Corporate Social Responsibility – from Voluntary to Obligatory

When the two of the 10 richest people joined hands to start The Giving Pledge, they had a tough time convincing billionaires across the world to contribute most of their wealth for philanthropic causes. The Indian government took a leaf out of the concept and made it mandatory for specific class of companies to ensure they spend on Corporate Social Responsibility (CSR) through the new Companies Bill that has been passed in the Lok Sabha in November 2012.

Although some European countries require companies to report their CSR information in their Annual Reports, India is arguably the only country in the world that has made CSR mandatory through an Act.

What is CSR?

CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members who may also be considered as stakeholders. A firm's implementation of CSR may go beyond compliance and engage in some social good, beyond the interests of the firm and which is required by law.

Whom does it apply?

Mandatory requirement of CSR applies to any company that has either of:
a)      Net worth of Rs 500 crore or more
b)     Turnover of Rs 1,000 crore or more
c)      Net profit of Rs 5 crore or more
Note that this applies to every company regardless of private or public company.

What is the Requirement?

For every company fulfilling any of the above criteria has to perform the following:
a)      Set up a CSR Committee
b)     Spend at least 2% of the Average Net profits of the preceding three financial years on CSR activities
The Bill uses the phrase ‘shall make every endeavour to spend’ at least 2%. There are no serious consequences if the company does not spend at least 2% of the Average Net profits on CSR. The only consequence stated in case of non-spending is that the Board’s report shall state reasons for not spending the amount.
Further, the Average Net profits is not defined clearly in the Bill. Is it Profit before tax (PBT) or profit after Tax (PAT); should it include profits generated within India or those generated outside India as well.

CSR Committee

The CSR committee should consist of at least three directors of which at least 1 should be an Independent Director.
If company has only 2 directors (since CSR applies to private companies also), one director would have to be appointed. Also, if company does not have any Independent Director (since Independent directors are mandatory only for Listed companies – clause 143), an Independent Director would have to be appointed for the CSR committee.
The CSR committee would formulate and recommend the CSR policy to the Board in line with the activities specified in Schedule VII. The committee would also recommend the amount of expenditure as in the CSR policy and monitor the CSR policy from time to time.

What are the activities specified as CSR activities?

According to the Companies Bill, the following activities can be included in CSR according to Schedule VII:

1. Eradication of hunger and poverty,
2. Promotion of education and gender equality,
3. Empowerment of women,
4. Reduction in child mortality and improvement in maternal health,
5. Combat of HIV, acquired immune deficiency syndrome, malaria and other diseases,
6. Environmental sustainability,
7. Vocational training enhancing employment,
8. Social business projects
9. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central or state governments, welfare of SC/STs and OBCs.
10. Others as may be prescribed

The list is likely to grow as the exact provisions of the Bill are still being debated. The bill does not state what happens to corporate support to issues other than ones stated above. For some companies CSR could mean providing lunch to employees while for others it could be tackling environmental issues and global warming including reducing carbon footprint.

Compliance Report

No form has been prescribed for filing the compliance certificate for CSR. However, compliances and non-compliances are to be stated in the Board report.

Some other aspects

According to Forbes India the CSR Spend from India’s top 500 listed companies alone could channelize Rs 63 billion to flow in to CSR spends. If we expand this list to the top 1,000 corporations, add MNCs, banks and SMEs, then we are talking about at least Rs 120 billion. Not a bad number for a country of 1.2 billion. If we further extrapolate this calculation, each of India’s 660 districts could get over Rs 18 crore of this investment. How much of this will actually materialise, only time will tell.

Moreover, companies are often accused of gaining mileage from their CSR spends as public relations exercise.

Many corporations have set up trusts or other separate entities to spend on philanthropic activities and other charitable activities. Given the mandate to spend 2%, many companies are likely to re-channelize those spends through their corporate programs and the estimates of CSR investments are not likely to materialise. Examples are found in India’s largest conglomerates such as Wipro, Aditya Birla Group and Tata Sons who largely route their activities through trusts and charitable organisations rather than business entities.

Companies are also worried about how to treat the 2% spend on CSR. As long as the companies can spend the 2% of net profits on shared value projects that will bring back benefits to the companies, companies are likely to treat them as investments. However, if the money is spent on philanthropic projects unrelated to the business, he said, then it is really just a social tax on profits.

All said, at least three things can be agreed upon: (a) India needs a new approach to solving social problems and fostering inclusive growth (b) companies have an essential role in doing so, and (3) the government wants to build companies’ capacity to do so successfully.

References:

Forbesindia.com
en-wikipedia.com