CSR: Welding conscience into the balance-sheet

Corporate Social Responsibility (CSR) appears to be the new route to corporate redemption.

 Or at worse, as the critics say, just the right aura of respectability to mask misdemeanours or allegations thereof and silence murmurs of radical or even Leftist disapproval. Or, maybe, a new way of assuaging one’s guilt conscience and “doing one’s bit for society” with a few accidental rewards expected on the way -- like social approval, and of course, rich dividends in the market? 

CSR’s appeal to government and common man alike lies in its ability to compel corporates to give something back to society. Corporates might understandably have chosen to read more into it. The new CSR norms of the Ministry of Corporate Affairs, which entails companies to mandatorily shell out at least 2 per cent of their three-year average annual profit towards CSR or social welfare activities, forces one to think on these lines.

As per the new CSR norms, companies with net worth of at least Rs 500 crore or minimum turnover of Rs 1,000 crore or those with net profit of at least Rs 5 crore, have to devote a minimum 2 per cent in CSR activity. Besides Indian companies, foreign companies registered in India have to comply with this norm. Funds donated to political parties and money spent for the benefit of the company’s own employees will not be counted as CSR. As part of deciding the CSR spending eligibility of a company, the profits from overseas branches and dividend received from other companies in India will be excluded from the net profit criteria.

When the norms came into force on April 1, 2014, around 8,000 companies in India came under the ambit of CSR compliance to facilitate investment in human development. This will translate into estimated spending of $1.9-$2.4 billion annually. Besides being considered as a mechanism to highlight a company’s social initiatives, the CSR policy should be part of a larger strategy to restore the position of companies in society.

“If we integrate it as a shared value in the business activity, the benefits emanating from it will be manifold. Besides increasing the competitiveness of the company, it will advance economic and social well being of communities. It will help increase the long-term sustainability of the company. All the more, it will improve cooperation between business, society and government,” said Kushal Sampath, President and CEO Dun & Bradstreet India.  

The new Companies Act has stipulated that for all CSR activities, companies should take the approval of their boards of directors in accordance with the CSR policy and the decision of a CSR Committee. Even though the norms allow a company to carry out CSR work through a registered trust or society or a separate company, the rules insist that surplus money arising out of CSR projects or programmes must not form part of the business profit of a company. It also allows companies to collaborate with other companies for CSR activities, though they would have to report spending on such projects separately. The Corporate Affairs Ministry also stipulates that companies can spend only up to 5 per cent of their total CSR expenditure on manpower in a single financial year.

On the programmes to be included under CSR activities, the ministry says that besides livelihood enhancement projects and steps for the benefit of armed forces veterans, rural development projects, promoting preventive healthcare and sanitation and safe drinking water projects come under the CSR ambit. Besides protection of national heritage, art and culture, setting up libraries and promotion and development of traditional arts and handicrafts, and activities aimed at reducing inequalities faced by socially and economically backward groups are included under CSR. Setting up of old age homes, daycare centres and such other facilities for senior citizens are also considered as CSR work. Environmental protection activities like ensuring ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water also fall under CSR activity. 

The government wand

The government has shown the leadership in CSR initiatives with its monitoring and reporting mechanisms via programmes like the National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business and the Global Reporting Initiative. In the forestry sector, the National Action Mission for Climate Change has eight missions under its fold in specific areas — solar energy, enhanced energy efficiency, sustainable habitats, water, sustaining the Himalayan ecosystem, Green India, sustainable agriculture and strategic knowledge for climate change.According to Vikram Bapat, former executive director, Tax & Regulatory Services with PricewaterhouseCoopers, the government should not be the only agency shouldering all social responsibilities despite the huge tax collections flowing in from private companies for public spending. 

“We know that lots of companies are earning crores in India, especially consumer goods companies. There is no harm in government collecting money in addition to the taxes which is mainly for planned expenditure. The new CSR norm can be used to meet unplanned expenditure and for sustainable development,” he said. Bapat opines that the new CSR norms are a moral obligation imposed on companies. “We know that in the past, companies like Tatas and Birlas spent lots of money for social cause. But the new norm is only a supplementary law for the already existing  practice”. Here it is more obligatory, though not mandatory. If companies are free to spend more than 2 per cent stipulated in the CSR rule, there will be some initiatives on their part to bring out innovative ways of spending money for making greater impact on society,”he said.

As per the findings of the report by Forest  Trends’ ‘Ecosystem Marketplace’ (state of the forest carbon markets, 2013), the private sector remains the largest source of demand in the carbon market, responsible for 70 per cent of market activity. Two out of every three carbon offsets were sold to multinational corporations. Here some 23 per cent of businesses were motivated by offset-inclusive CSR activities, and 20 per cent to “demonstrate climate  leadership” in their industry or send signals to regulators.

Even though CSR sounds mandatory, companies failing to spend money are required to give reasons for the same in their annual reports. Companies will have to draw shareholder attention to their non-compliance. “The new CSR norm is a positive step paving the way for the corporate sector to play a larger and more conscious role in shaping communities and participating in the social side of the economy. But some doomsayers will say that it does not fully cover responsibilities,” Sampath said.

Roadblocks on the anvil

According to State Bank of India Deputy General Manager L Rajan, CSR activities should be taken up by professionals. “SBI recruits professionals for undertanking CSR activities who will be sent for one year to rural areas. It will give them information on ground realities and later on help them formulate CSR programmes to tackle these,” said Rajan.

At a recent interaction on CSR activities, Manipal Foundation Chief Executive Officer Balachandran Warrier said, “There is no criteria that companies should be bracketed under their profit margin and other factors. We are very concerned about our CSR activities and do not want to confine it within 2 per cent. Since nature has given us everything it is our responsibility to give something back. We are broadening our CSR activities,” Warrier said.

But the doomsayers also find that there is no explicit provision in income tax law or specific guidance from the Central Board of Direct Taxes (CBDT) on tax treatment of CSR spends by corporates. They want the Finance Ministry, especially CBDT, to provide clarity on tax treatment of CSR contributions. According to Pavan Kumar Vijay, managing director of New Delhi-based legal and financial services firm Corporate Professionals Capital Ltd, the Finance ministry is yet to come to come up with tax exemptions for CSR activites. “Since it is notified by the Ministry, all CSR activities are taxable. We are expecting the new government to do something in this regard,” Vijay said.

The new regulation would mean that the top 100 companies by annual net sales in 2012 will spend Rs 5,611 crore on CSR  activities, compared with the Rs 1,765 crore that they are spending now, according to a March report published in Forbes India magazine. Government-owned companies account for a significant portion of CSR spending currently. 

The consensus is that with inspiration from leaderships and commitment across organisations, the CSR norms can establish a symbiotic link between corporations and communities and take forward the India growth story to new heights. As Ford chairman Bill Ford Junior said, “A good company delivers excellent goods and products. It also strives to make the world a better place.”