As per the amendments in Companies Act, 2013 in India, all eligible companies need to spend 2% of their net profit towards CSR (Corporate Social Responsibility) activities.
How CSR project funding works:
There are mainly two decision making bodies:
1. Board of Directors (Apex decision makers in a company) are required to share details of company's CSR spend in their annual report. Although there is no penalty if less than 2% is spent, Board must state the explanation for lesser expense in their annual report. Therefore from the compliance as well as goodwill perspective, all companies would like to refrain themselves from stating an explanation for paltry underspent CSR monies.
2. The next and most important decision makers in hierarchy of a company regarding CSR is its
CSR Committee appointed by the Board. This committee is the key decision making body who (maybe with the help of external consultants) scrutinizes project proposals, seeks approval from the Board and monitor the progress of approved projects until they are completed and reports it to Board for them to disclose it in their annual report.
There might be a possibility that a company not have the exact operational method as stated above but majority of companies follow similar module. This information is the result of analysis of CSR policy and annual report of 50 eligible companies in India
Few facts and insights:
1. As per the news reports, the cumulative sum of CSR money spent by eligible companies was INR 8606 crore and INR 9309 crore for FY14-15 and FY15-16 respectively. It will be an upward trend for next few years as more number of companies are yet to abide with the 2% expenditure.
2. As per the law, companies need to spend the CSR money on activities related to following categories and each company has pre-decided a few categories which they have and call it as their Focus Area and the same is mentioned in their Policy/Annual Report
3. Also, the amendment has recommended (but not mandated) companies to invest the CSR money in local areas where the company and its branch offices operates.
4. Government could have collected this 2% money as CSR tax from companies but instead have given the liberty to companies to spend on their own (with no penalty) with the expectation that few great companies shall put their sweat (in the form of talent) along with money and contribute towards nation building in the long run
How Entrepreneurs can leverage this opportunity?
As it is a mandate for companies to spend money on CSR, they would generally fund projects that
-meet basic regulatory criteria,
-qualify under company’s pre-defined CSR focus area,
-have definite completion period,
-instills confidence regarding execution,
-have defined metrics for monitoring progress at regular intervals and
-most importantly are benefitting local community where the company operates
Once an Entrepreneur understands the above mandate from company’s perspective and can tweak his/her product/service to come up with a project proposal that meets the regulatory criteria, has defined completion period, inspires confidence regarding its execution, has defined metrics for robust monitoring the progress and finally benefits the local community, there is no legitimate reason for a company to reject the proposal.
It’s the third financial year since the law has been implemented and majority of the CSR money seems to have been spent in a rather conventional manner. For disruptive innovation to happen in the CSR spending, I believe entrepreneurs need to take the initiative. Business and Product development teams should spend more time brainstorming on as to how their product/service could add value to a company spending its CSR money and the other involved stakeholders likewise.
On an ending note, if you feel this article made sense , please share it with your entrepreneurial friends who are building great products or are delivering excellent services. For making innovations happen in this niche domain, right words should reach right set of ears!