The introduction of mandatory CSR under Section 135 of the Companies Act, 2013, was a pioneering move by India, making it the first country to mandate CSR for eligible companies. After a decade of implementation, it is crucial to assess its progress, challenges, and overall impact on businesses and society.

Key Features of CSR under the Companies Act, 2013

Applicability:
CSR is mandatory for companies meeting any of the following thresholds:

    • Net worth of ₹500 crore or more.
    • Turnover of ₹1,000 crore or more.
    • Net profit of ₹5 crore or more during the immediately preceding financial year.

    Expenditure:
    Eligible companies must spend at least 2% of their average net profits of the preceding three financial years on CSR activities.

    Activities:
    CSR activities are listed under Schedule VII of the Act and include:

      • Poverty alleviation
      • Education
      • Health care
      • Environmental sustainability
      • Rural development
      • Promotion of gender equality and more.

      Reporting and Compliance:

        • Companies must establish a CSR committee to formulate and monitor policies.
        • Non-compliance requires an explanation in the board’s report (“comply or explain” approach).
        • Recent amendments have made non-spending without justification a punishable offense.

        Unspent Funds:

          • Funds not spent within a financial year must be transferred to specific funds or carried forward for multi-year projects.

          Achievements

          1. Increased Social Spending

          CSR has contributed to significant funding for social and environmental causes. Between 2014 and 2022, companies spent over ₹1 trillion on CSR activities, impacting sectors like education, health, sanitation, and rural development.

          2. Institutionalization of CSR

          The mandate has encouraged businesses to integrate social responsibility into their core strategies. It has formalized CSR spending and brought accountability and transparency through mandatory reporting.

          3. Public-Private Partnerships

          CSR initiatives have enhanced collaboration between the corporate sector and governments, NGOs, and civil society organizations, especially in health care, education, and disaster management.

          4. Regional Development

          CSR has bridged gaps in regions lacking state support, especially in backward and aspirational districts. For example, CSR spending in rural development has improved infrastructure and livelihoods in remote areas.

          5. Focused Interventions

          The law’s flexibility allows companies to align their CSR projects with their expertise. For instance:

          • Tech companies focus on digital literacy.
          • Pharmaceutical firms emphasize health care.

          Challenges

          1. Geographical Imbalance

          A significant proportion of CSR funds are concentrated in metropolitan and industrially developed states like Maharashtra, Karnataka, and Gujarat, while underserved states like Bihar, Jharkhand, and the Northeast receive limited attention.

          2. Compliance vs. Commitment

          For some companies, CSR is treated as a compliance requirement rather than a genuine commitment to social development. This undermines the spirit of the law.

          3. Limited Impact Measurement

          Despite significant spending, mechanisms to measure the long-term impact of CSR projects remain inadequate. Companies often report outputs (e.g., the number of beneficiaries) but not outcomes (e.g., improvement in quality of life).

          4. Unspent Funds and Bureaucratic Delays

          A considerable portion of CSR funds remains unspent due to:

          • Lack of clarity on project selection.
          • Delays in identifying credible implementing partners.
          • Bureaucratic hurdles in fund utilization.

          5. Small and Medium Enterprises (SMEs)

          While SMEs are exempt from mandatory CSR, their exclusion limits the scope of CSR initiatives, especially in niche sectors.

          6. Risk of Tokenism

          Some companies focus on high-visibility activities like tree-planting drives or distributing goods rather than addressing systemic issues like education quality or climate change.

          Recent Reforms and Trends

          1. Focus on Impact Assessment:
            Companies spending ₹10 crore or more annually on CSR are required to conduct impact assessments of their projects. This aims to ensure accountability and better utilization of funds.
          2. Increased Penalties:
            Non-compliance with CSR norms now attracts financial penalties, signaling the government’s intent to enforce stricter adherence.
          3. Collaborative CSR:
            The trend of pooling resources through industry coalitions or partnerships with government initiatives (e.g., Aspirational Districts Programme) is growing.
          4. Thematic Focus:
            Post-pandemic, there has been a surge in CSR funding for health care, sanitation, and digital education. Climate action and sustainability are also emerging priorities.
          5. Integration of ESG (Environmental, Social, Governance):
            Companies are increasingly aligning their CSR activities with global ESG standards, enhancing their credibility and investor appeal.

          Way Forward

          1. Geographical Equity:
            The government can incentivize CSR spending in underserved regions through tax benefits or recognition programs.
          2. Capacity Building:
            Support NGOs and grassroots organizations with technical training to enhance the quality and scalability of CSR projects.
          3. Strengthening Impact Evaluation:
            Establish standardized metrics for measuring outcomes, not just outputs, to ensure meaningful interventions.
          4. Focus on Sustainability:
            Encourage multi-year projects addressing systemic issues like climate resilience, skill development, and women’s empowerment.
          5. Engaging SMEs:
            Explore voluntary CSR programs for SMEs, encouraging them to participate in local development projects.
          6. Policy Simplification:
            Reduce bureaucratic hurdles and provide clear guidelines for compliance to facilitate smoother implementation of CSR activities.

          Conclusion

          The mandatory CSR provision under the Companies Act, 2013, has laid the foundation for a robust partnership between corporates and society. While it has achieved significant milestones, addressing its challenges and enhancing its focus on equity and impact will be crucial for driving inclusive and sustainable development. By aligning CSR with national priorities and global sustainability goals, India can ensure that businesses play a transformative role in building a better future.

          Published by Pragyanxetu

          One Earth. One Future