Corporate Social Responsibility was made mandatory under the Companies Act to engage businesses in complementing the state’s developmental activities. Explain why its impact so far has been limited. (15 marks)

Corporate Social Responsibility was made mandatory under the Companies Act to engage businesses in complementing the state’s developmental activities. Explain why its impact so far has been limited. (15 marks)

Approach:

  • Introduce briefly with CSR
  • Briefly note how the Companies Act of 2013 made CSR mandatory
  • Explain the shortcomings like lack of expertise, few sectors and states getting most of the funds etc.
  • Suggest a way ahead for more optimal use of CSR funds

Telegram: https://t.me/SimplifiedIAS

Model Answer :

The development goals of the country are immense and the challenges can only be overcome with the effort of every stakeholder in the ecosystem. Corporate Social Responsibility (CSR) signifies the responsibility of the corporations to contribute towards economic, social and environmental development that creates positive impact on society at large.

Companies Act:

The inclusion of CSR in Companies Act, 2013 under Section 135 is an attempt by the government to engage the businesses with the national development agenda, to complement state’s developmental activities. As per the Companies Act, companies (meeting certain criteria of net worth or profits) need to spend at least 2% of its average net profit for previous three years on CSR activities.

Shortcomings:

It was hoped that the corporate sector will come up with transformative solutions that will scale up impact across the country. While companies have spent about 6000 crore, 7500 crore and 8500 crore in 2014, 2015 and 2016 respectively on eligible CSR activities, only limited impact has been made in the development issues that India faces. There are many shortcomings that need to be addressed before CSR becomes a powerful force for change.

  • Most of the funds allotted to just few sectors: The Ministry of Corporate Affairs (MCA) data shows that the bulk of the CSR money (almost 75%) is allocated to just three sectors—education, health (including sanitation and water) and rural poverty.
  • Few states getting most of the funds: The MCA data also reveals that almost 40% of the money goes to just a few relatively well-developed states—Maharashtra, Gujarat, Karnataka, Tamil Nadu, Andhra Pradesh and Telangana as India’s most profitable companies invest mostly in these states.
    • The Section 135(5) of the Companies Act encourages companies to “give preference to the local area and areas around where it operates, for spending the amount earmarked for CSR activities.” This means that the current model is not the most efficient at alleviating the existing regional and social disparities.
  • Lack of expertise: Corporates have limited experience and expertise in addressing the complexities of social development. Many of the companies made their CSR investments to the Prime Minister’s Relief Fund.
  • The usage of funds does not seem optimal: The current usage of CSR funds is too individualistic, with every company doing its own thing.

Way ahead:

The government is responsible for social development. Corporates cannot replace them in this role but they can make a meaningful contribution through optimal use of their resources.

  • To ensure more compliance and effectiveness of CSR, the National CSR Data Portal and Corporate Data Portal were launched in 2018 to provide open access to data to public. It will drive accountability and transparency for corporate India. They will also facilitate social audit of CSR projects, besides bringing together CSR contributors, implementers and beneficiaries and aligning CSR activities with national development goals.
  • The idea of corporates pooling their CSR funds into a common CSR trust and allowing an autonomous body to manage and disburse the funds may also be explored.

Subjects : Current Affairs

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