Performance Rating of NGOs for CSR Activities


Background

»  CSR Bill & Its Implications

»  Current Scenario of CSR

»  Issues & Challenges in Distribution of CSR Funds

Analysis

»  Need For a Third Party Opinion on the Performance of NGOs




Highlight

 

Today, India has become one of the fastest growing economies in the world but socio-economic problems like unemployment, unavailability of adequate educational facilities, gender inequality and lack of healthcare and rural development etc. are still hampering its growth. Limited resources and an organized system to deal with such issues still remains a challenge.

With the upcoming legislation (Companies Act 2012), corporate houses having net worth of ` 500 crore or turnover of ` 1000 crore or PAT of ` 5 crore or more will be required to spend 2.0 percent of their yearly profits on Corporate Social Responsibility. It is estimated that this CSR provision will qualify about 8,000 companies leading to ` 19,000 crore annual investments in the CSR initiatives, which can play a vital role in resolving some of the most pertinent socio-economic issues. Subsequently to assess the impact and performance of companies listed at the BSE in CSR activities, Bombay Stock Exchange (BSE) and Indian Institute of Corporate Affairs (IICA) have signed a memorandum to develop a corporate social responsibility index to look at the performance of companies in their mandatory CSR spend. Further, the government has also proposed a minimum fine of ` 50,000 on companies and can exceed up to ` 25 lac, depending on the situation. Still, the CSR index is an outcome based measure and does not resolve the issues faced by the corporates.

To bring CSR activities into a regular practice, some companies have formulated their dedicated CSR teams that devise specific policies, strategies and goals for their CSR programs and set aside their budgets to support them. Although, these corporates are implementing their CSR actions but due to non-availability of expertise in the related field or having limited resources to evaluate their CSR actions taken, these corporates face challenges and leads to their dependence on Non- governmental organizations (NGOs). Often corporates face problems to find out credible and deserving NGOs who are aligned with their CSR objectives. Likewise, problems are also faced by NGOs in exhibiting their visibility and credibility among the donors. This has given rise to an information gap between deserving NGOs and willing corporates. Due to this, a large amount of corporate fund for CSR is still lying idle.

ONICRA believes that a mechanism is required which can identify credible NGOs and match them with corporates to help them achieve their CSR objectives. The credibility of an NGO should be evaluated by an independent third-party agency. The evaluation framework should highlight areas like governance, past track record, financial sustainability and impact of the work undertaken by the NGOs on the local society. This, we hope can resolve certain pertinent issues related to dissipation of funds by the corporates and help both corporates and NGOs in achieving their goals.



 

Background

Formulation of Corporate Social Responsibility in India

 
Corporate Social Responsibility (CSR) came into the light in the late 1960s and early 1970s after several corporates felt the need of development and welfare of the communities at local level. CSR refers to the activities taken by a company for the social welfare of the society. With the passage of time, CSR gained importance in the Indian corporate scenario. The corporates realized that apart from registering growth in their respective businesses they also need to build credible and favorable relationships with the community at large.
TATA being the pioneer in CSR activities, established Tata institute of Social Sciences (TISS) in the year 1936 with a purpose of establishing institution for excellence in higher education that could ultimately assist in promoting dignity, equality, social justice and human rights for all sections of society in the country. The institution’s constant efforts have been helpful in building bridges between education, research, field action and dissemination. TISS become a renowned name and gained appreciation and recognition from not only from local government but also from international agencies. Other corporates like Aditya Birla, Indian Oil Corporation, Infosys, HCL to name a few, have been involved in serving the society ever since their inception. All of them are associated with CSR by doing their part for the society by way of donations or charity events.

The CSR Bill & its Implications


As per provisions, introduced to revise companies bill (passed on 4th October2012) proposes to make CSR spend of at least 2% of their average net profit of past three years mandatory for companies meeting any of the one specified criteria:

  • Net worth           > ` 500 crore
  • Annual Revenue > ` 1000 crore
  • Net Profit            > ` 5 crore

 

The draft rules on CSR are proposed to be implemented from financial year 2014-15, while companies are required to do the first CSR annual reporting based on the three preceding years ending on or before March 31, 2014.

