CSR Laws a Success in India, but Strong Growth Obscures Challenges

India is driving the way that multinational companies think about their corporate social responsibility (CSR) work. As one of the first countries to mandate CSR spending, India has seen social impact spending grow by nearly 50%[1] since implementing the “2% law” in 2014.[2]

This rapid growth in spending on India’s social impact projects outstrips growth in corporate profits.  In other words, an increasing number of top companies are spending more than their required 2% target.  As the Government of India lays out an ambitious slate of development goals, many companies have embraced CSR spending as a way to give back to local communities and position themselves – and industry broadly – as important GOI partners.  At major companies, CSR committees are growing in size and increasingly include company CEOs and Board directors, demonstrating a new integration of CSR with traditional business decision-making.

Companies are also taking more active ownership of the projects that their CSR spending supports, with an increasing number going beyond the legal mandate to disclose beneficiary and impact data.[3]  Over 90% of major companies now publicly report their CSR focus areas,[4] with many tied to companies’ strategic objectives.  In 2017-18, over 80% of these companies reported details of the people impacted by their projects, a 400% increase since 2014-15.  The number of companies publicly reporting their CSR expenditures has doubled over the same period. [5]

Future Outlook

While India’s CSR trends are largely positive, India will need to address some structural challenges as it seeks to transform the mindset of companies across the country.

• The Company Size Problem: Large companies have adapted quickly to the new CSR mandate, in most cases easily reaching (or exceeding) the mandated expenditure and structural requirements and aligning programs with broader corporate strategic goals. Smaller or less well-resourced companies have been less successful, in some cases reporting that they were unable to meet the 2% target because they “did not find the right project.”[6] While CSR spending is on the rise, that growth is primarily driven by the largest companies giving more.
• Focus on 2% Misses the Mark: In some cases, companies focus on meeting the minimum spending requirement to the exclusion of incorporating the mindset of social impact into their operations. While more companies met the 2% spending requirement in 2017 than prior years, there was a dip in compliance on governance and transparency markers compared with previous years.[7]
• NGOs Drive CSR Spending: With NGOs increasingly handling the bulk of CSR project spending – managing the funds of 74% of companies in 2017, compared with 62% in 2016[8] – due diligence is an increasing challenge. As a result, CSR funds tend to be concentrated with large and well-known NGOs.  This creates challenges for locally impactful but smaller NGOs across India.
• Clustering of CSR Spending: Over 60% of CSR-funded projects cluster in the healthcare and education fields.[9] While both are unquestionably important areas for development funding, this concentration means that only small proportions of CSR spending support areas like gender equality, urban development, environmental sustainability – and the host of other identified development priorities.
• …and Preferred Geographies: India’s legislative framework around CSR encourages companies to prioritize projects close to the facilities they operate.  As a result, industry-heavy Maharashtra receives 16% of CSR funds and the top 10 Indian states receive nearly 60% of total funding.[10]  The bottom five states receive just 3.5% of total CSR funds, creating a major gap in programming between wealthy and poor states.

Nearly five years after the 2% Law, India’s legislative framework on CSR remains in flux.  Last April, the Indian Ministry of Corporate Affairs set up a committee to review CSR compliance and provide recommended changes.  The submitted recommendations tighten the screws on companies, disallowing the practice of carrying forward unspent CSR funds to the next financial year and requiring stricter adherence of projects to the set list of CSR activities.  These changes may push more companies towards technical compliance, but it will take changing minds in the Boardroom for many companies to see a full-scale embrace of the CSR mindset across company operations.

The U.S.-India Business Council works with both a select group of non-profit organizations and the corporate partners who support and fund impactful programs across India.  We help our members connect to develop new initiatives and funding sources, and use USIBC events and social media platforms to highlight members’ CSR-focused work.

[1] https://qz.com/india/1508321/how-indian-companies-spend-on-csr/

[2] India’s revised Companies Act, 2013, which came into effect in April 2014, mandated a CSR spend of 2% of average net profits for the proceeding three years for companies with a 1) net worth of INR500 crore ($70.25 million) 2) turnover of INR1,000 crore ($140.5 million) or 3) net profits of INR5 crore ($700,000) during the preceding financial year.  Qualifying companies were also required to stand up a CSR Committee of the Board of Directors and disclose CSR details in the Director’s report.

[3]Annual CSR Tracker 2017: From Commitment to Impact, Confederation of India Industry (CII)- ITC Centre of Excellence for Sustainable Development

[4] India’s CSR Reporting Survey 2018, KPMG India

[5] India’s CSR Reporting Survey 2018, KPMG India

[6] Annual CSR Tracker 2017, CII

[7] Annual CSR Tracker 2017, CII

[8] The CRISIL CSR Yearbook: Entrusted Philanthropy – Implementing Agencies are Increasingly Executing Corporate Mandates, CRISIL Foundation, March 2018

[9] Annual CSR Tracker 2017, CII

[10] CSR In India: The Numbers Do Add Up, NGOBox and CSRBox, July 2018