Though several countries including Sweden, Norway, the Netherlands, Denmark, France and Australia require mandatory CSR reporting, the Indian Government has gone one step ahead in making India the first country to mandate CSR expenditures. The Indian parliament has passed a new Companies Bill w.e.f. 2014 that requires companies which have a net worth of Rs. 5 billion or more, turnover of Rs. 10 billion or more or net profit of Rs. 50 million or more during any of the previous three financial years, to spend at least 2 per cent of their average net profits on Corporate Social Responsibility. According to the audit and advisory company, Ernst & Young, the 2 per cent law would cover about 3,000 companies in India and account for about US $ 2 billion expenditure on CSR activities.
While companies around the world are increasingly under pressure to portray themselves as socially responsible, this is the first time in history that the Indian Government has implemented mandatory CSR spending for a large number of companies. Along with spending 2 per cent of average net profits, the companies must also setup a ‘CSR Committee’ with at least one independent director, appointed to the company’s board. Moreover, the Committee must include CSR activities within the company’s annual report detailing the funds earmarked for CSR, the composition of the Committee itself and if failed to spend the required amount, then the detailed reasons explaining the failure to comply.
The new law provides scope to further CSR initiatives in India, which till-date is primarily restricted to philanthropic activities such as giving donations and about uplifting the poor. What is important is the need to create an integral CSR strategy. Given the controversy surrounding the concept of CSR, it is not surprising that the law does not define CSR for the purposes of expenditures; instead it recommends a few genres of CSR activities such as eradicating hunger and poverty, HIV, TB and malaria, maternal and child health issues, promoting gender equality and environmental sustainability, which provides a vague legal premises. Apart from this, the new provision holds that the companies should provide preference to the local areas in which they operate. Nonetheless if a company does not conduct its own CSR, it can give the required amount to the Government’s socio-economic welfare programs such as the Prime Minister’s National Relief Fund.
[bleft]In India, where one-third of the population is illiterate, two-thirds lack access to proper sanitation, and 400 million people still live on less than US $ 2 a day, the Companies Act should be hailed as a positive step forward in ensuring that business contributes to equitable and sustainable economic development.[/bleft]
In a country such as India, where one-third of the population is illiterate, two-thirds lack access to proper sanitation, and 400 million people still live on less than US $ 2 a day, the Companies Act should be hailed as a positive step forward in ensuring that business contributes to equitable and sustainable economic development. But the law can be refuted on the basis of pragmatism as ineffective with various loopholes. It does not discuss, let alone define, an enforcement mechanism or penalties for non-compliance. Also, if the 2 per cent allocation is not made within a fiscal year, the CSR Committee has to submit an explanation to avoid being penalized. There is no discussion of what explanations would be legally valid, opening up much room for corruption.
It remains to be seen how long India will take to redefine the concept of CSR and how corporate India would eventually move away from philanthropy to a world of redistribution of wealth. Being at a nascent stage, it is too early to predict whether the 2 per cent bill would set a benchmark in India, but it would surely provide an initial push to the much-debated CSR.
