A new law on corporate social responsibility has finally been put in place to ensure companies spend a minimum of 2 percent of their total profits towards projects that positively impact society. Under Clause 135 of the new Companies Bill, approved by Parliament on 8 August, every company with a net worth of Rs 500 crore or more, or with revenue of at least Rs 1,000 crore or a net profit of above Rs 5 crore, will have to spend 2 percent of three-year average annual profits towards fulfilling their Corporate Social Responsibility (CSR).
The law has helped alter the arcane Companies Bill for the first time in half a century. Though the new clause seems a noble endeavour — one called by Corporate Affairs Minister Sachin Pilot as a law to bring India’s corporate governance in sync with the changing business environment of the 21st century — it also raises many questions. Rohini Nilekani, who recently sold Infosys shares worth Rs 164 crore, to put to use in philanthropist activities has said that such a step is at best retrograde in today’s day and age. “In the 21st century, companies must be socially and environmentally responsible for 100 percent of their entire value chain, why only 2 percent of profit after tax?” she asks. “There are many inside-the-fence issues that corporate India needs to address with regard to pollution, resource use, employee practices, human rights and so on. Big companies that have progressed on these indicators could also help smaller companies with aspirations to do the same.” Nilekani believes the Bill is silent on how companies make money and only talks of how it should be spent.
It’s this short-term, check-box nature of the amendment that has upset India Inc. Can a clause on CSR really improve corporate ethics and greater common good for society? While of late, philanthropists in India have donated more to the society than corporate bodies, experts feel that by making CSR a compulsory process, the very essence of that responsibility is diminished.
Pilot, the main hand in pushing this Bill, is convinced about its rationale. “The CSR law gives a structure to whatever the companies have been doing on the CSR front over the past few years,” he says.
The Confederation of Indian Industries (CII), however, has expressed worries about the execution of the law. “Now that the law is ready, it is time to focus and work on the practical aspects of complying with its provisions. One such vital provision is surely the clause dealing with CSR spend,” read the CII statement, following the announcement of the amendment. The fear remains how the government will oversee the implementation of this law since the past record of such laws is quite abysmal.
But mostly, the criticism is centred on the following points and it seemed to come even from those who have long reflected on the need for corporations to help the society.
One, that the government’s dictum to spend 2 percent of the profit after tax is a forced payment. While India Inc believes it is against the spirit of CSR to be mandatory, it also emphasises that the government has been charging a cess all these years on their profits to put together social projects. Executives are also wary that the government’s efforts, despite all the money at their disposal, have been partly wasted. However, there is hope, since India Inc will now directly put money in social projects, the effectiveness may improve. “Now that this CSR law is in place, we need to focus on its implementation and ensure the money reaches the right people,” says TV Mohandas Pai, former CFO, Infosys.
Two, the government has long cited trust deficit between industry and people as a reason to implement this CSR law, but corporations blame the government’s flawed regulations for doing so. “Now that the law is here, we have to look ahead to ensure that the government does not outsource its responsibility of governance to the private sector,” says Nilekani.
According to one estimate, the Bill may unleash up to five times more money for CSR activities than is available right now. Of this, public-sector firms too will account for a big chunk. There is a fear that the definition of CSR may be exploited to include projects that may not be strictly for the needy.
Pilot says the government has no intentions of interfering with a company’s decision to spend money. “A CSR committee on the board of a company will decide which project is right or wrong, not the government or I,” he says.
The quality and standards of CSR is also going to come under scrutiny, especially now, since companies have to show that the money has been spent, which opens it up for some manipulation. “It is important to ensure that companies do not greenwash or whitewash their way through this and that the government upholds the rule of law to make business accountable to society,” says Nikelani.
Although the Bill mandates companies to spend 2 percent of their profits on CSR, it doesn’t talk of qualitative aspects, such as how the profits were made. Not defining the source of those profits, but only determining how they are spent, is something that’s come under criticism. Has it suddenly made “financial responsibility” more relevant than good governance? Isn’t CSR as much about improved practices inside the corporation such as behaviour of the bosses with their employees, hire and fire practices, etc?
Other than focussing on CSR, the new law recognises and rewards whistleblowers. According to Pilot, its focus is to enhance transparency and ensure fewer regulations, self-reporting and disclosure.
The legislation provides for a whistleblowing mechanism. This would help in evolving ethical corporate behaviour, rewarding employees for their integrity and for providing valuable information to the management on deviant practices.
The law also provides for class action suit, which is a key weapon for individual shareholders to take collective action against errant companies. It also mentions better disclosure requirements in financial statements and disclosure of interests of directors, etc. It has streamlined procedures relating to disclosure of transactions related to directors, promoters and others concerned with the company.
The new law requires auditors to be changed every five years to avoid collusion with the management, while rules would be tightened for the appointment of independent directors. “Compared to the earlier law, the new one is a positive step forward. While much will depend on the actual working rules that are formulated under the Act, the general thrust is on more transparency and better information flow,” writes Dhirendra Kumar, an independent provider of investment information, on his website.
It strengthens insider trading rules and restricts non-cash transactions involving directors
Industry chamber FICCI said the Bill has introduced numerous changes and concepts, which should “simplify regulations and bring greater clarity and transparency in managing businesses.” It provides for a uniform financial year (April-March) for all companies. For small entrepreneurs, the concept of one-person company has been introduced.
While most of the initiatives are welcome, the only area of apprehension remains the mandatory CSR spend. But corporate India will do well if it starts planning how it will go about it instead of pondering why it needs to — the law is now a reality.