamsetji Tata
setting up the JN Tata Endowment for higher education of Indians. Jamsetji introduced the apprentice
system at work, crèches and primary classes for children of women mill workers, and free medical
help to all employees in 1886. Other benefits for the well-being of his staff that were weaved into the
policies of several of his propitious ventures included gratuitous pension fund, provident fund,
maternity benefit allowance and a remuneration fund for accidents for all employees – all of which
were ahead of their times. Through self-help groups, it has engaged in women empowerment
activities, rural community development, income generation, and other social welfare programs. In
the field of education, it provides scholarships and endowments for numerous institutions. The Tata
group also engages in healthcare projects, such as the facilitation of child education, immunization,
and creation of awareness of AIDS. Even today, as per the latest Ministry of Corporate Affairs data,
two of Tata subsidiaries, namely, TCS & Tata Steel, feature in the top 10 CSR contributors for
FY2018-19.
2. Godrej:
The Godrej family made its first donation in 1926. Ardeshir Godrej, one of the founders of the
Godrej Group, through a spontaneous gesture, gave Rs 3 lakh for the upliftment of Harijans
(considered untouchables at the time). This was a period when donations of such scale were unheard
of; Mahatma Gandhi acknowledged this as the largest contribution to that cause, a particularly
important one for him. Since then, the Group’s charitable works have become more organized and
widespread. Soonabai Pirojsha Godrej Foundation set up in 1972.The trusts are entirely financed by
the family.
3. Mahindra & Mahindra:
Indian automobile industrialist Mahindra & Mahindra (M&M) established the K. C. Mahindra
Education Trust in 1954, followed by Mahindra Foundation in 1969 with the sole focus of promoting
education. The company primarily emphasized on education programs to assist economically and
socially disadvantaged communities.
4. ITC Group:
ITC Group, an amalgam with business interests across hotels, agriculture, FMCG, IT, and packaging
sectors has been that specialize in creating sustainable livelihood and environment protection
programs. The organization has been active to generate sustainable livelihood opportunities for 6
million people through its CSR activities. Their e-Choupal program, which focuses to attach rural
farmers through the net for procuring agriculture products, covers 40,000 villages and over four
million farmers. Additionally, as per a survey exhausted January 2015, mere 8 months from the
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
mandatory CSR spend law being passed, majority – 73% of survey participants already had a CSR
policy in situ. Only 10 percent of the respondents indicated that their Organization didn't undertake
CSR activities. Therefore, we will conclude that though the mandatory contribution law has brought
a greater number of companies, particularly mid-size entities, under its ambit, but the drive to figure
for the greater good of humanity is embedded in India’s DNA.
Indian companies are misusing public trusts to launder their CSR spending:
Some sections of India Inc may now be abusing these for laundering of black money. Some
companies are hiring charitable trusts to fabricate CSR spending. The fraud is simple. Suppose a
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
organization must spend Rs 10 crore on CSR, it writes out a cheque in favour of a trust that works in
any of the activities specified by the govt. The trust, after deducting its commission, discreetly
returns the profit cash to the officials or promoters, instantly turning Rs 10 crore of white money into
black. The middleman gets a cut also.
Police uncover CSR funding scam: MH Police police are on the lookout for unidentified accused
who forged documents of Hexaware Technologies and approached NGOs and charitable trusts across
the country with a proposal to produce CSR funds worth over ₹100 crore in name only of an IT firm.
The suspected person has approached minimum seven trusts in New Delhi, Maharashtra, Rajasthan,
Uttar Pradesh and Haryana.
1. An organization was funding health care spends under its CSR initiatives. The organization
later engaged a consultancy to conduct a review of its programme, results showed that a number of
the funds went to patients that didn’t exist.This type of ghost beneficiaries isn’t the sole kind of issue
companies face during a period of CSR spending, which is almost Rs 12,000 crore in 2018-19.
Numerous frauds related to procurement, construction, and end-use of funds, have had companies
engaging forensic auditors to closely monitor how money is spent by the beneficiaries.
2. An organization was funding water cooler facilities for primary schools in Delhi around 2017.
Every unit and other civil construction were to cost around Rs 2 lakh. But later found that
intermediaries had pocketed most of the CSR capital given by the organization, spending only Rs
50,000-60,000 per unit. Even in a very few cases, the units were missing entirely.
3. In another instance, an organization allocated capital for livelihood creation. The amount was
spent on a well, which was said to be helping the farmers’ irrigation needs. The well was there after
they visited with water at a depth of 20 metres, but the pipe that was said to possess been used for
irrigation was only 18 metres long, which is 2 metres short of the water surface. The wells couldn’t
have been used for irrigation purposes as was being claimed.
Absence of diligence in beneficiaries’, weak governance and limited management involvement are
contributing to moral lapses and fraud in CSR program implementations. Also, too much dependency
on third parties for execution of CSR programs, about 65 per cent of the implementation partners
don’t have a transparent diligence policy and only 45 per cent companies accepted that they’ve
checked the past record of implementation partners.