 

The Ministry of Corporate Affairs (MCA) proposes to mandate companies to spend 2% of their average net profit for past three years on fulfilling their corporate social responsibilities (CSR) even if their Group makes consolidated net loss. If a company fails to spend the amount, it will have to explain the reason for same in its annual report and may even further result in fines and possible imprisonment for a company's directors.

Current Scenario of CSR:

India is one of the first in the world to make social welfare spending by companies as a part of the regulation. At present, there are more than 1.33 million companies registered in the country, out of which nearly 0.9 million companies are active. Going by the numbers, it would imply that only around one percent of companies would be required to follow the CSR norms. In monetary terms, it is estimated that the CSR provision will lead to ` 19,000 crore annual investments in the country's social sector, which can play a vital role in transforming the Indian economy.

Voluntary organizations/ NGOs have always played an important role in society from time immemorial. The concept and approach in voluntary work have undergone many changes from time to time. From pure charity, relief and welfare oriented approach, this sector has in recent times suitably molded and equipped itself to meet the development needs of the society. There is hardly any field which is not now touched by voluntary organizations/ NGOs. The NGOs have acquired strong position in various fields at the national and international level.

According to study conducted by Government of India (GOI), at present there are a large number of NGOs’ working in India, the largest number of NGOs are registered in Maharashtra (4.8 lac), followed by Andhra Pradesh (4.6 lac), UP (4.3 lac), Kerala (3.3 lac), Karnataka (1.9 lac), Gujarat (1.7 lac), West Bengal (1.7 lac), Tamil Nadu (1.4 lac), Orissa (1.3 lac) and Rajasthan (1 lac). More than 80 per cent of registrations come from these 10 states.

Despite such impressive numbers, NGOs along with government have not reached the position wherein they can feel a sense of accomplishment. Till today, India is facing several challenges from the various sectors and is looking for a best alternate to bring end to the ongoing problems.


The Socio-Economic Challenge – Key Areas of Concern


Wordle: CSR


To combat such challenges, apart from NGOs many big corporates have come forward and have played a lead role in eradicating the common problems of the nation. In today’s scenario, corporates deemed to be best source which can separately or collectively play a lead role in weeding out the above challenges.

 

India's Leading Corporates & their CSR activities in their Preferred Sectors

S.No.

Company

CSR Activities

1

ONGC               

The public sector giant has participated in activities which contributes to welfare of health, education, water management, women empowerment, infrastructure, environment, protection of heritage sites and initiatives for promoting sports and supporting agencies.

2

Reliance Industries Ltd.

The largest private sector company of India is taking care of its CSR initiatives by contributing in welfare of education, environment, health care, road safety, rural development, agriculture quality, heritage, Indian culture, promoting sports and talent.

3

Coal India Ltd.

The public sector giant is involved into development of education, water supply, social empowerment, infrastructure, grants/ donations to NGOs for upliftment of society, heritage sites, disaster management activities and adoption of villages.

4

State Bank of India

Country’s largest commercial bank in terms of assets and profits is making its contribution to welfare of children and eradication of child labor.

5

NTPC

The Maharatna Company is taking care of society by way of contributions in human rights, labor, environment, anti-corruption, resettlement and rehabilitation, community development and social security for old age, health, education, gender equality and natural calamities.



Further, a snapshot of above corporates is also presented in reference to their CSR spending in monetary terms along with their financial performance recorded in FY 12 in their books.

S. No.

Company

Revenue

Avg. PAT

Actual Spend

2% of PAT

1

ONGC

1,51,121

23,660

121

473

2

Reliance Industries Ltd.

3,68,571

21,138

288

423

3

Coal India Ltd.

