How SMEs struggle with CSR compliance

Key Challenges Faced by CSR-Eligible SMEs in India

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1. Financial Constraints

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Unlike large corporations, SMEs operate with limited financial resources. Committing 2% of their net profits to CSR can strain their budgets, particularly in times of economic downturns. Many SMEs struggle with cash flow issues and high operational costs, making it difficult to allocate funds for CSR. Unlike large companies with diverse revenue streams, SMEs often operate in niche markets, making mandatory CSR a financial burden.

 

Ganges Jute Pvt. Ltd. (West Bengal) is an  SME in the jute manufacturing sector  and it faced financial difficulties during economic slowdowns, making it hard to allocate funds for CSR activities like rural education programs. The mandatory 2% CSR spending became a financial burden, forcing them to cut back on operational expenses.

Shakti Pumps (Madhya Pradesh )is an SME in the solar pump sector. Despite good revenue, the company faced cash flow issues due to delayed government subsidies, making it difficult to maintain consistent CSR funding.

 

2. Lack of Awareness and Understanding

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Many SMEs are unaware of the CSR provisions and their implications. There is confusion about which activities qualify as CSR under Schedule VII of the Companies Act, leading to misallocation of resources. A lack of knowledge about the strategic benefits of CSR, such as brand value enhancement and improved stakeholder relations, reduces their willingness to invest.

We may recall here the case of Stanley Black & Decker India which failed to transfer its unspent CSR funds to a designated account within the required timeframe. According to the Act, companies must transfer any unspent CSR amount to a special account within 30 days of the end of the relevant financial year. For the financial years 2020-21 and 2021-22, Stanley Black & Decker was required to transfer Rs 1.2 crore and Rs 1.28 crore, respectively, but failed to do so, resulting in the penalty under Section 135 (7) of the Companies Act.

 

Sai Bio Organics in Maharashtra is engaged in organic fertilizers The company was initially unaware that initiatives like farmer training programs could qualify as CSR. They mistakenly believed that only large-scale social projects were considered valid CSR activities.

In Rajkot Engineering Cluster (Gujarat), several SMEs were unsure about CSR compliance norms and ended up making informal donations without proper documentation, leading to non-compliance issues.

 

3. Compliance and Regulatory Burden

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SMEs often lack dedicated legal and compliance teams to manage CSR obligations, unlike large corporations with structured CSR divisions. Documentation and reporting requirements are cumbersome, making it difficult for SMEs to track and report their CSR initiatives in compliance with legal mandates. Frequent changes and updates in CSR laws create further compliance challenges.

MCA imposed penalty for CSR reporting irregularities and disclosure non-compliance in 2024 to Prabhu Spinning Mills Private Limited, a firm in Tirupur, Tamil Nadu. While the Company disclosed CSR spending details in the FY 2016-17 Board's Report, the format did not follow the prescribed tabular format of Rule 8.

Swastik Industries (Delhi), a small auto components manufacturer found the CSR reporting process too complex and costly, as hiring legal consultants for compliance increased administrative overhead. The lack of a dedicated CSR team meant compliance reports were often incomplete or incorrect.

Pioneer Embroideries Ltd. (Mumbai) faced difficulties in navigating the evolving CSR rules, leading to delays in fund allocation and reporting to the Ministry of Corporate Affairs.

 

4. Limited Human Resources and Expertise

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SMEs generally do not have specialised CSR professionals to design and implement effective CSR programs. Employees are primarily focused on business operations, leaving little room for CSR initiatives. The lack of expertise in assessing social needs, choosing the right projects, and measuring impact affects CSR effectiveness.

GreenField Agro Tech (Punjab) is an SME in sustainable farming. It lacked a dedicated CSR team and relied on general staff to execute CSR activities, leading to inefficiencies. Employees were not trained in impact assessment, making it difficult to measure CSR effectiveness.

Ajanta Pharma Ltd. (Maharashtra) is a growing SME in pharmaceuticals. Its CSR programs suffered due to limited skilled personnel to design healthcare initiatives beyond just donations.

 

5. Difficulty in Identifying Suitable CSR Projects

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Identifying and selecting appropriate CSR projects that align with the company's business objectives and the needs of the local community is another significant challenge. Many SMEs operate in urban areas, whereas CSR often requires contributions to rural development, causing logistical issues. Lack of access to credible non-profit organizations and social impact partners makes implementation difficult.

Shri Ram Switchgears Ltd. (Madhya Pradesh) is a manufacturer of electrical components. The company struggled to find meaningful CSR initiatives related to its industry. Initially funded an urban beautification project, which was later deemed ineligible under CSR norms.

Several small textile SMEs operate in Tiruppur, Tamil Nadu. Many small garment exporters in the area found it hard to identify CSR projects that aligned with their business, and ended up making unstructured donations rather than impactful contributions.

