Understanding the implications of the new CSR rules: will it lead to a rise in CSR agencies?
By Prof. Utkarsh Majmudar and Namrata Rana
India’s new CSR law, which requires a mandatory spend of two percent of net profits went into effect this week.
It is estimated that $3 billion of capital will be generated annually through the money spent by 16,000 companies on CSR. The Companies Act mandates CSR activities for both Indian companies and foreign companies registered in India. In addition, the new rule also requires involvement of senior level staff as well as mandatory disclosure of these activities and the creation of:
- A CSR Committee;
- Reporting details of all CSR initiatives undertaken by the company; and,
- A CSR Policy that details which activities will be undertaken by the company and what budget will be spent on them.
Some key provisions under the new rule:
1. CSR expenditure to exclude those incurred in normal course of business
Under the new rule, CSR expenditure companies would need to clearly distinguish those activities which are undertaken specifically in pursuance of normal course of business and those that are done incrementally as part of the CSR initiatives. Expenses incurred in the normal course of business do not classify as CSR expenses – even though the expenditure is for CSR related purposes. The rules also lay down some specific areas where CSR budgets can be spent.
2. Areas where the CSR Budget can be spent
- Eradicating hunger, poverty and malnutrition, promoting preventative health care and sanitation and making available safe drinking water;
- Promoting education including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
- Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and other such facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
- Ensuring environmental sustainability, ecological balance, protections of flora and fauna, animal welfare, agroforestry, conversation of natural resources and maintaining quality of soil, air and water;
- Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
- Measures for the benefit of armed forces veterans, war widows and their dependents;
- Training to promote rural sports, regionally recognized sports, Paralympics sports;
- Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;
- Contributions or funds provided by technology incubators located within academic institutions which are approved by the Central Government; and,
- Rural development projects.
3. Foreign companies are covered under CSR provisions
Foreign companies are expected to contribute to CSR based on the profits of their Indian business operations.
As per the new guidelines, an annual filing/return detailing project-wise spend needs to be submitted. The government does not intend to audit CSR spends, relying instead on consumers, media and civil society to provide the necessary checks on corporate activities and the disclosure of spending details. But corporations would need to assess and audit their projects either on their own or through qualified third party assessors/auditors appointed by the company.
5. Pooling together of resources to reach scale
In an earlier article, we spoke of the possibility of various companies pooling together CSR resources to solve common problems. The rules have given legitimacy to this idea and pooling of resources enabling companies to enhance their spend capacity to take bigger CSR project is now a provision under the rules.
- Companies belonging to the same group can set up a trust of not for profit company to undertake CSR.
- Companies can also join hands with other companies to undertake CSR projects jointly.
6. Surplus from CSR activities not business profits of company
Surpluses arising from CSR activities are not to be considered as business profits of the company and may therefore need to be ploughed back into CSR activities.
Implications of the New CSR Rules
Corporate India has a role to play in the global stage and in their contribution to society. In a connected globalized world, intent and action counts. And this new bill is an opportunity. The task, now, is to convert the opportunity to tangible outcomes that not only comply with the law but also highlight the larger vision of the organization.
Scarcity of Talent
For many corporates this strategic shift is difficult and is compounded by the scarcity of CSR talent to create scalable long-term strategy and implement it. While several thousand jobs will be created because of this Bill, several CSR jobs at all levels lie vacant. The big questions in these nascent CSR departments include what causes to support, how to scale efforts and how to implement without losing focus?
Rise of the CSR Agency
With CSR spends expected to be large and trained resources scarce, growing the CSR department will be a slow process at most companies initially. Many are predicting the rise of the CSR agency, an intermediary firm, which will serve as the middleman - taking the funds and distributing them to NGOs – and ensuring efforts are consistent, being accounted for and scalable. The agency could also help companies with other aspects like training, verification, impact assessment and ongoing audits.
Reporting and Disclosure
The realization that CSR projects can no longer be charitable contributions but need to be accountable for impact is slowly hitting home. The fact that they can have a significant impact on brand and corporate reputation is worrying for many.
Our study of sustainability reports indicates that the quality of reporting leaves much to be desired. With information flowing from both internal as well as external sources (e.g., CSR agencies) ensuring high quality reportage will be complex. This may lead to the growth of specialized agencies (e.g., CSR auditors) to ensure high quality reporting and minimize the information asymmetry that currently exists – much like the American ecosystem, which has mushroomed a marketplace of organizations and agencies to support corporations' efforts in CSR reporting, verification, etc.
This is an exciting time for India and CSR. The future is uncertain but there is also hope – that corporations will finally do more of the right things and tell more!
About the Authors:
Dr. Utkarsh Majmudar has worked with large corporations and held various positions in academics and administration at some of the top business schools in India (IIM Lucknow, IIM Udaipur and IIM Bangalore). His interest areas include corporate finance and CSR.
Namrata Rana is a Director at Futurescape. She has a Masters in Sustainability from Cambridge and an MBA degree from IIM Ahmedabad. She has worked extensively in sustainability, CSR, livelihoods, healthcare and mobility. She also conducts workshops on CSR and sustainability practices of businesses.