78,410

11,759

119

235

4

State Bank of India

1,47,197

13,056

71

261

5

NTPC

66,366

9,334

49

187

Data by Forbes - Sources Ace Equity; CSRidentity.com; company annual reports; company responses via email


Likewise, several other corporates are also participating in CSR activities and with the upcoming legislation this number will sharply rise and will push the pace of development and definitely help to present a better picture of the society. Indian Institute of Corporate Affairs (IICA) a business group established by the Ministry of Corporate Affairs, has calculated and interpreted that near about 7,000 companies will qualify under the new standards and create a possible annual pool of funds of ` 19,000 crore. With the advent of this law, many big names like ONGC, Reliance, TATA, Birlas, and Wipro would be the leading names to contribute to develop people and communities and other important stakeholders of the company. As per study by Forbes India, the new regulation would mean that the top 100 companies in terms of their annual net sales in 2012 will spend ` 5,611 crore on CSR activities, compared with the ` 1,765 crore that they are spending now.


Issues &Challenges in Distribution of CSR Funds


The new legislation on CSR has fuelled many issues and challenges not limited to companies but also for government and also for NGOs.


Challenges for the companies

  1. Lack of information on sector specific NGOs: There are various NGOs working on different sectors. Some work on specific sector and some in general. The biggest problem faced by the companies is to search a suitable option wherein they can park their funds with ease and trust. After availability of various options on a particular sector, there will be a need of comparative study amongst the various NGOs, so that funds can be directed to a deserving NGO. A enormous task of search and study, with availability of limited information might become a problem for the corporates.
  2. Dearth of qualified professionals in NGOs: There is a need to bridge a gap between required professionals and available numbers. In India like nation, there is a dearth of highly skilled and qualified professionals in NGOs, which leads to under utilization of resources as compared to its extent. This gap leads to making of an adjustments between achievements made by NGOs and targets set by the companies, which may further raise tensions for the corporates in right selection of an NGO.
  3. Un-organized Framework and lack of transparency in the system: Almost all companies tend to work under systematic & time disciplined approach but there are little or no NGOs who are capable to move in line with the standards set by the companies. Companies wish all the procedures to be transparent for proper utilization of the funds and believe that all the actions taken are supported with proper evidences and information, which are found to be difficult to deliver by NGOs. These gaps affect the process of trust building between the companies and social agencies working at ground level and ultimately affect the success of CSR initiatives.
  4. Non-availability of clear CSR guidelines: Yet, there are no clear cut statutory guidelines or law which gives a definite direction to the efforts initiated or actions taken, which might result into a chaos and lack of confidence amongst companies. Further, this unavailability of systematic legal framework acts as a big challenge for the companies in continuing their CSR actions.
  5. Challenges in finding out the impact of initiatives at the ground level: Companies are willing to donate the funds but do not have adequate knowledge on whom to rely upon. India has a wide network of NGOs but it’s hard to find a credible one. There is a lot of confusion and lack of confidence amongst people when it comes to making a donation to a Non Governmental Organization (NGO). We see so many cases in the news where the organization is running on paper and the donations are contributed to the personal accounts of the trustees. Nobody really knows the ground reality because this sector has grown very fast in recent years. This has caused confusion and a big problem for corporates for optimal use of their funds.
  6. Lack of knowledge and awareness within the local community: Companies tend to contribute towards CSR activities within the local communities but gets the lukewarm response from the locals. This is mainly due to lack of knowledge and interests exhibited by the local communities. This situation further gets wider due to lack of communication at ground level and also by the reluctance shown by the local people to adapt to changes in their life, which might ruin the success level of the CSR initiatives.


Challenges for the Government

  1. What are the guidelines for 2% PAT is it related to the profits generated in India or related to the overall profits made from global operations?
  2. Government has only prescribed activities under Schedule VII of Section 135 (Health, education, skill development) to be considered as CSR, but what about corporate support for the issues which are not covered under this schedule? Till today, many companies are funding various NGOs on the issues which are untouched in new bill, if such thing persists, companies will be compelled to pull their support and resultantly such NGOs and communities could find themselves stranded
  3. Can companies claim the financial equivalent of volunteering hours as part of their CSR spend? Some companies follow CSR activities which are not easily quantitative and cannot be justified in monetary terms, will such activities be acceptable under new guidelines or need to be pulled back.
  4. Can investment in infrastructure related to the CSR activities mentioned in Schedule VII be eligible under CSR spending? If a company spends in infrastructure work, meant for CSR activities, so would this investment qualify for any exemption for companies in their total CSR spend?