 

6. Lack of Collaboration with NGOs and Government Bodies

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Unlike large corporations that form partnerships with reputed NGOs, SMEs struggle to find reliable and transparent partners. Many small businesses lack the network and knowledge to collaborate with government schemes that align with CSR goals. The absence of proper guidance and support from regulatory bodies further complicates partnerships.

Everest Spices (Mumbai), is an  SME in the FMCG sector. The company faced challenges in verifying the credibility of NGOs for CSR partnerships. Past attempts at collaboration resulted in funds being mismanaged due to a lack of monitoring.

Many SMEs in Coimbatore’s machine tool industry wanted to invest in skill development but found it hard to partner with government programs due to bureaucratic hurdles.

 

7. Short-Term Business Pressures vs. Long-Term CSR Goals

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SMEs operate in highly competitive environments with short-term financial objectives, making it difficult to invest in long-term CSR initiatives. Unlike large firms that can integrate CSR into their corporate strategy, SMEs often treat CSR as an obligatory expense rather than a strategic investment. The inability to see immediate financial returns from CSR discourages SME owners from investing in social initiatives.

Hartex Rubber Pvt. Ltd. (Telangana), a tire manufacturing SME. It faced competitive pressures and had to cut back on CSR spending during an economic downturn, affecting long-term initiatives in road safety awareness.

EdTech Startup SMEs in Bengaluru, mostly education-focused SMEs, despite a social mission, prioritized short-term profitability over long-term CSR strategies.

 

8. Geographical and Sectoral Limitations

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Some SMEs operate in industries with minimal direct social impact (e.g., B2B manufacturing units), making CSR engagement challenging. SMEs in smaller towns and rural areas may lack access to CSR-relevant infrastructure, training, and implementation partners. Many CSR initiatives require large-scale implementation, which may not be feasible for small companies with limited reach.

Many SMEs in Moradabad’s brassware industry (Uttar Pradesh), mostly brass handicraft exporters, found it difficult to engage in CSR activities due to their remote locations and lack of local implementation partners.

Tea plantations SMEs in Assam, faced challenges in implementing CSR for local communities due to logistical difficulties and lack of proper NGO partnerships in rural areas.

 

9. Fear of Misuse and Fraudulent NGOs

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SMEs fear that funds allocated to CSR projects may be misused due to fraudulent or inefficient NGOs. The lack of transparency and accountability in some CSR projects discourages SMEs from participating. Unlike large corporations with due diligence mechanisms, SMEs often lack the resources to verify the credibility of CSR partners.

 

10. Lack of Incentives for SMEs

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The government provides few incentives for SMEs to engage in CSR, unlike tax benefits available for some corporate social initiatives. No structured support system exists to help SMEs integrate CSR into their business models efficiently. Unlike large corporations that can use CSR for branding and reputation building, SMEs often fail to capitalize on their CSR efforts due to limited marketing budgets.

Some SME IT firms in Hyderabad donated CSR funds to NGOs that later turned out to be fraudulent, leading to financial losses and reputational damage. They lacked due diligence mechanisms to verify NGO credentials.

A group Agri-Tech Startups in Pune attempted to fund rural irrigation projects but faced fund mismanagement due to lack of oversight.

 

 Suggestions to Overcome Challenges

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1. Financial Support and Flexibility

• Introduce tax benefits or financial incentives for SME CSR spending.

• Allow flexibility in CSR contributions based on the financial health of SMEs.

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2. Awareness and Capacity Building

• Conduct workshops and training sessions for SMEs on CSR compliance and impact assessment.

• Develop government-led platforms to educate SMEs on CSR opportunities.

• Create simplified compliance mechanisms

• Reduce bureaucratic hurdles and simplify CSR reporting norms for SMEs.

• Provide digital tools to help SMEs track and report CSR activities easily.

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3. Collaboration and partnership

• Facilitate partnerships between SMEs and reputed NGOs to ensure effective implementation.

• Encourage cluster-based CSR initiatives where SMEs in similar sectors can pool resources.

 

4. Awareness about Integration of CSR into Business Strategy

• Encourage SMEs to align CSR with their business goals (e.g., skill development in their industry).

• Promote in-kind contributions (e.g., offering services, training, or product donations) instead of just financial contributions.

 

5. Government & Industry Associations’ Support

• Create an SME-focused CSR helpdesk or advisory body to assist in CSR planning and execution.

• Establish industry associations that can support SMEs in identifying and executing CSR projects.

 

Final Thoughts

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SMEs in India face significant hurdles in complying with mandatory CSR, driven by financial constraints, resource limitations, and regulatory complexities. Many SMEs struggle with awareness, compliance, and project implementation, making it difficult to contribute meaningfully to social development. Addressing these challenges through financial incentives, capacity building, regulatory simplification, and stronger collaborations will enable SMEs to fulfil their CSR obligations effectively while ensuring long-term social impact.