Challenges of the 2% CSR Paradigm

Corporates demand financial accountability from their NGO partners. But the boot will soon likely be on the other foot, with higher financial outlays, investors are sure to ask companies for similar accountability on how the money is used.

Sanjay Bapat
Updated: Mar 21, 2013 08:26:54 AM UTC

Sanjay Bapat is the founder of and He started his career on the shop floor of Godrej Soaps after his engineering and followed it up with an MMS from Mumbai University. Later he worked in the advertising industry. In his last job, he worked on Social PR for P&G’s PEACE programme, introduced International Business Simulation Games from MCC International, Amsterdam, worked on India Young Business Achiever Programme to identify first generation entrepreneurs below 40 and was part of the team from Wolf Olins which worked on the Corporate Identity programme for the Tata Group. Sanjay has a copyright on the concept of CSR Tree which is an MIS, Reporting and Benchmarking system. He plans to work on capacity building of Corporates and NGOs using this concept and promote to a global audience. Having led teams which have facilitated over 300,000 employee volunteering hours, he hopes to promote core competency volunteering. Sanjay is an ASHOKA Fellow and an advisory member on India Japan Global Business Summit.

As the latest Forbes India cover story shows- we expect Rs 63 billion to flow in from India’s top 500 listed companies, going by the government’s 2% norm. If we expand this list to the top 1,000 corporations, add MNCs, co-operative banks and SMEs, then we are talking about at least Rs 120 billion. Not a bad number for a country of 1.2 billion. If I further extrapolate this calculation by geography- each of India’s 660 districts could get over Rs 18 crore of this investment.

Though the bill promises to bring a paradigm shift- it will also change the face of CSR activity as we know it. Both the primary stakeholders are tentative about the Bill, and its not surprising that doubts still remain. Lets take a look at some of these.

Challenges for the Government The new Companies Bill has been passed only in the Lok Sabha.  One is not sure if it will be passed by the Upper house in this session or the next. Or indeed, if we will have to wait for the next government before it becomes law. From my conversations with senior corporate executives- there are many doubts that remain about the new bill. Here are some of the most prominent ones-

# Will the charity or donations be made mandatory eventually? The current draft Bill only recommends the 2% spend. But is there a chance that this could be made compulsory in the future. It would be better if there was clarity on this.

# Is the 2% PAT related to the profits generated in India or the corporation’s overall profit from global operations? As India Inc’s revenues from international operations grow, this question becomes very relevant.

# If only prescribed activities under Schedule VII of Section 135 (Health, education, skill development) are considered as CSR, what about corporate support for issues not covered under this schedule? Should they stop their investments and focus only on mandated areas? The NGOs and communities they support, could find themselves stranded if this happens.

Most of the activities mentioned in the Schedule VII seem to come from the Millennium Development Goals, our national commitment for 2015. Post this, will the priorities change and if they do, companies could find it difficult abandon their communities.

# Can companies claim the financial equivalent of volunteering hours as part of their CSR spend?

# Can investment in CSR infrastructure related to the activities mentioned in Schedule VII be accepted?

Challenges for Indian companies
An analysis of CSR spend of the top 500 listed companies in India shows most do not spend even 1% of their PAT on CSR. Increasing this to the government recommendation, will in most cases, mean more than doubling CSR budgets. Lets analyse some of the immediate implications of this.

# Many stakeholders accuse companies of treating CSR as a kind of public relations exercise. They say companies do not let go of the smallest opportunity to get mileage from CSR. As of now, not even 50% of the top 100 report their CSR budgets in their annual report. And whatever is reported could well be inaccurate, because there are no norms yet, on what should be included.

# Corporates demand financial accountability from their NGO partners. And rightly so. But the boot will soon likely be on the other foot, with increased spends- investors are sure to ask companies for similar accountability on how the money is used. Like their global counterparts, Indian business needs to engage with the investors and other stakeholders and report this much better.

# Companies should look at CSR as a 360 degree perspective- including their business processes, people & planet policies, regulations and compliance. Right now it is largely charity and donations.

# CSR teams in most companies are headed by people with corporate communications or HR background. These teams are usually small and get little time to update themselves with the Social, Environmental & Economic Canvas of India. This, and the pressure on these teams to please every branch or location with some CSR budget, means that of the 660 districts of India, only 100 odd districts gets CSR funding. Sadly, the activity does not reach the really backward areas.

# While MNCs talk about thinking global and acting local, most seem to follow the same philanthropic issues as their parent companies. While India needs investments in a vast spectrum, these funds have the opportunity to get invested in lots of issues to fill the gaps in development funding.

# Most corporates depend on their NGO partners to arrive at the number of beneficiaries. Only a few carry out external audits to figure out the real impact. And in many cases, the donation amounts are so small, that it is difficult even to measure them. Add to this, the policy of many companies to support NGOs for not more than three years. How on earth, can you ever arrive at the impact of your money, which supported a student only for three years!

# Corporates often underplay the strength of their biggest asset – their employees, when it comes to engaging with communities. Analyse the volunteering hours reported by companies and you will find that most activity is limited to one global community day. They rarely promote core competency volunteering, where employees can share their business competencies with NGO partners.  If this is done- it will surely ensure greater return on social investments.

The thoughts and opinions shared here are of the author.

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