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Mandatory CSR in India: help or hindrance?

India became the first country in the world to write CSR into legislation in April 2014, forcing companies to invest in sustainability programs. This should spell great news for development in India but business leaders are split over the effectiveness of such a law.

Companies across the world are under increasing pressure to demonstrate that they are responsible players in building an equitable society. According to consulting firm KPMG, by 2011, almost all of the world’s 250 largest companies had started reporting on their corporate social responsibility (CSR).

Last April, India became the first country in the world to write CSR into legislation for corporations. Hotly debated by India Inc, the Companies Act 2013 requires companies with a market cap of more than INR 5 billion or a turnover above INR 10 billion to spend at least two per cent of their net profit on social development and the environment.

Audit and advisory company Ernst & Young estimates that the new regulation will cover 3,000 companies and result in about $2 billion in expenditure on CSR, defined by the regulation as “the process by which an organization thinks about and evolves its relationships with stakeholders for the common good, and demonstrates its commitment… by adoption of appropriate business processes and strategies.”

Government-mandated CSR activities can range from those aimed at eradicating hunger, poverty and malnutrition, to those promoting preventive health care and education.

The regulations require that CSR activities be overseen by a special committee comprising a board of independent directors. These directors will outline the strategy, including expected expenditure, type of activities, roles and responsibilities of various stakeholders, and include a monitoring mechanism among other things. 

However, opinion is splintered within India Inc on whether this state-orchestrated philanthropy can benefit a nation of 1.2 billion people where over 400 million subsist on less than US$2 a day.

Novel solution, or yoke on growth?

A section of corporate India has lobbied hard against the directive, arguing that it will further inconvenience foreign companies already navigating a plethora of complex regulations while operating in India. India ranks an abysmal 140 out of 189 nations in a survey by the World Bank in its annual Ease of Doing Business Report in 2014.

“By adding layers of unnecessary regulation and taxation, CSR will make the country less alluring to foreign investors,” says Anil Saxena, chief executive of Infiniti Power Private Limited, a New Delhi-based IT company.

According to Saxena, profitable companies already foster job creation and income generation. “So why should we bear the brunt of an additional tax which further erodes our profits in a tough economic climate?” he asks.

Nevertheless, some industry leaders note that in a country like India, where one-third of the population is illiterate and two-third lacks access to proper sanitation, CSR initiatives ensure that businesses contribute to equitable and sustainable economic development.

“Mandatory CSR is a welcome step towards contributing to society and helping a company achieve a balance of economic, environmental and social imperatives while addressing the expectations of shareholders and stakeholders,” Sonica Malhotra, director at MBD Group, a premium Indian hospitality and publishing chain, told Eco-Business.

CSR should be a part of the DNA of any organization because successful ventures have to also give back to society and not just always take from it. This way businesses can have an overall positive impact on the communities, cultures, societies and environments in which they operate.

Sonica Malhotra, director, MBD Group

“CSR should be a part of the DNA of any organization because successful ventures have to also give back to society and not just always take from it. This way businesses can have an overall positive impact on the communities, cultures, societies and environments in which they operate,” she adds.

CSR as part of strategy

The increasing importance of CSR was also reflected in a recent survey conducted by Marsh & McLennan Companies India Inc, a global services firm that advises companies on risk, strategy and human capital. In the survey, conducted across 40 India-based organisations, 75 per cent said that CSR had become more important within their companies over the past two years.

The majority - 81 per cent - of the participants felt that CSR was an extremely important component of business strategy and that 73 per cent of survey participants have a CSR policy in place.

Only 10 per cent of the respondents indicated that their company did not undertake CSR activities.

In an essay published last April, Delhi University assistant professor Akanksha Jain notes that the mandated CSR investment is a novel solution to India’s social problems.

“It may not be perfect but it is a product out of necessity for economic justice. Corporations in India have failed to take the responsibility for the real cost of their functioning…The new policy may turn out to be a boon for both the corporates and the society, propelling India towards the path of equitable and sustainable growth.”

However, such views may be held by the minority, especially in a country where an inclement business environment characterised by high taxation rates, an avalanche of regulatory hurdles and bureaucratic apathy already make for a toxic cocktail for entrepreneurs.

Most corporate honchos - including IT tycoon Azim Hashim Premji of the US$7.3 billion Wipro and Ratan Tata of the US$141.27 billion Tata conglomerate - have publicly given a thumbs down to the new rule.

Some also point out that at 32.45 per cent, the corporate tax rate in India is already one of the highest, compared to a global average of 24.09 per cent.

This two per cent compulsory spend can be construed as a “clandestine way to increase corporate tax without a transparent debate”, observes Sumant Sarkar, a Delhi-based chartered accountant. “In a way, the bill penalizes companies for being in business and that’s why companies are now lobbying intensely for tax incentives on the two per cent spend on CSR activities.”

Rather than direct legislation, some feel India should follow the example of countries like Sweden, which have put in place regulations that control business behaviour in areas like the environment and human rights, and established anti-corruption measures.

“This system creates an enabling environment for the private sector to adopt sustainability practices by default without making it seem forced. To put it simply, in cases where private profits and public interests are seamlessly aligned, the very idea of CSR becomes irrelevant,” explains a senior official at Confederation of Indian Industries, an industry lobby.

Regardless of its effectiveness, however, industry observers say that the law has helped raise the profile of CSR among businesses in India. Shanthi Naresh, business leader of information solutions at global consultancy Mercer India, observes: “The importance of CSR and sustainability is seeping deep into Indian companies as three out of four firms in India already have, or are planning to form a core team dedicated to CSR within the next one to two years.”

He shares that a recent Mercer survey 40 organisations showed that 81 per cent of corporates in India are most likely to spend on education, followed by community-based development (64 per cent) and environmental sustainability (61 per cent).

Shallabh Kumar, a member of the All India Federation of Tax Practitioners, a pan-India body of advocates, chartered accountants and tax practitioners, echoes this view: “More and more companies in India are beginning their journey in CSR, or are starting to think about pulling together what they’re already doing and taking it to the next level.

“Results should be visible by 2016 as the legislation has been in place only a few months,” he adds.

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