The Companies Bill 2013, approved by Parliament in India on August 8th, will require companies which meet certain conditions to spend 2 per cent of their profits on CSR activities.
New requirements for companies to have at least one woman on their board are a small step in the right direction for a country where only 5 per cent of top management or board positions are held by women. Equally, the requirement that a third of board positions are filled by independents (with no financial interests in the company) is a sensible, if not groundbreaking move to improve governance. But if the reforms detailed above represent conservative, incremental advances then the Corporate Social Responsibility (CSR) elements of the Bill are, in the words of Corporate Affairs Minister Sachin Pilot “leap of faith”.
By requiring Companies that meet a certain set of criteria to spend at least 2 per cent of its average profits over the last three years on Corporate Social Responsibility (CSR) the Indian government is taking a step into the unknown. In theory, compelling companies with a net worth in excess of Rs 500 Crore (about US $77 million), a turnover of Rs 1,000 Crore (about US $155 million) or more per year or a net profit of Rs 5 Crore (about US $920,000) or more per year to spend 2 per cent of their profits on CSR could raise enormous amounts of new revenue with some speculating that it could generate an additional Rs 27,000 Crore ($4.2 billion). However, the real impact of the Bill are hard to predict.
Whilst the legislation has wide ranging support there are many who feel that it is too open to interpretation and that this vagueness could lead to opportunities for corruption. Critics also worry that CSR contributions may get channelled into government-created funds that do not serve a legitimate charitable purpose. Companies unable to comply with the CSR requirement would be required to provide an explanation or face penalties but exactly what constitutes a reasonable explanation is not yet clear.
Clearly there are a lot of questions that are subject to clarification from government before the Act comes into force. But what impact the Companies Bill will have on CSR are hard to predict even if it is implemented properly. Could it be that by requiring companies to comply to CSR obligations their ability to stand out for their CSR work will be diminished? Would removing the incentive of positive public relations as a result of CSR work lead to a disconnect between the public perception of corporate behaviour and the actual reality of it (as a recent study by Cone Communications suggests is happening in the UK). Solutions to some of the problems that legislators in India are facing were addressed way back in February in an excellent Forum for the Future blog by Stephanie Draper which, rather than summarising here I suggest you read in full.
Where companies are able to demonstrate good CSR practice and communicate the outcome of that practice to the public there can be benefits for all concerned. If companies are able to help not-for-profit organisations to improve their governence and reporting of impact this could also have benefits for mass public engagement in philanthropic giving by improving public trust. Given that CAF’s India Giving report showed that 54 oer cent of Indian’s feel that a “lack of transparency hinders their donations to NGOs” this could could be significant for the development of a philanthropy in India.