Challenges for NGOs

  1. Establishing Credibility among Donors & Other Stake-holders: One of the key areas of concern for an NGO today is to create awareness about its good work and establish credibility among donors and other stake-holders. Most NGOs find it difficult to get sufficient funding in absence of such mechanism. They are perceived as group of individuals and NGOs that control access to donor funds. They have limited resource mobilization skills and are often not looking for funds that are available locally, preferring to wait for international donors to approach them. There is a high dependency on donors and a tendency to shift interventions to match donor priorities. There is a lack of financial, project and organizational sustainability. NGOs often fail to showcase the impact of their work creating an information gap at the part of stakeholders who want to understand the effectiveness of the efforts done by the NGO.
  2. Poor Governance: Knowledge of good governance varies widely among NGOs in the country. NGOs have very little understanding about requirement of qualified Board and its roles and responsibilities. Many with better understanding of good governance acknowledge that this is fundamental to NGOs accountability and transparency. Many NGOs mismanage their resources, quite often with the involvement and encouragement of their Boards that eat their resources.
  3. Limited Capacity: NGOs often have limited technical and organizational capacity. Few NGOs are able or willing to pay for such capacity building. Weak capacity is an area of concern for fundraising, governance, technical areas of development, and leadership and management. Introduction of quality standards and technological advancement in day to day working and approach is still limited to a very small group.
  4. External factors: NGOs often work on sensitive issues thus the interference of local leader is a major hindrance to their work. This situation often leads to disputes which may jeopardize the existence of the NGO and may also impact the other stake holder and their associates with the organization.

 

Analysis

Need for a third party opinion on the performance of NGOs


Onicra believes that a mechanism is required which can identify credible NGOs and match them with willing corporates to help them in achieving their CSR objectives.

To bring this into a process, there is a need of an independent agency who can act as a match maker between these CSR players. First of all, this independent agency should have a clear vision over corporate CSR objectives and can transform it into a customized solution under time disciplined approach. To undertake such activity, this agency should have a better understanding of a purpose that need to be accomplished. Thereafter, on having a grasp on corporates vision next step should be identification of the NGOs which are working for the same cause or is aligned with the corporates objectives. An intensive study is required to find a sector and region specific NGO which can suffice the requirements of the willing corporates/ donors. After exploring of various alternatives, an agency should select a best match which can serve the corporates in allocating their funds hold for specific purpose. In this, an independent agency is also required to understand the requirements of an NGO and thereafter estimating the capability of a NGO to bring proposed objectives into a ground reality. The credibility of an NGO should be intensively evaluated by an independent third-party agency. The evaluation framework should highlight areas like governance, past track record, financial sustainability and impact of the work undertaken by the NGOs on the local society.

 


This information will enable corporates to decide on the proportion or total of their CSR funds to be allocated to that selected NGO and ultimately in achieving their CSR objectives. This we hope can resolve certain pertinent issues related to dissipation of funds by the corporates and help in eradicating socio- economic problems of our country.

 

 


References


 

 

 


Contact Details

For Further Queries, Kindly Contact:


ONICRA Credit Rating Agency of India Ltd.


Corporate Office: Onicra Credit Rating Agency of India Limited
5th Floor, Building No: 21-22,
Udyog Vihar, Phase-IV, Gurgaon (H.R.) 122015
Phone#: +91-0124-3076000
E-mail: corporate@onicra.com
URL : www.onicra.com

Disclaimer


Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should be used in place of professional advice. Onicra credit rating Agency of India Ltd. accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material.