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India Mandates Corporate Social Responsibility: The 2 Percent Bill

by Joya Banerjee, Manager, Membership and Advisory Services, GBCHealth

In August, the government of India passed controversial legislation that requires large companies to spend at least 2 percent of their profits every year on corporate social responsibility (CSR). The bill applies to companies with an average net profit of at least 50 million rupees (approximately $816,000 USD) over a period of three years.

Companies will be able to develop their own social investment strategies and decide where to invest and implement programs, but the government has recommended particular areas of need, including eradicating hunger and poverty, maternal and child health, HIV, TB and malaria, promoting gender equality and environmental sustainability. Companies should give preference to the local areas where they operate. 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.

What it means for your business

The bill will take effect in 2014. The rules are part of sweeping changes made to an existing law, The Companies Act, intended to create more accountability and government oversight of the private sector. 

The CSR provision requires affected companies to spend at least 2 percent of their average net profits made in the preceding three years on CSR. Companies must set up a “CSR Committee,” including at least one independent director who will be appointed to the company’s board. They must also include a report within the company’s annual report which details CSR activities, the amount of funding earmarked for CSR, the composition of the CSR committee, and, if they have failed to spend the required amount, detailed reasons explaining the failure to comply.

The bill has been highly controversial in India, with critics calling it a “tax” and pointing out the government’s failure to regulate business, root out corruption or even to collect income taxes that could fund social programs. (According to India’s Finance Minister, the country collects income tax from only 2 percent of its entire population). They believe the law will be ineffective without a strong enforcement mechanism or meaningful repercussions for companies that do not comply. Many critics oppose it on philosophical grounds, arguing that CSR should be voluntary. However, supporters see the bill as a way to spur corporate investment in social as well as economic development and ensure that the investments benefit a broader spectrum of the population including those most in need.   

Traditional CSR vs. the Shared Value Approach

The policy mandates that CSR activities cannot be undertaken exclusively for the benefit of employees of the company or their family members—clearly an effort to deter corruption. However, this approach takes a very conventional—some would say outdated—approach to CSR, a concept that in recent years has evolved away from simple philanthropy to embrace social investments that link back to a company’s core business strategy. 

CSRWire’s Akhila Vijayaraghavan says, “CSR need not be altruistic to be effective. Companies like PepsiCo and Coca-Cola invest in projects like water treatment facilities and a zero waste footprint for their products because it helps them reduce their resource use, which in turn helps them become sustainable and achieve higher profits…. The Bill should not be expected to become a tool for companies to use CSR as a vehicle to promote philanthropy that has little or no alignment with their business – and therefore, tends to fall off the radar after the initial run.”

Some Indian companies, such as GBCHealth Member Tata Iron & Steel Ltd., already spend more than 2 percent on CSR programs. However, few others have followed suit, and it is hoped that the new legislation will encourage corporate philanthropy and set new norms around giving. The accounting firm Ernst & Young estimates that the bill will generate $2 billion in its first year towards CSR alone, and India’s Minister for Corporate Affairs, Sachin Pilot, estimates that 9,000-10,000 companies will be covered by the bill.

GBCHealth will devote a session to the new CSR Bill and its implications for business during its upcoming India Business Forum on November 13th in Mumbai.

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