Large firms prefer setting up foundations for CSR4 min read . Updated: 18 Nov 2016, 01:39 AM IST
The CSR rules give companies the choice of implementing activities through a registered trust or society with a minimum of three years experience in an area
Bengaluru: What is the best way for a company to discharge its corporate social responsibility (CSR)? Should it set up a foundation? Or work through non-profits? Or implement its schemes directly?
All these options are open to companies but an increasingly large number of them are choosing to set up their own foundations to carry out CSR.
“We are increasingly seeing more and more companies setting up their own foundations to carry out CSR, as it gives them more control over the programmes they choose to undertake," said Noshir Dadrawala, chief executive officer of the Centre for Advancement of Philanthropy, a CSR consultancy.
Besides, Dadrawala said, companies find donations to foundations to be a convenient way of using up their mandated CSR spend for a given year. “By transferring the CSR funds to a foundation, the company is easily able to meet its mandate," he added.
The Companies Act, 2013 mandates that firms with a net worth of Rs500 crore or revenue of Rs1,000 crore or net profit of Rs5 crore spend 2% of their average profit in the last three years on social development-related activities.
The CSR rules give companies the choice of implementing such activities through a registered trust or society with a minimum of three years experience in an area, a foundation established by the company (foundations are a Section 25 company) or a subsidiary/associate company.
While most companies such as Tata Motors Ltd and Marico Ltd adopt a mixed model of CSR—they execute some projects themselves as well as set up a foundation and work through non-profits—some like State Bank of India (SBI) and Reliance Industries Ltd prefer to the foundation route.
The number of projects implemented through foundations alone has gone from 99 in FY15 to 153 in FY16, said Richa Bajpai, co-founder of NextGen, a CSR consulting firm.
She said companies adopt a certain mechanism based on the size of their corpus. “Companies with large funds usually prefer to set up a foundation, as they have more control over how the money is spent," Bajpai said, adding that companies work through foundations when carrying out CSR activities not directly related to their business.
SBI, which set up its foundation in June 2015, had a Rs99.5 crore budget in FY16.
“We have been doing CSR since the 80s, but when the mandate came we decided to set up a foundation because it helps bring in better corporate governance as it requires one to set up a separate board dedicated to this entity," said Sanjutha Sharma, CSR head of the SBI Foundation.
To be sure, foundations are popular even among companies with smaller budgets.
Marico spent Rs10 crore on CSR in FY16, with close to 30% of its funds going through its foundation, said Harsh Mariwala, founder of Marico Innovation Fund, which identifies innovative social projects and funds them. He said he prefers the foundation route as it is easier to transfer funds to it and helps maintain focus.
Dadrawala said the ease of transfer of CSR funds to foundations makes it popular with companies. “Having a foundation can help companies comply, as they can pass on the entire CSR budget to the foundation and avail tax benefits."
When a company provides a CSR grant to its own foundation or an NGO having an 80G certificate, the company enjoys a 50% tax deduction on the amount spent on CSR. Meaning, if a company’ total income is Rs1,000 but gives Rs100 to its own foundation or NGO having 80G certificate, it can deduct Rs50 while computing its income liable to tax.
According to experts, setting up foundations also helps firms create a legacy.
“Foundations all over the world create lasting legacies, as corporate foundation is a visible and positive symbol of the company’s dedication to philanthropy and CSR. It can help the company develop a community investment and involvement strategy that furthers the company’s social vision and its business interests," says Dadrawala.
Foundations may be gaining in popularity, but a majority of companies still rely on non-profits to carry out their CSR programmes, Bajpai said.
“The majority of listed companies still does its CSR by giving money to NGOs (non-governmental organizations). Companies take this route when they don’t have expertise in an area," she added.
When companies do have expertise in an area, they execute projects on their own. For instance, Tata Motors Ltd trains car and truck drivers as part of its CSR initiative.
“We have the know-how within our company, so we are in the best position to execute it," said Vinod Kulkarni, CSR head of Tata Motors, which uses its foundation, direct implementation and NGOs for CSR work. Kulkarni believes all three modes are necessary to implement various sorts of initiatives.
“In some areas we have expertise, and in others we don’t. In areas where we don’t have expertise, we prefer to work with NGOs especially when we expand to newer locations," he said.
Tata Motors currently operates in 50 locations and plans to expand to 100 in the next three years. Currently, the company spends 50% of its funds through its Sumant Moolgaokar Development Foundation.
Whatever the route, experts believe that the objective should be to maximize impact.