India’s government still struggles to provide reliable basic services to a majority of its citizens, trapping hundreds of millions of them in poverty. Now the country’s richest firms have been told they must help.
Under the new amended Companies Act passed last month by parliament, large businesses have been asked to spend 2.0 percent of their profits each year on “Corporate Social Responsibility” (CSR).
“The idea is that if we could divert some corporate energy and the corporate way of doing business into our development sector, for a country like India it could help enormously,” the head of the Indian Institute of Corporate Affairs (IICA), Bhaskar Chatterjee, explained.
CSR is broadly — some say vaguely — defined in the law to mean funding programs for education, poverty alleviation, protecting the environment or tackling disease, among others.
It’s one of the first such laws of its kind in the world, promising a cash bonanza for charities and non-government organizations (NGOs) while raising serious concerns the funds could worsen India’s endemic corruption.
CSR has been imposed across much of corporate India. Any business with sales of more than 10 billion rupees ($156 million), a net worth of 5.0 billion rupees, or bottom-line profits of 50 million rupees is liable.
They must set up a board to implement and report on the company’s CSR policy, in theory ensuring that an average of 2.0 percent of the net profits of the previous three years is spent annually.
Failure to report on this spending, as with other financial disclosure requirements, will result in fines and possibly imprisonment for a company’s directors.
IICA, a business group established by the ministry of corporate affairs, calculates that 7,000 companies qualify, creating a possible annual pool of funds estimated at 120-150 billion rupees ($1.9-2.4 billion).
Sidharth Birla, president-elect of business group FICCI, says that corporate India lobbied hard against previous drafts of the law that would have forced companies to spend their profits.
“If they had made it mandatory then what would have stopped any other authority from imposing a burden on the company?” he told, reprising one of the arguments against mandatory spending.
The final law says companies should set aside 2.0 percent of profits for CSR and must report on their activities, but it also gives them an easy get-out — there are no sanctions for failing to spend the money.
“We have been given to understand that you could well report that ‘I have seen everything and I can’t spend it’,” Birla said.
The success of the CSR revolution will therefore depend on how companies approach the new rules, says Samir Saran from the New Delhi-based think-tank Observer Research Foundation.
The money could become a sort of “slush fund” channelled into charities and NGOs run by politicians — “a legal way of bribing,” says Saran — or into foundations run as pet projects by the family members of business owners.
“We have to be sure that this is not another policy with good intentions and horrible consequences,” he told. “It is how it is implemented that will decide its success.”
One early alarm bell was the government in the central state of Chhattisgarh asking companies to deposit their CSR funds with the chief minister’s Community Development Fund earlier this week.
Saran favors mandatory CSR overall as a way of forcing good corporate behavior. The Indian private sector “is notorious for not having participated in the social agenda,” he says.
Though broadly true, not all can be tarred. The sprawling Tata conglomerate, owner of Jaguar LandRover and India’s biggest software company, is a global leader in corporate giving and is controlled by a charitable trust.
The founder of software group Wipro, Azim Premji, has followed the example of US billionaires Bill Gates and Warren Buffett by handing large parts of his fortune to his education charity.
But for the majority of companies with little or no experience in CSR, they will depend on external charities, foundations and NGOs amid questions about their capacity to absorb the cash.
India’s charity sector is rich in organizations — 1.2 million, according to the Charities Aid Foundation (CAF) — and low in regulation.
In November 2011, the national audit authority published a damning report showing that only 3.5 percent of the NGOs which received grants from the environment ministry completed their projects.
Peter ter Weeme, co-founder of international sustainability consultancy Junxion, which has an office in New Delhi, stresses that capacity as well as corruption is a huge problem.
“I’ve seen in North America where large corporations wrote one-million-dollar cheques to NGOs,” he said.
“The NGOs couldn’t handle that sort of money.”
State-run companies have been subject to mandatory CSR for years but they are sitting on cash piles with “no idea how to spend it,” he said.
He commended India becoming “probably the first country to have the most broad far-reaching legislation on the subject” — Nigeria and Malaysia are considering something similar — but there are obvious flaws.
“One of the biggest issues it doesn’t address is corruption. If anything it might even exacerbate it,” he concluded.