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MHCi Monthly Feature: February 2014

 

Will Doing Good Through Legalising CSR in India Actually Do Bad?

 

Dr. Michael Hopkins, recipe CEO, MHC International Ltd

Will doing good through CSR in India do a lot of bad?

Stepping off the plane to receive a CSR award in Delhi last week, I was unhappy with the new CSR law passed by the Indian Parliament in August, 2013 that will come into effect for the largest companies as of April 2014.  If it looks like a tax, smells like a tax, legislates like a tax…then isn’t it a tax?

It is not clear exactly how the new law will influence companies but it is important to note that it shows that CSR has moved out of the mainly academic and business area, as in the past, but now into Government responsibility. 

India is not alone and other countries, such as Mauritius and Denmark, have worked on legal frameworks.  India insists that its framework is essentially voluntary, while Mauritius has insisted on 1% of company profits to be allocated to ‘CSR projects’.  Companies have, unsurprisingly, reacted in Mauritius negatively against such a law and are reluctant to pursue CSR activities even though they are beneficial to them.

The India law requires companies with a net worth of over Rs 500 crore ($US80million), turnover of over Rs 1,000 crore ($US160million), or net profit of more than Rs 5 crore ($0.8mn), to spend at least 2 per cent of the average net profit in the immediate three preceding years on CSR activity.  However, it isn’t mandatory, and apparently boards of the companies will only have to report how much they spent on CSR and explain why they couldn’t meet the commitment. The government will not, it seems, even ask them to amplify on that explanation.

Another main provision, and seemingly to come closer to the systems multi-stakeholder model of CSR model that I favour, is that Companies will have to set up a Corporate Social Responsibility (CSR) committee at the board level that must be headed by an independent director on the board. The committee will frame a CSR policy for the company or group and recommend expenditure on various projects. It will also monitor the CSR policy of the company from time to time.

The company will have to provide information on their CSR policy and the attendant spending on the website and in the directors’ report, putting all the relevant information in the public domain that can be accessed by the company’s shareholder, the media and social activists.

The idea is not to regulate too much which is why the entire principle of CSR has been encapsulated in just one section – section 135 of the Companies Act 2013 – with five sub-sections. It is expected that there won’t be more than 12 to 14 rules that are currently under formulation.

The Act encourages companies to spend at least 2% of their average net profit in the previous three years on CSR activities. The ministry’s draft rules, that have been put  up for public comment, define net profit as the profit before tax as per the books of accounts, excluding profits arising from branches outside India. The Act lists out a set of activities eligible under CSR. Companies may implement these activities taking into account the local conditions after seeking board approval. The indicative activities which can be undertaken by a company under CSR have been specified under Schedule VII of the Act.

One provision that goes against the tenets of muti-stakeholder CSR is that activities meant exclusively for employees and their families will not qualify.

After listening to dignitaries at the CSR conference organized by Dr. Tripathi at the University of Delhi in Feb 2014 presenting this author with a CSR lifetime achievement award, my view changed.  The Government law has actually raised the profile of CSR substantially in India and could well lead to the systematic multi-stakeholder model favoured around the world.  The tax is cloaked as a voluntary contribution for large companies.  But this wolf could actually turn not only into a sheep but into a new profit centre for corporations.  Watch out for my future contributions on these points as the law may actually turn out to be a Trojan Horse that will eventually benefit both society and companies themselves.

PS Our next Certified CSR Workshop in India on the implications of the new law will take place in Mumbai, 21-22 October 2014 - more details and register here. And, as one of our CSRFI participants noted last week:

'It was indeed a great pleasure to have attended the CSR Seminar in Mumbai last week and to have you as a key speaker - giving us an eye opening, exhilarating and an enthralling presentation. I would definitely like to seek an opportunity and would look forward to attend another one of your presentations in the near future.  I must say that your website is a plethora of knowledge.'