The purpose of Corporate Social Responsibility (CSR) is to drive positive social change. India has been at the forefront by making CSR mandatory in select categories under the Companies Act, 2013. Covid-19 has highlighted the need to have a more structured approach, with corporates playing a key role in relief initiatives. But the debate to determine the effectiveness of any previous CSR efforts has thrown up several challenges: Finding reliable implementing partners, monitoring and tracking funds, and assessing their impact.
The impact of Covid-19 has acted as a driver for the government to shift from a "voluntary" to "mandatory" approach to CSR.
In January 2021, the introduction of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, brought about sweeping changes, outlining additional responsibilities for companies, boards, CSR committees and implementing agencies.
Two key clauses cover unspent funds being transferred to a designated account and conducting impact assessments. This makes corporate governance critical for CSR, putting the onus on stakeholders to maintain the accuracy of records, robust practices and regular monitoring of CSR expenditure. The amendments will compel CSR committees, boards and the chief financial officers (CFO) to institute a transparent monitoring mechanism for the policy and projects, factoring in potential non-compliance, fraud and lapses in integrity.
The 2021 rules require registered entities with a credible track record to undertake projects on behalf of a company. All eligible partners need to be registered with the ministry of corporate affairs, and obtain a unique CSR registration number. This will have to be quoted in the company's annual report.
According to an Ernst & Young (EY) survey, CSR in India: re-engineering compliance and fraud mitigation strategies, 65% of the respondents did not have a defined third-party due diligence policy that covered implementation partners. This was alarming, considering 75% said they worked with agencies to execute their CSR programmes. Third-party risk is one of the inherent challenges that companies need to address upfront and bridge the gaps.
Having an implementation agency without adequate due diligence can magnify risks. There may be several agencies in the race with questionable track records, litigation history, fraud and corruption issues or dubious affiliations. The process of due diligence cannot be over-emphasised considering concerns including financial misrepresentation, conflict of interest, ghost beneficiaries, tax evasion or inflated expenditure
Our survey also noted that 75% said their businesses did not have a governance structure or a definite policy to address ethical lapses or fraud in CSR programmes. This can be dangerous as the 2021 rules will hold the board, CSR committees and CFOs accountable to oversee and review CSR activities. They are also mandated to disclose the committee's composition, policy, and board-approved projects on their websites. Further, the CFO or equivalent is required to certify if CSR funds are utilised as approved by the board.
Companies will have to ramp up internal controls when selecting, getting information on and functioning of implementing partners to safeguard against misappropriation, misrepresentation and other vulnerabilities. The introduction of monetary penalties can be a deterrent, making it crucial to have strong systems, governance, transparency and maintain regulatory compliance.
The accountability of companies has grown manifold, given the additional compliances and strict penal provisions. It is likely to require a significant overhaul in how organisations approach and run CSR programmes. The way forward demands CSR implementation, monitoring, record-keeping and ancillary activities be prominent in the company's wider corporate governance plan.
Arpinder Singh and Saguna Sodhi are partners, Forensic & Integrity Services, EY
Disclaimer: This article first appeared on Hindustan Times, and is published by special syndication arrangement