Reason for 22% jump in adherence to CSR by larger companies: Use of NGOs for execution

csrExcerpts from “Altruism rising: The CRISIL CSR Yearbook January 2017”, prepared by Maya Vengurlekar (Chief Operating Officer CRISIL Foundation), Ninad Ankleshwaria (Director CRISIL Global Analytical Center), Prabhash Choudhary (Associate Director Corporate Research, CRISIL Global Research & Analytics):

Between Gordon Gekko’s exhortation three decades back that “Greed is good. Greed is right. Greed works…” in the seminal movie Wall Street, and the ruthless competition of the nineties and the noughties, there was little time for ‘passive niceties’ such as spending on corporate social responsibility (CSR). That mindset, however, seems to be changing ever so slowly. After all, cold, relentless, profit pursuits had wrought the global financial crisis and much public indignation.

On their part, companies are also realising that businesses can sustain and thrive only if the communities they serve also endure and flourish. Given the milieu, it was great to note that in fiscal 2016, India Inc inched closer to the 2% CSR spending mandated by the Companies Act, 2013.

An analysis of 4,887 companies listed on the Bombay Stock Exchange showed as many as 1,505 of them, or 30%, met the criteria stipulated in the Companies Act for mandatory spending and reporting on CSR in fiscal 2016. Of this lot, 77% reported their CSR spend, compared with 75% of those eligible in fiscal 2015. And the purse-strings were opened wider: CSR spending was up 22% over fiscal 2015, and there were fewer companies (7% of the eligible companies compared with 10% in fiscal 2015) that did not disclose such details.

csr2The Companies Act, 2013, encourages corporates to spend at least 2% of their average net profit of the past three years on CSR activities. Fiscal 2016, the second year of implementation of the CSR obligation, saw 1,158, or 77% of the eligible 1,505, formally reporting such activity. Their CSR spending edged up to 1.64% in fiscal 2016, compared with 1.35% (by 1,024 companies) in fiscal 2015. The absolute money spent by them was over Rs 8,300 crore compared with Rs 6,800 crore in fiscal 2015. To reach the mandated 2% mark, these companies would have had to spend another Rs 1,835 crore. There were 133 companies that either didn’t spend a dime, or were still freezing their CSR agenda.

But even that’s an improvement given that 200 companies were in this zone in fiscal 2015. Of the 1,024 companies that figured in our analysis last year, 921 continued to meet the CSR eligibility criteria in 2016. Nearly two-thirds of them increased their CSR spend, while nearly one-third reduced. Encouragingly, 56% of them spent 2% or more compared with 50% in fiscal 2015.

The spending profile of larger companies improved significantly, with more than half of them adhering to the 2% mandate versus roughly a third last year. And smaller companies continued their enthusiastic run. There were two reasons for the 22 percentage point jump in adherence by the larger companies: One, they have started to surmount the challenge of large-scale interventions, which takes more time and effort. And two, they are using implementing agencies, mainly non-governmental organisations (NGOs), for execution.

Interestingly, over 84% of the large companies – with sales of Rs 10,000 crore or more – use implementing agencies. Somewhat counterintuitively, many smaller ones prefer going solo.

csr1Both public and private sector companies improved their CSR spending, with an increased proportion complying with the 2% stipulation. However, public sector undertakings made distinct progress.

On average, nearly half the companies across industries (except commodities) are still spending less than 2%. The Financial Services, IT and Telecom sectors, which generate a third of the net profit of listed companies, have been rather parsimonious.

In fiscal 2016, more than half of the companies spent 2% or more, except those from telecoms and IT. Commodities and diversified industries stood out, with 60.2% and 59.2%, respectively, of companies in the sector spending 2% or more.  Spending on technology interventions has seen more than eight-fold increase to Rs 128 crore from a mere Rs 15 crore in fiscal 2015. But a caveat is in order here: this could be because most companies had begun CSR planning in fiscal 2015, and spending materialised only in fiscal 2016. Then there were the tax incentives, too.

What’s good to see is education and healthcare getting the bulk of CSR spend. That’s heartening given that, as a percentage of total government expenditure, the money set aside in the Union Budget for 2015-16 – Rs 68,306 crore for education and Rs 44,516 crore for healthcare – is well below what other BRICS nations commit normatively. Something similar can be done in sports, where a minuscule Rs 1,592 crore was budgeted last fiscal so that India can harvest a better medals tally at the next Olympics in Tokyo.

csr3More than half the companies in all states spent 2% or more. The top 10 states make up 95.8% of the total CSR spend, with Maharashtra contributing 40.5%, followed by NCT of Delhi with 24.7%. Average CSR spend by company was the highest in NCT of Delhi, followed closely by Karnataka and Maharashtra.

Fiscal 2016 saw some companies announcing that they were joining hands for CSR activity, even as Prime Minister Narendra Modi himself weighed in on its many virtues on several occasions. Yet, actual instances of collaboration have been hard to come by.

Under the earlier CSR provision in the Companies Act, 2013, a company could conduct activities only on its own or through a holding, subsidiary or associate company. But this changed with a February 2014 notification of the Ministry of Corporate Affairs amending the provision. As per Rule 4(3), Companies (Corporate Social Responsibility Policy) Rules, 2014, “A company may also collaborate with other companies for undertaking projects or programmes or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programmes in accordance with these rules.”

Put simply, two companies can now undertake CSR activities jointly through a separate legal entity that could be a trust, society, or a third company. This is particularly beneficial to smaller firms that find it hard to spend on CSR projects directly given their relatively modest corpus. However, large corporates stand to gain no less since collaboration is the greatest force multiplier when it comes to making an impact.

We believe greater policy facilitation can be a huge fillip to collaboration given that corporates and their implementation partners are largely open to the idea. Based on survey responses, the issues that need to be addressed are as follows:

  • Lack of information on collaboration opportunities and partners: Many companies open to collaboration aren’t sure where to find like-minded, value-aligned partners. This would require the setting up of a real-time CSR activity grid to spot relevant opportunities.
  • Lack of clarity on rules: The refrain among corporates and NGOs is that there is little clarity on reporting when it comes to partnership projects. Clarifications would thus spur interest. − Lack of uniform tax incentives: Currently, only contributions to the Prime Minister’s Relief Fund, scientific research, rural development projects, skill development projects, agricultural extension projects as enlisted in Schedule VII enjoy exemptions under different sections of the Income Tax Act. The incentives can be uniformly applied to other segments, too.
  • Lack of clarity on working models: Collaboration among corporates for philanthropic work predates the CSR regulation. However, the pitch has queered since the 2% norm kicked in. With reporting made mandatory, corporates seem to be preferring to spend the money themselves rather than join hands. − The question of brand identity: This is a big hurdle, because collaborating corporates may not be able to call the project/s their own despite wholesome spending. Some good, working examples can illuminate the path for others. The alternative may be to incentivise collaboration.
  • Lack of management approval: We believe that with greater clarity on rules and incentives, and as working models become more visible and stable, corporates will be more forthcoming and actually seek out collaboration opportunities.

Download full report HERE

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