CSR Clause in the Companies Act:
Four Years After

Clause 135 of the Indian Companies Act, 2013, or the CSR Clause came into effect from April 1, 2014. The practices have been studied by researchers and think tanks.

Four years hence, this piece explores the impact and practice of the CSR Clause based on various analysis reports available in the public domain, from conversations with NGOs and from the experience of Tatas, a corporate group that has been practising CSR well before it was legislated (where the author led the sustainability function till August 2017).

Understanding CSR

In India, CSR was always understood as community development or corporate philanthropy or corporate initiatives in the community and the CSR Clause has merely codified this. This is different from the global understanding of CSR, which is more akin to terms like sustainability and triple bottom line.

Fundamentally, CSR was, and continues to be about social and human development. Therefore, in terms of purpose, CSR is similar to the work that NGOs do. Arguably, CSR approaches do not reflect state-of-the-art in terms of development thinking, perhaps because development is not the core competence of companies.

However, what significantly differentiates CSR from NGO work is that it is driven by a company’s thinking, priorities and worldview. While companies do want their CSR activities to positively impact communities, most look for a ‘business benefit’. This term ‘business benefit’ needs to be better understood. Companies do not expect their CSR activities to generate profits. However, they do look for benefits such as ‘the community’s license to operate’ (critical for manufacturing companies who focus on communities and the environment around their plants to mitigate the negative impacts that is inherent in manufacturing) and deepening employee engagement (which enables them to attract and retain talent as increasingly, employees want to work with companies that care).

Government’s thinking behind the CSR Clause

What drove the government to introduce Clause 135 into the Companies Act? The stated thinking was that since companies in post-liberalised India were engines of growth, they had a responsibility to contribute to inclusive development as they had certain abilities, skills and competencies – organisation and management, result-orientation, efficiency focus to name a few – that would enhance the quality of social development initiatives which were hitherto the domain of government and NGOs.

Critics, however, point out that this clause was to defray the criticism that the government was trying to push a neo-liberal agenda and wanted to project themselves as pro-poor rather than pro-business.

Lessons from Practice

So, what does the practice tell us? These are discussed below, based on reports from 3 principal sources - CSR Tracker published by CII’s Centre for Excellence in Sustainable Development, KPMG’s report that analyses CSR performance of the top 100 listed companies and the reports of the civil society network.

•      Compliance

All reports suggest that compliance with the provisions of the clause and rules has been steadily improving. According to various reports, procedures like the formation of the CSR Committee with at least 1 independent director, at least 3 board members, the formulation of a CSR policy and its availability on the company website and publicly available CSR reports were complied with by 95-99% of the companies.

•      Spends

Even spending has shown increase and with CII-CESD’s report for 2016-17 – CSR Tracker 2017 – showing 92% spends and KPMG’s report of top 100 listed companies showing 97% spend in the same year. In fact, the KPMG report indicates that 22 of the top 100 companies spent more than the 2% (twice as much as in the previous years). Interestingly, contributions to the Prime Minister’s Relief Fund as a percentage of total CSR spends, very small to begin, have been steadily declining over the years, suggesting that it is a last resort for most companies.

•      Geographies and sectors of spend

The analysis suggests that CSR spends were concentrated in a few geographies and sectors. Five Indian states received from 60% to 70% of the total spends and these were not necessarily the ones that were most underdeveloped - a criticism of the local area preference of Clause 135. The KPMG report observed that 5 states with 15% of underdeveloped districts received 70% of CSR funds while 6 states with 60% of underdeveloped districts received only 15% of CSR funds.

In terms of sectors too, there was a definite preference. Three sectors – health (including water and sanitation), education (including skills) and rural development attracted 70% of CSR funds. This is not surprising in itself, given India’s poor performance in these sectors but when this is read along with an observation in Corporate Watch’s report that a negligible number of companies disclosed that they had undertaken a community needs assessment before launching their CSR interventions, it may well suggest that CSR tended to be driven top-down rather than the more logical bottom-up.

There is not enough data on the actual activities done as a part of CSR but indications are that many of them are pretty routine e.g. school uniforms, scholarships and skilling under education, mobile health camps, building toilets and blood donations camps under health and so on. Companies have traditionally preferred to build physical structures as these are, quite literally, concrete but also because, as the cynics would say, they can brand it!

•      Beneficiaries not defined or counted

Who benefits from CSR? Interestingly, the mandated reporting format neither asks for numbers or profile of those who benefit. Data suggests that more and more companies are disclosing the numbers, in some cases even project-wise, which is of course useful. But this is in an aggregated way and not by gender, ethnicity or disability which many consider the 3 markers of social exclusion and hence poverty. In the absence of this, it is very difficult to make even preliminary assessments as to who benefits from CSR.

•      Mode of implementation

The CSR Rules have indicated several ways that companies can implement their CSR activities – directly though their own trusts / foundations, in partnership with other companies and through implementing partners. The KPMG report found that 91 of the top 100 companies preferred working through NGOs or a combination of its own trusts / foundation and NGOs. The CII CESD report, which covered a larger number of companies, indicated that 53% of the 700 or so companies that disclosed this data also preferred these two routes. Thus, NGOs are a key element of the mix. This also suggests that the fear that all companies will set their own foundations is not supported by evidence, and this is logical because an implementing foundation is viable only if the CSR spend is significant. Most large and old companies like the Tata group set up their own implementing foundations largely because in those days, grass-root NGOs were few and far between.

Opportunities for Improvement

Some suggested modifications to the CSR Clause are given below:

• CSR must be seen in the larger context of business in society.

• The local area preference suggestion in Clause CSR sometimes inhibits companies from supporting work beyond their ‘backyards’ and hence should be de-emphasised.

• The reporting format should be reviewed to include items such as population benefited.

• The 5% limit on administrative expenses must be reviewed and clarified so that this is not used to restrict NGO expenditures to unreasonable limits.

There is no doubt that Clause 135 has given company employees and the board an opportunity to reflect on the role of the company beyond making profits and explore how these profits can be used to benefit society. The track record of the past few years suggests that it has both good parts and opportunities for improvement and the latter need to be urgently addressed. Financially, there is little doubt that CSR funds cannot solve India’s development challenges. Estimates suggest that CSR funds will amount to only 2-5% of the government’s development expenditure. CSR’s biggest contribution perhaps is to influence and shift the outlook of the company from merely thinking ‘how much profits’ to thinking on ‘how its profits can be used for the benefit of the society and the environment. ■

End Note:
This article has been adapted from an essay written by the author for a conference organised in June 2018 by the Duke Human Rights Centre at Keenan Institute for Ethics, Duke University, USA entitled Four Years On: Taking Stock of India’s Mandatory Corporate Social Responsibility Legislation

Shankar Venkateswaran
svenkateswaran@devalt.org

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