CSR Spends Climb, yet Corporate Reputations show little Improvement

Corporate Social Responsibility (CSR) mandates in India have led to a significant increase in spending by companies. 

• However, despite these substantial investments, the public perception of corporate entities remains largely negative, indicating a disconnect between financial contributions and improved reputation. 

Genesis of Mandatory CSR in India

• Underlying Principle: CSR is based on the idea that companies, having benefited from society’s resources, infrastructure, and workforce, should contribute to its welfare after achieving financial stability.
• Voluntary to Mandatory Shift: While corporate responsibility practices existed voluntarily, the Companies Act, 2013 made CSR compulsory for companies meeting specific financial thresholds.
• Trigger For mandatory CSR: A series of corporate controversies before 2013 damaged public confidence in business ethics and governance.
  • Vedanta Controversy: Vedanta, an Anil Agarwal company, faced severe backlash for its plans to mine in Odisha’s Niyamgiri hills, sacred to the Dongariya Kondh tribal community. 
    • The company was accused of prioritising profit over environmental and tribal rights, a stance ultimately rejected by the Supreme Court.
  • No-Go Area Dispute: Pressure from the mining lobby led to concerns that companies prioritised profit over environmental protection even in ecologically sensitive areas earmarked as ‘No-Go Areas’ for mining.
  • Special Economic Zone (SEZ) Policy (2005): Although intended to boost investment, this policy led to widespread, indiscriminate land acquisition from farmers. 
    • Many farmers received inadequate compensation or were defrauded, severely damaging the reputation of developers like DLF.
  • Satyam Scandal: This massive corporate fraud, perpetrated by Satyam Computer’s chairman Ramalinga Raju, involved multi-crore accounting irregularities. 
    • It casted doubts over the entire IT industry and raised serious questions about corporate governance, including the role of independent directors and auditors.
• Corrective Legislative Measure: Section 135 of the Companies Act, 2013 institutionalised CSR obligations to: ensure companies contribute to social and environmental causes, Strengthen corporate governance, Restore public trust in the corporate sector.

Mandatory CSR: Criteria and Expenditure Trends

• The CSR mandate applies to companies meeting any of the following criteria:
  • Net worth of ₹500 crore or more.
  • Turnover of ₹1000 crore or more.
  • Profit of ₹5 crore or more.
• Companies fulfilling these criteria are required to spend 2% of their average net profit from the preceding three financial years on CSR activities. 
• Failure to do so necessitates a clear explanation. 
• Approved areas for CSR spending include education, health, poverty alleviation, and environmental protection.

Impact of Mandatory CSR on Spending

• Rising Expenditure: In Financial Year 2024, CSR spending reached ₹17,967 crore, marking a 16% increase compared to the previous year.
• High Compliance: Approximately 98% of companies are fulfilling their CSR targets.
• Exceeding Mandates: Almost 50% of companies are spending more than the legally mandated 2%.

Benefits of Mandatory CSR

Beyond just increasing expenditure, mandatory CSR has brought several positive outcomes:

• Lifeline for NGOs: With foreign funding becoming increasingly difficult due to stricter Foreign Contribution (Regulation) Act (FCRA) regulations, domestic CSR funds have emerged as a crucial lifeline for thousands of small, grassroots non-governmental organisations (NGOs).
• Executive Reality Check: CSR initiatives compel corporate executives to step out of their offices and engage with communities, particularly in rural areas. 
  • This direct exposure to the realities of India fosters a changed mindset among corporate leaders.

The Reputation Paradox

• Despite the significant increase in CSR spending and some positive impacts, corporate reputations in India have shown little improvement. 
• The term “corporate” often retains a negative connotation in the public mind, indicating a lack of trust even after substantial investments. 

Reasons for the Reputation Paradox

• Geographical Skewness: CSR funds are overwhelmingly concentrated in already developed states like Maharashtra and Tamil Nadu, where many companies have their headquarters. 
  • Poorer states such as Jharkhand, Bihar, and Chhattisgarh receive less than 20% of the total CSR funds, exacerbating regional imbalances and contributing to the “rich get richer” phenomenon.
• Sectoral Skewness: Most CSR spending is directed towards high-profile sectors like education and health. 
  • Companies favour these areas for the positive public relations and publicity they generate, a practice known as “virtue signalling.” 
  • Less attention and funding are given to critical areas such as slum development, environmental projects, and livelihood generation, which are often less visible.
• CSR as Compliance and PR Exercise: For many companies, CSR has unfortunately devolved into a mere “check-box compliance” or a public relations exercise rather than a genuine commitment to social welfare. 
• Government Intrusion: Increasing government involvement in dictating where and how much companies should spend is perceived as a “throwback to the License Raj era,” curtailing corporate autonomy and increasing their compliance burden. 
• • For instance, in 2018, 272 companies received notices regarding their CSR rule adherence.

India’s Unique Mandatory Model vs. Global Voluntary Approaches

• India is unique in mandating CSR spending. In contrast, Western countries typically operate on a voluntary CSR model, where governments encourage but do not legally enforce contributions.
• Western countries often have an inheritance tax, which incentivises wealthy individuals to donate large portions of their wealth to charitable foundations (e.g., Bill Gates donating 90% of his fortune) to avoid high taxation upon death. 
  • This system inherently promotes private philanthropy.
• India, however, abolished its inheritance tax in 1985 due to low collection and high administrative costs, which consequently reduces the incentive for large-scale private philanthropy seen in the West.

Conclusion

For CSR to improve corporate image, it must move beyond compliance to genuine societal commitment, address regional and sectoral gaps, and focus on creating a better society, not just customers.