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Institutional EYE

Commentary on Corporate Governance Issues

IiAS: COVID Relief and vaccinations set to dominate CSR spends this year

India Inc’s FY20 CSR spends continue the trend of being project driven; FY21 spends to be dominated by COVID-19

Summary findings

  • The S&P BSE 100 (BSE 100) companies spent 2.24% of three-year average profits on CSR in FY20, compared to 2.05% in FY19

  • Companies increased their CSR spend by 20.3% to Rs.102.7 bn in FY20 from 85.3 bn in FY19

  • 79 companies have spent at-least 2% of average three-year profits on CSR activities, compared to 71 last year

  • The three loss making companies spent Rs.602.3 mn in FY20, down from Rs.747.3 mn by four companies in FY19

  • The number of companies that ‘underspent’ has come down to 18 from 25,even as the unspent amount increased to Rs.7.5 bn in FY20 from Rs.6.9 bn in FY19

  • Family-owned business are the largest spenders at Rs.46.7 bn; PSUs have seen the biggest uptick in absolute amounts to Rs. 34.1 bn in FY20 from Rs.24.6 bn in FY19

  • Energy sector (Rs. 30.2 bn), financial services (Rs.16.1 bn) and IT (Rs.14.5 bn) remain the largest spenders

  • Education (Rs. 22.1bn), hunger, healthcare and poverty (Rs. 20.1bn) and rural development (Rs.11.9 bn.) get bulk of the spends. This year companies also spent on COVID relief (Rs.10.9 bn.); vaccine delivery will see increased spend in FY21

    • While the COVID – 19 pandemic impact was visible at year end, companies had limited time to maneuver resources in this direction for FY20. Going by the public disclosures made by companies, annual reports and other press releases, COVID-19 will take up a lion’s share of the CSR spends in FY21.

  • The top-five companies remain unchanged with Reliance as the highest spender followed by ONGC, TCS is now at #3 replacing IOC who has slipped to #4 with HDFC Bank at #5

  • GoI proposed draft amended rules for CSR 2020 signals a shift away from ‘comply and explain’

Corporate Social Responsibility (CSR) spend by companies listed on BSE-100 witnessed an increase of ~20% to Rs.102.7 bn in 2019-20 from Rs. 85.4 bn in 2018-19. Over a three-year period, the CSR spend of BSE 100 companies increased by ~38% while net profits increased by ~15%. In IiAS’ previous report on CSR, we cited that spends by the BSE 100 continue to be increasing project driven; not necessarily link to company profitability. This year’s spend pattern further reinforces the same pattern. Companies continue to undertake impact assessment studies and align spends on defined social objectives.

The Government of India (GoI) declared the COVID-19 pandemic as a ‘notified disaster’ in March 2020 that enabled the state governments to utilize funds from the State’s Disaster Response Fund (SDRF) towards relief measures. Shortly after, the GoI allowed classification of funds spent on COVID-19 as eligible for CSR activities.

The GoI was timely in setting up the dedicated national fund to deal with distress situation (like the COVID-19 pandemic) in the name of ‘Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund’ (PM CARES Fund). Several companies have committed to contribute towards the PM CARES Fund. In August 2020, the GoI expanded the scope of CSR spends to include research and development (R&D) spending on new vaccine, drugs, medical devices related to COVID-19 for FY21, FY22 & FY23. The expansion of the CSR scope are definite steps in the right direction.

CSR spends continue to exceed the mandatory requirement of 2% of their average 3-year net profit for the second year in a row: 79 out of the 100 BSE companies spent 2% or more of their average 3-year net profit. And in line with regulations, many loss-making companies continue to spend on CSR.

This year saw an aberration in spends by ownership. PSU’s outspend their prescribed spends by 126% owing to last minute COVID spends by cash rich PSU’s. This was followed by MNC’s, promoter driven companies and widely held companies at 109%, 106% and 103% respectively.

The top areas of spends contribute ~82% of the CSR budget. These are education at Rs.22.1 bn (21.6% of the total), hunger, poverty, and healthcare at Rs.20.1 bn (19.6% of the total), rural development at Rs.11.9 bn (11.6% of the total), COVID-19 relief at Rs.10.9 bn (10.6% of the total), reducing inequalities at Rs.10.2 bn (10.0% of the total), environmental sustainability at Rs.8.4 bn (8.2% of the total). Prime Minister’s/Chief Minister’s relief funds, multiple causes and programs such as technology incubators, armed forces veterans, national heritage, sports, comprised the remainder of the spends.

Energy companies continue to be the largest spenders (29.5% of the total), followed by financials (15.7% of the total) and information technology (14.1% of the total). The top ten CSR spenders account for 48% of the spends of the BSE 100 companies.

Companies that did not spend the stipulated amount continue to cite implementation issues (such as technical complexities, stringent procurement process and community participation issues). Others were unable to disburse funds to deliverable target linked mechanism.

The Government of India (GoI) in FY19 presented the first National Corporate Social Responsibility (CSR) Awards to recognize the efforts of corporate India. We believe, the GoI should continue the awards for FY20 despite the pandemic.

The ministry has recently proposed draft amendment rules for CSR. Implementing these rules will make matters of CSR spends prescriptive and will lead to increased reporting. In the proposed draft amendments, impact assessment is being made mandatory for spends above Rs.50 mn which helps validate the CSR spends. However other areas in the amendment seem to increase regulatory burden and seem oblivious to ground level implementation challenges. These include CSR money not being spent during a financial year being restricted only to ongoing projects (for a maximum of 3 years), utilization certificates to be provided by the CFO, surplus from the CSR activity to be transferred to an unspent CSR account, unspent CSR funds (except if retained for the ongoing projects) to be transferred to a National unspent CSR account and additional disclosures on the website and in the annual report. Given the spirit in which corporate India has embraced CSR, we believe the GoI should follow their mantra of ‘less government and more governance’. GoI should experiment with lesser rules rather than strife companies in the CSR area.

While the regulatory requirement for the CSR committee is 3 directors, the average CSR committee size for the BSE 100 is ~4.3 directors. While the COVID – 19 pandemic impact was visible at year end, companies had limited time to maneuver resources in this direction for FY20. Going by the public disclosures made by companies, annual reports and other press releases, COVID-19 will take up a lion’s share of the CSR spends in FY21. The project related spends will see delays and deferments for FY21 and maybe beyond; depending on how the pandemic plays out. We would encourage companies to articulate their thought process on the project spends considering large allocations will be towards the pandemic. Companies continue their efforts to demonstrate a strategic level thought process on their CSR spending by linking it with their business and geographic areas.

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