As CSR spends touch Rs 12,000 cr, investigators stalk ghost beneficiaries

A company was funding healthcare spends under its corporate social responsibility (CSR) initiatives. It later engaged a consultancy to conduct a review of its program, only to discover that some of the company funds went to patients that didn’t exist.

Such ghost beneficiaries aren’t the only kind of issue companies face during a period of unprecedented CSR spending, touching nearly Rs 12,000 crores in 2018-19 (FY19). Frauds related to procurement, construction, and end-use of funds have had companies engaging forensic auditors to keep tabs on how money is spent, revealed conversations with those involved in such investigations. Firms are also increasingly strengthening their own capabilities to better implement their programs.

"In the beginning in 2014-2015, it took a while for organisations to put in place strategies on how they wanted to spend the CSR money. Over the last year and a half, more and more organisations, especially the savvy ones, are trying to get some expenditure reviews and governance systems in place.," said Jagvinder Brar, Co-Head, Forensic Services at KPMG in India.

Rajat Vig, Partner (Forensic – Financial Advisory) at consultancy firm Deloitte India said that companies often turn to experts to find the truth after a tip-off.

“(Around) 40-50 per cent of our investigations work will come through the whistleblower channel,” he said. The investigations can be of varied kinds of projects.

A listed company was funding water cooler facilities for primary schools in Delhi around 2017. Each unit and surrounding civil construction was to cost around two lakh rupees. The company later found that intermediaries had pocketed some of the CSR capital, spending only around Rs 50,000 to Rs 60,000 per unit. In other cases, the units were missing entirely.

In another instance, a company allocated capital for livelihood creation . The money was spent on a well which was said to be helping with farmers’ irrigation needs. The well was there when they visited with water at a depth of 20 metres. The pipe which was said to have been used for irrigation was only 18 metres long, leaving it two metres short of the water surface. This also meant that it could not have been in use for irrigation purposes as was being claimed. There were also no farms in the vicinity.

Many companies still have gaps to plug.

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"The maker checker controls are not very strong in CSR because they want to keep the headcount very lean," said KPMG’s Brar.

An analysis of data from corporate tracker nseinfobase.com shows that administrative expenses have gone up as a percentage of the total CSR expenditure by companies, suggesting that companies are growing more serious about building capacity when it comes to the implementation of such activities. They were around 1.55 per cent of the total expenditure between 2014-15 to 2017-18. This has since risen to 5 per cent in 2018-19. The absolute amounts have risen from Rs 98.4 crore to Rs 593.9 crore in the same period. It is up over 500 per cent over the last four years.

Better systems generally once violations are detected. For example, the company funding water cooler facilities in Delhi subsequently put in place stronger monitoring and supervision controls for the units to ensure that the leakage of funds was mitigated.

Arpinder Singh, Partner and Head, India and Emerging Markets, Forensic & Integrity Services, EY said that the firm also has seen significantly more traction in recent times as companies look to curb fraud and misappropriation.

"I find the risk increases at the end of the year. There is sometimes panic in March to disburse the funds as per the Companies Act. A proper plan put in place at the beginning of the year can help avoid last minute decisions which sometimes may not be the right decision," he said.

Companies spent Rs 11,867 cr on CSR activities in FY19; highest so far

Companies are spending increasing amounts on charitable contributions through the corporate social responsibility (CSR) route. The total expenditure in 2018-19 (FY19) was Rs 11,867.2 crore. This is the highest since such spends became mandatory in FY15. (See chart 1)

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The Companies Act made it necessary for firms to spend at least two per cent of their average net profit over the preceding three years on CSR projects. The spends could be under heads ranging from education and healthcare, to sports or for ensuring gender equality.

The FY19 spend is 17.2 per cent higher than the Rs 10,128.3 crore spent the previous year, shows data from corporate tracker nseinfobase.com. It was Rs 6,552.5 crore in FY15. The biggest spends (Rs 4,406 crore) were for schedule VII (II) which involves ‘promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.’ The next biggest spend (Rs 3,206.5 crore) was under schedule VII (I). This involves initiatives for ‘eradicating hunger, poverty and malnutrition, promoting health care including preventinve health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.’ Rural development projects got Rs 1,319 crore, placing it third in the list of segments which received CSR capital. Others include contributions for environmental purposes, for the benefit of the armed forces and disaster management; among others. (See chart 2)

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A geographic concentration does seem to be present. Maharashtra and Gujarat top the list.

