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CSR: have increasing costs dampened efforts?

The 2013 Companies Act has brought essential attention and structure to the CSR landscape in India. However, the Act’s complex compliance regulations have increased both the monetary and social costs of carrying out corporate social responsibility (CSR) activities. So, have the new regulations done more harm than good?

CSR is not a new to India; many of the country’s larger companies have  undertaken vast social welfare projects long before CSR became a buzzword. (See linked article on the Indian history of philanthropy). But mandatory CSR has increased the hurdles businesses must clear: besides the 2% companies are compelled to spend on CSR, the Act also requires corporations to form a CSR board, consisting, if possible, of one independent director; it further mandates that companies create a defined and comprehensive CSR policy. Companies are also obligated to report the conclusions of their CSR efforts on their websites and to their shareholders in an annual report.

Bahram Vakil, one of the founding partners of AZB & Partners, speaks of the uphill “…cost of complying with the paperwork and the governance and audit…” Lawyers have to be called in regularly to ensure that a company’s CSR activities fall within the parameters set forth by the government, to aid companies in drafting their CSR policies, to help companies navigate the interplay between the Companies Act and other legislation such as environmental laws and the Foreign Contribution Regulation Act, to assist with pooling funds together, and to confirm that companies are complying with the specified reporting obligations.

The increased monetary cost of sustaining CSR programs and complying with the law have not dampened the CSR efforts of larger companies, with high profits and structured means of carrying out CSR, such as in-house foundations. They may, however, have changed track, and begun molding efforts to primarily fund activities prescribed under the Act. Richa Roy, an associate at AZB & Partners, notes, “We’ve also seen companies that would have otherwise given to something which may not fall within the four squares of the requirements under the Act, will change focus and find something that ticks the box.”

Companies that chose to donate a lump-sum to a government-sanctioned CSR activity, such as the Prime Minister’s National relief fund, have found it easier and less expensive, and such donations comes with a bigger tax exemption.  Xerxes Anita, partner at Wadia Ghandy and Co, explains that this is an “easy fix for a corporation because you get a CSR credit…In other instances ”…[for companies that] don’t have that kind of infrastructure in place to be able to monitor [and] vet NGOs, this is an easy way to meet their obligations.”

However, the cost of compliance with the Act is not solely monetary, it is also social. The Act has shifted the focus of CSR from improving the social welfare of India’s citizens in sincere, meaningful, and varied ways to drafting, calculating, spending and reporting. The Act’s external 2% spending requirement has reduced the definition of CSR to “donating to the needy”. At the same time, the requirements don’t include other facets of CSR like including employees and sustaining the environment, have forced these issues to the background.

Many companies want quantifiable impact they can report on their websites and to their shareholders. Of lesser concern to companies is internal CSR, like engaging the rest of the company in charitable efforts (through volunteering), or initiating programs within the company that ensure standard business practices which have a positive impact on the environment—and these are harder to quantify and report.

The Companies Act may not have created these attitudes; companies were concerned with the visibility of their projects even before the Act. For now, therefore, the impact of the law appears to be a mixed bag.

Alexa Kardos is a junior at Lehigh University, Pennsylvania, U.S., double majoring in political science and economics.  She is especially interested in studying how governments design and implement programmes benefit economically disadvantaged citizens.

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