Is India breaking new ground by requiring corporates to spend 2% of company profits on CSR?

December 2, 2013

     By Duncan Green     

This is a joint post with Avinash Kumar (right), Oxfam India’s Policy, Research & Campaigns DirectorAvinash

Corporate responsibility in India is getting interesting – an unheralded aspect of the growth of its business sector. Recent legislation requires public sector enterprises to make social responsibility and stakeholder engagement part of their core business practices, while in July, 2011, the Ministry of Corporate Affairs came out with ‘National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Business’.

This has moved up another gear with the approval in August of a new Companies Act. The detailed rules are still being formulated, but the new law looks like becoming an important milestone.

The new Act replaces the old and increasingly outdated Companies Act of 1956. Momentum for reform came from a series of spectacular corporate Corruptionscams and scandals, including the telecom sector, Satyam, Saradha Chit Fund and the Sahara group.

The Act requires companies to:

  • Have at least one woman on every board
  • Set up a Corporate Social Responsibility Committee within the board of directors, including at least one independent director. The Committee must formulate and recommend  to the Board  a Corporate Social Responsibility Policy, recommend how much to spend on CSR, and specify the sector along with specific activities/projects to be undertaken
  • Appoint a CSR ‘Nodal Officer’ and implementing teams
  • Draw up a Corporate Social Responsibility Reporting Framework (CSRRF) to be submitted annually
  • Monitoring must be undertaken by a different agency to those implementing and report to a board level committee

But what has grabbed the attention of civil society organizations is Clause135, which obliges large companies (net worth of US$80m, turnover of US$160m, or net profit of US$8m) to devote 2% of the average net profit (after tax) to corporate social responsibility. Conservative estimates put the total at roughly US$2.5 billion.

There is a pretty important get-out here – spending the money is on a ‘comply or explain’ basis, but companies that choose to explain why they haven’t spent the money are likely to face some serious criticism from the media and civil society.

How will companies react? They have plenty of leeway: the Act’s definition of CSR includes eradicating extreme hunger and poverty; promoting education; women’s empowerment; reducing child mortality and improving maternal health; combating HIV, AIDS, malaria and other diseases; environmental sustainability; vocational skills; social business projects and contributing to the Prime Minister’s National Relief Fund or any other state fund socioeconomic development.

A nice analysis by Kordant Philanthropy Advisers suggests:

‘There are several behaviors that we expect companies to exhibit following the law’s passage. Some companies will make the structural changes to their board to avoid fines, only to explain in their board report why they are unable to spend on CSR. Others will allocate an additional portion of their budget to meeting the reporting requirements and/or use the board report as an opportunity to showcase their CSR activities. Many companies are likely to re-categorize current quasi-CSR activities so as to fall within the scope of the new law. Whether the CSR Clause actually encourages more CSR spending or not, it will certainly force companies to seriously contemplate social responsibility or risk becoming a conspicuous non-spender amongcompanies act infographicpeers who already invest heavily in it. ‘

Some of the top Management Schools, including the elite Indian Institutes of Management (IIMs) have already responded by initiating CSR management courses on a par with their other management programmes. Clearly, the direction is towards making social responsibility an additional arm of the Corporate brand.

How is civil society reacting? Will this be the answer to the funding shortfall as aid donors leave India, and civil society and NGOs look for new sources or revenue? While there is a predictable buzz around the Act, the detail of its implementation is still unclear. But there are already indications of what to expect:

The Act lists a wide range of players who could be eligible for grants, including community-based organizations (formal or informal), NGOs, civil society organizations, institutes/ academic organizations, civil works contractors and professional Consultants.  This means much sharper competition for resources.

Many corporates are setting up their own Trusts and Foundations which can then determine the extent and nature of their respective CSR portfolio. Many of the smaller Foundations are beginning to do the work themselves instead of giving sub-grants to NGOs or other partners.

However, some big companies do not want to hand over their cash in small fragments to a range of organizations and may prefer to give money in large chunks to organised, professional NGOs or other agencies who can provide ‘the value of their money’, (that will also mean a greater ‘professionalisation’ in terms of showing results, indicators of success etc).

Will corporates divert the cash or bypass the rules? Will they attach unacceptable strings and/or compromise the independence of Indian civil society? Will a new generation of NGOs spring up to spend their cash without any commitment to social change, so dragging Indian civil society to the right and away from the rights agenda and structural change (as aid for service delivery arguably does with INGOs)?

Another danger is that the definition of corporate responsibility becomes so broad as to lose all meaning. Already there is a talk of using the CSR 2% for infrastructure development or even funding the government’s existing social sector commitments such as the Food Security Act.

There are fears of greenwash. After all, companies like Satyam (the most celebrated self-confessed Scamster in recent years in India), as well as international corporate like Shell and BP, which stand accused of gross environmental misconduct, have still managed to win top notch CSR awards. CSR must not be seen as a separate dangling arm of Corporate Affairs, but as an integrated part of the entire business cycle.

indiaisprobiThis all poses real dilemmas for NGOs like Oxfam India. The fast depleting resources of external donor-financed, rights-based work mean that they are at a cross-roads today. The question for them is whether to compete with the new Foundations being set up under CSR to fill the vacuum of service-delivery in the wake of the government withdrawal and its replacement by PPP models, or face extinction as clearly rights-based social movements. In the end CSR in its present format is likely to re-affirm the present model of growth led development and those trying to question it may find themselves relegated to the sidelines.

But on the other hand, the new Act may provide a real opportunity to open up formal spaces for dialogue with the corporates, which have been non-existent so far. Earlier, corporates only talked to the government and with their huge money muscle they had a great advantage over CSOs who could only shout from outside the board rooms. This may be, (just maybe) an entry point where the NGO sector can find an equitable place for dialogue.

December 2, 2013
Duncan Green