The former received Rs 931.4 crore from over 501 companies. This is nearly half of the 1015 companies out of the 1360 firms listed on the National Stock Exchange which are required to make some spends for CSR purposes and for whom the data is available. Maharashtra tops the country in terms of gross state domestic product at factor cost at current prices (with a base year of 2011-12) shows Reserve Bank of India data. Gujarat is also in the top five.

States like Bihar, which rank lower on development, also rank lower on corporate largesse. It received contributions from 209 companies in FY19. The total amount spent was Rs 274.2 crore. States in the North East received low funding as well. Arunachal Pradesh got Rs 134.2 crore from 170 companies. Similar numbers were seen in other states like Sikkim and Meghalaya. (See chart 3)

Large spends have also seemed to have prompted closer attention to how the money is spent, according to experts.

Amit Tandon, founder and managing director of Institutional Investor Advisory Services India (IiAS) said that this has become more common. "There are more and more companies who are doing impact assessment...people recognise the need to do it," he said.

Pranav Haldea, managing director at Prime Database said that low CSR budget could act as a constraint for some companies to adopt monitoring mechanisms. "It may only make sense for firms with very large budgets. Smaller companies may find it too expensive to employ an agency for external audits on a regular basis," he said.

Note:Amounts are split equally where no information is given

Maharashtra is the biggest beneficiary

State Amount Spent (in crore Rs) Number of Companies

MAHARASHTRA 931.35 501

GUJARAT 668.75 366

RAJASTHAN 592.22 311

KARNATAKA 584.35 328

TAMIL NADU 559.06 355

ODISHA 473.51 242

DELHI 453.09 346

ANDHRA PRADESH 441.40 278

WEST BENGAL 435.40 295

TELANGANA 416.92 282

UTTAR PRADESH 413.82 314

KERALA 410.34

Bill to fine firms over corporate social responsibility tabled in Lok Sabha

The government on Thursday introduced a Bill in the Lok Sabha to amend the Companies Act to restructure provisions about unspent funds for the corporate social responsibility (CSR) and impose penalty on firms and officials not adhering to these provisions.

The Bill also seeks to empower the Centre to debar directors responsible for mismanagement for five years after approval from the National Company Law Tribunal (NCLT).

The Bill proposed that unspent CSR funds be carried forward to a special account and spent within three financial years in case of ongoing projects. This account will be opened by the company concerned in bank and be called the ‘Unspent Corporate Social Responsibility Account’.

In case, the money remains unspent in three years, it should be transferred to any fund specified in Schedule VII of the Act such as the Prime Minister's National Relief Fund or any other fund set up by the central or the state governments for socio-economic development and relief.

In case, the project concerned is not ongoing, the unspent fund would be transferred to the funds cited above.

Those not adhering to these provisions would be fined in the range of Rs 50,000 to Rs 25 lakh. Company officials involved could be imprisoned up to three years and fined to the tune of Rs 50,000 to Rs 5 lakh.

According to Companies Act, every firm having net worth of at least Rs 500 crore or turnover of Rs 1,000 crore or a net profit of Rs 5 crore will have to spend 2 per cent of its average net profits of the preceding three years on CSR. If not, the company has to give reasons.

Following irregularities in the IL&FS, the Bill also proposes to empower the government to debar errant directors of the companies for five years to hold the similar posts in any company.

In this regard, the Bill proposes to amend Sections 241, 242, and 243 of the Act, allowing the Centre to approach the NCLT to declare the errant persons as not fit and proper for their acts of mismanagement.

The Bill also seeks to enable the National Financial Reporting Authority (NFRA) to perform its functions through divisions and executive body.

Besides, the Bill seeks to empower Registrar of Companies to initiate action for removal of a company's name if the latter is not carrying out business activities according to the Act.

Corporate Affairs Minister Nirmala Sitharaman said the Bill is being brought in to "ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in corporate sector".