CSR: The Cost of Compliance by Alexa Kardos

Have the new regulations in the 2013 Companies Act done more harm than good? Corporate social responsibility (CSR) is not a novel term for India; in fact, many of India’s larger companies have been undertaking vast social welfare projects long before CSR was considered fashionable, and without receiving recognition. (See linked article on the Indian history of philanthropy).

The 2013 Companies Act has brought essential attention and structure to the CSR landscape. However, the Act’s complex compliance regulations have increased both the monetary and social costs of carrying out CSR activities.

In 2014-2015, first fiscal year the Act was in effect, India has fallen two spots on the World Bank’s “Ease of Doing Business Rankings,” from 140 to 142 out of the 189 economies studied. [1]Mandatory CSR has increased the hurdles businesses must clear; besides the 2% companies are compelled to spend on CSR, the Companies Act also mandates corporations form a CSR board, consisting, if possible, of one independent director, and further mandates 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, founding partner of AZB, contends that: “the cost of complying with the paperwork and the governance and audit is just crazy.” Vakil jokes that the law is “not good for anyone except the lawyers,” who are called in regularly, for a fee, to ensure 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 law and the Foreign Contribution Regulation Act, to assist companies with pooling funds together, and finally, to confirm companies are complying with the specified reporting obligations.

Similarly, CSR consultancy firms have benefitted from the heightened demand following the Act’s implementation. Some firms, such as Dasra, NextGen Consulting, and Sound N Light Consulting have proven their expertise in the field of CSR. Sound N Light Consulting even offers free information sessions about the Act to help companies navigate this new landscape. Noshir Dadrawala, founder and CEO of the Centre of Advancement for Philanthropy, however, warns that not all of these firms are as knowledgeable as they claim to be, describing the formation of some of these groups as a “mushrooming of quacks and fakes.” But whether effective or not, law and consultancy firms are a diversion of funds from actual CSR programs.

For the larger companies with billions of rupees in profits and structured means of carrying out CSR, such as in-house foundations, the increased monetary cost of sustaining CSR programs and complying with the law have not dampened their CSR efforts. 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, “What we’ve also seen, unfortunately, is that, you know, companies that would have otherwise given to something which may not fall within the four squares of what the requirements under the Act are, will change focus and find something that ticks the box.”

“Richa’s right,” Vakil adds, “if you don’t fall within these parameters, yes, certainly your life has become more difficult.” Other articles in our series examine the impact of the law on NGOs. Companies who have chosen 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. Xeres Anita, partner at Wadia Ghandy and Co, explains this is an “easy fix for a corporation because you get a CSR credit…and when it comes to your own reporting, it makes your life a little bit easier.” He goes on to say that 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 for them to go ahead and meet their obligations.” Dadrawala notes that “if [companies] chose to work with an implementing partner that’s an NGO, the basic tax deduction [they] would get is probably 50%,” on the other hand, if companies choose to donate to the Prime Minister’s Fund, they will receive a “100% [tax] deduction.” “It’s a win-win,” he says.

The cost of compliance with the Act is not solely monetary. At some social cost, 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 arithmetic of it all. The Act’s external 2% spending requirement has reduced the definition of CSR to ‘donating to the needy.’ Simultaneously, the absence of requirements that include other facets of CSR like including employees and sustaining the environment, have forced these issues into the background. Anita notes: “at the end of the day, (a company’s) idea of CSR is something that (they) can point to and say ‘I did this,’ for example, ‘I distributed a thousand blankets.’” Companies want a 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 (i.e through volunteering), or initiating programs within the company that ensure standard business practices have a positive impact on the environment, which is harder to quantify and report but important nonetheless. It is not certain that the law has caused this attitude. We have learned that companies were concerned with the visibility of their projects predating the Act. As yet the impact of the law appears to be a mixed bag when seen from the perspective of those professionals who help companies maintain legal compliance.