CSR in India: Making Corporate Responsibility Mandatory
December 6, 2012
With the logjam in the Indian Parliament resolved with the approval of FDI in multi-brand retail by the Lower House of the Parliament, all eyes in the country are now focused on when the ruling UPA alliance will move on to an extensive list of Bills on the agenda for the Winter Session of the Parliament that the country’s policymakers need to debate and pass with increasing urgency.
The Cabinet-approved Companies Bill, 2011 is on the top of that list as it seeks to replace a very outdated Companies Act, 1956. If and when the Companies Bill, 2011 becomes a law, with the suggested amendments, it would usher in sweeping changes with regard to how corporations are governed, audited, and held accountable in India. These include the introduction of higher corporate disclosures and class-action law suits. Also significant among these changes is that India would become the world’s first country to make investment in corporate social responsibility (CSR) a legal requirement, despite not establishing penalties for noncompliance.
One of the more controversial provisions of this 372-page piece of legislation, the CSR clause would make it mandatory for companies with a profit of Rs 500 crore ($90 million) or more, a turnover of Rs 1000 crore ($180 million) or more, or a net profit of Rs. 5 crore ($90,000) or more, in a fiscal year, to conduct CSR activities. To fund these activities, companies will have to spend 2 per cent of the preceding three years’ average profits on CSR. A company qualifying for it will have to explain if it fails to do so under Section 134 of the Bill which says that any company that contravenes the CSR spend provision, and also fails to explain the reason for the same in its reporting, shall be punishable with a fine not less than Rs 25,000 but which may extend to Rs 25 lakh.
Most other countries approach CSR either through broad exhortations under company policy or other legislation or by specifically requiring corporate actors – primarily boards of directors – to take into account the interests of non-shareholder constituencies and broader stakeholders while making corporate decisions. In that sense, no absolute obligations are imposed on companies under the law in other jurisdictions to carry out CSR activities. The only other example of mandatory CSR is from Saudi Arabia where companies are required to pay amounts “equal to 2.5 percent of income and capital” to the revenue department, which then distributes the amounts to the needy around the country.
While this operates more like a government levy on corporate profits, in India the proposal leaves it to the discretion of individual companies to determine the manner in which the amounts are deployed. However, Schedule VII of the Companies Bill directs companies to the following activities to be included in their CSR Policy:
1) Eradicating extreme hunger and poverty
2) Promotion of education
3) Promoting gender equality and empowering women
4) Reducing child mortality and improving maternal health
5) Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases
6) Ensuring environmental sustainability;
7) Employment-enhancing vocational skills;
8) Social business projects;
9) Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the state governments for socioeconomic development, and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
The reactions from India Inc. to the government proposed CSR clause of the Companies Bill have been mixed, with different industry associations coming out with conflicting statements on their stance. While the Associated Chambers of Commerce and Industry of India (ASSOCHAM) has welcomed the provisions of spending of at least 2% of net profit on corporate social responsibility (CSR) activities in the Companies Bill, The Confederation of Indian Industry (CII) said it is “very concerned” about the mandatory provision, saying that this should be a voluntary activity.
While CSR in India is followed by an increasing number of public and private companies, CSR activities in the country sometimes suffer from a lack of understanding, inadequately trained personnel, non-availability of authentic data and specific information on the kinds of CSR activities, coverage, and policies that companies should be investing in. However, many large multinational companies, including GE, Honeywell, and Lockheed Martin, engage in active CSR programs. Among many foreign direct investors, CSR is already the rule, despite not yet being legally mandated.
CSR is coming out of the purview of ‘doing social good’ and is fast becoming a ‘business necessity’. Many corporations are tying CSR to business objectives, for example, Godrej Consumer Products Limited (GCPL)’s Project Vijay runs courses that provide skills in sales to enable rural youth to get employed as sales representatives. GCPL absorbs a significant number of the trained youth for its own requirement. The rest are assured placement in other companies with an average monthly salary in the Rs. 5,000-7,000 range. Over 4,500 students have already been trained through the program, which is offered free of cost.
Other companies who are combining CSR with business benefits include Mahindra & Mahindra (M&M), Hindustan Unilever (HUL), Marico and Procter & Gamble (P&G). M&M’s watershed project covering 32 villages in Damoh district, Madhya Pradesh, was set up with the primary goal of conserving water and soil. The dam covers about 10,000 hectares, 4,000 households and 20,000 people. In turn, M&M expects that farmers in the area will purchase tractors for cultivation and that farmers will adopt micro-irrigation for their fields. As the project involves high levels of construction activity, it is expected that local entrepreneurs will adopt construction equipment and work on projects locally. Local businessmen are also expected to purchase commercial vehicles to cater to the needs of the area.
While Indian companies are generating methods of incorporating CSR into their business strategy, the Centre has also shown considerable interest on getting India Inc. on board regarding CSR before moving amendments to the Companies Bill in Parliament. In his first meeting with industry after assuming charge as Corporate Affairs Minister (independent charge), Sachin Pilot met representatives of different industry associations in the Capital on Tuesday, December 4th. Prior to the meeting, Mr. Pilot had also proposed the creation of an entity for the monitoring of CSR funds use; likely to be a special purpose vehicle (SPV) that would be independent of government intervention and run by corporates/industry bodies, with a wide representation to ensure its neutrality.
After the meeting with industry captains over the issue, Mr. Pilot said that the government has no intention of being a “watchdog” over the implementation of the measure but rather make it voluntary and participatory for Indic Inc. “We do not want an inspector raj, but rather have a system which is self regulating and self compliant,” Mr. Pilot said as quoted by The Times of India newspaper. The Corporate Affairs Ministry on Tuesday also said that it would pitch for tax exemptions for companies that spend 2% of their net profit on CSR activities as proposed in the new Companies Bill.