Corporate organisations still feel CSR spending a burden and commit serious fraud
The actual face of corporate companies may not be as real as it seems. In recent times, more than 196
companies came under the Radar of the Serious Fraud Investigation Office (SFIO).
1. In 2009, founder of Satyam Computer Services, Mr. Raju’s foundation carried out many
social activities, like setting up a call center for villagers without a college degree, brought
telemedicine, an ambulance service which reaches an emergency within 30 mins with all paramedical
equipment. Satyam was also awarded for its social activities by the Government. Later disclosed that
all this was done under the fraudulent bracket of CSR. Mr. Raju later confessed having fiddled
accounts and brushed significant amounts down the carpet in the name of CSR.
2. About three years back during the data boom period, Idea Telecommunications had
introduced a new scheme as part of their CSR campaign. Idea Launched an advertisement stating that
the company would provide 20 MB for every missed call, the data could be further transferred to the
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
rural schools for help in education. Idea promised for only 1 GB data for each school. Also, Idea had
involved its customer base for this CSR project. This campaign is more of a promotional activity
rather than a CSR by Idea telecom.
3. Manforce India also came under the radar of wrong CSR strategy when it campaigned its
brand and products using a controversial ad featuring Sunny Leone across Gujarat during Navratri
season. The advertisement evoked strong reactions from people with religious thought which led the
authorities to remove about 500 hoardings of “Play Safe in Navratri” a CSR initiative claimed by
Manforce India.
Ratan Tata former Chairman TATA group criticised, “We have a phenomenon which is meant to be
good but is going to be somewhat chaotic. India yet not have the infrastructure or foreseeing
capability to successfully introduce such a scheme. We’re seeing an enormous growth in NGOs, We
don’t yet know what kind of monitoring there’ll be, in terms of how well this money is used” and
“some venal organisations would see the mandatory donations as a form of taxation and would make
an attempt to short-circuit funds back into NGOs with which they are connected under the surface”.
CONCLUSION:
The Mandatory 2% CSR contribution provision of the Companies Act, 2013 have a cascading effect
on Indian economy which can be speculate in both positive and negative light. We can notice one of
the bad sides of the mandatory CSR is in increasing inefficiency by forcing business to divert from
the main objective of profit making to social welfare which by the words of Friedman is “taxing” and
it deprives the investors of mobilizing the economy. Further this government mandated intervention
will lead to the wastage of the economy which in real sense might not contribute to any real social
benefit.
While on the other hand when we try to see this in a positive light we observe this policy brings India
at par with other advanced liberalized economies such as the US in terms of India’s charitable giving
which is expected to be an optimal 2% of GDP (after the implementation of this CSR provision).
India has a vast area of opportunity for the development of human welfare and environmental
standards which are currently suffering due to increased deregulation, capitalization and privatization
in India and the India failing to improve standard of living for its population. Mandatory CSR
reduces such type of inefficiencies in the economy and there will be more human capital developed
such as education, training, healthcare etc. in the economy which will have a long term ridge effect
on Indian economy to accelerate the production of goods and services. The mandatory spending in
sectors like energy, environment and R&D will lead to being efficiently being utilised. It will
eventually boost the capital generation and hence the economy in the long run. Instead of not
increasing the taxes and rather allowing the companies to invest in their own CSR program can be
seen as a way to improve the economy as the companies in terms of their technical, local and
information capabilities are in a unique position to better provide social goods than the government.
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Mandatory Corporate Social Responsibility Spending: A Trap or Requirement
The act may not be perfect and may require certain amendments, but it is a product out of necessity
for economic justice in India. Corporations in India did not take the responsibility for the real cost of
their functioning. Many often pollute the environment and run away from human hazards that they
produce. 2% CSR policy envisions a system within which each industry would contribute in a very
apt manner according to their expertise. Chemical and oil companies might take environmental and
safety initiatives and technology companies might take tech-education initiatives. Thus, in a very
nutshell, this new policy may end up to be a boon for both the corporates and also the society,
propelling India towards the trail of equitable and sustainable growth but there is a strong
requirement to amend the law to make it more effective and a road map of how to use CSR amount
so that organization does not remain limited to allot the amount only but to ensure effective use of
that money, in which most corporations have a mandate.
Sources& References
1. Introduction
https://www.mca.gov.in/SearchableActs/Section135.htm
https://indiacsr.in/corporate-social-responsibility-csr-in-india/
2. Mandatory CSR Spending & its positive impact
Tata Chemicals
https://csrbox.org/India_Company_Tata-Chemicals-Limited-Maharashtra_5427
https://www.tatachemicals.com/investors/financial-reports/Yearly-reports
Mahindra & Mahindra
https://thecsrjournal.in/top-indian-companies-for-csr-2019/
https://www.marketingmind.in/top-4-companies-india-take-corporate-social-responsibility-csr-seriously/
https://www.avinashchandra.com/mahindra-and-mahindra-csr-activities/amp
http://ignited.in/a/57947
Ambuja Cement Foundation
http://www.ambujacementfoundation.org/
https://csrbox.org/India_Company_Ambuja-Cements-Limited-Maharashtra_5825
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