The new Companies Bill – a new dawn for Corporate Social Responsibility (CSR) in India

August 9th,2013

The passage of the revamped Companies Bill in the Rajya Sabha today ushers in a new regulatory stance towards corporate social responsibility (CSR) in India. The Bill, which should get enacted into a law in the next few weeks, lays down mandatory requirements in regards to CSR for larger companies (those with at least Rs5Cr net profit/Rs500Cr net worth/Rs1,000Cr turnover), which includes a requirement to spend at least 2% of annual net profit on CSR activities. An estimated 7-8,000 companies in India will be covered under the CSR legislation and the total annual spend based on this norm could be equivalent to US$1-2bn.

Seeking to create an enabling environment

While most discussions in the run-up to the passage of the Bill have focussed on the 2% ‘surcharge’ on corporates’ profits, the moral issues around the government mandating CSR and the potential for misuse of mandated CSR spending; a closer look at the provisions on CSR (Sec 135 of the Bill) reveal that considerable thought has gone into delivering a regulatory framework that nudges companies to start thinking strategically about CSR and aligning these efforts to addressing stakeholder/community needs. There is actually no ‘penalty’ spelt out for not spending the mandated 2%, but the penalties for non-disclosure and the requirement for Board-level oversight of the company’s CSR efforts will itself bring in a more serious, and hopefully, strategic approach to CSR by the Indian corporate sector.

All key social causes covered

In fact, there is considerable flexibility for corporates on the areas that they can address as part of their social responsibility activities, the geographical regions that could be chosen for the intervention and the manner of engagement. While the original Bill listed nine such activities (in Schedule VII), we understand that the final version covers as many as 22 activities – and provides the additional flexibility to the company’s Board to decide on some other activity as well, as long as it is spelt out in the company’s CSR Policy. All the core social needs – including education, healthcare, sanitation, environmental sustainability, employability – are covered under Schedule VII, so the Bill is clearly aiming to align corporates CSR activities with the country’s social development imperatives.

Positioning CSR as an extension of business processes

The Bill clearly demarcates CSR from charity and does not position it as a ‘moral responsibility’ for companies. The accent appears to be on employing standard business principles to develop and roll-out CSR strategies and programs, so as to optimise resources and maximise impact. By requiring CSR policy formulation and monitoring to be governed by a Corporate Responsibility Committee (CSRC) comprised at least three directors (one of whom should be a non-independent director), the Bill is ensuring that CSR becomes a Board level agenda and is therefore viewed strategically and subject to a high level of scrutiny within the company. The activities to be undertaken need to be clearly spelt out in the CSR Policy, approved by the Board, monitored carefully and will need to be disclosed in the Directors Report; a CSR ‘return’, akin to an Income Tax return will have to be filed each year. There are fines and/or imprisonment stipulated for non-compliance on disclosures.

Although the exact rules/guidelines for compliance with the regulation will come out in a subsequent notification, the drafts that have been circulated for comments provide adequate perspective on the regulation’s orientation towards efficiency and impact; activities allowed for CSR spending will need to be in the form of ‘projects’, engagement of experts for implementation is encouraged and monitoring and impact assessment of project is recommended. The rules also exclude spending on employee benefits from ‘allowed CSR’ and underscore the need for clearly defined beneficiaries (especially for environment conservation activities).

Significant capacity building required

After much delay and many rounds of discussion, Sec 135 now looks set to become law and corporates will have no choice but to comply. A few corporates have had well-developed CSR strategies and programs even without the pressure of regulation, and for them, compliance with the new procedures will require little additional effort. But for most, the new regulation will necessitate capacity building in regards to CSR – in terms of understanding the regulation, developing policies, building a governance structure, evaluating and deciding on programs, choosing partners, monitoring and assessing impact of programs.

This will not only be a challenge for companies, but for implementation partners as well – since most NGOs will not be equipped to absorb the significantly higher support (and thus the scale-up in operations) that could arise from the step-up in CSR spend by corporates (we estimate current spending to be significantly below the 2% norm). While the ecosystem will undoubtedly build-up to meet this demand, corporates will need to understand the landscape across different development sectors, evolve those strategies that are impactful and yet most appropriate to their needs and find the right implementation partners programs to help them deliver.

Krishnan Neelakantan

Managing Director, Samhita Social Ventures

Click here for a more detailed commentary and analysis on the subject.