Do good INC.
Mar 07 2014 , Mumbai
Rs 30,000 crore will now flow from corporate books into CSR initiatives. It must not go waste
~ Robert Brault
The responsibility of any government to herd the masses out of their misery may have been well established since the civil state concept came into being. Even for cash-rich companies across the world, being charitable is a way of life, though not legal. But for companies in India, sharing the obligation with the state comes with a diktat. It is no longer voluntary.
It is for the first time that the Indian government has legalised the term corporate social responsibility (CSR) by making it mandatory for the companies to deploy 2 per cent of their profits towards the upliftment of the society, environment and economic development by enforcing the CSR recommendations under Schedule 7 of the Companies Act 2013.
There is no doubt that from time to time companies have taken upon themselves to participate in reformation exercises by helping the underprivileged to assuage hunger, provide education, opening health centres, but largely to people closer to where they operate. It has been widely acclaimed and generally accepted that the objective of any company is to maximise profits even where they offered these services. The skills were honed to take care of their business or labours trained to take up activities within the campus.
The new norms have changed the perspective and would oblige companies to look beyond their trusts and foundations that were mostly taking up philanthropy-related activities. Under Schedule 7 of the Companies Act, the government has identified specific areas where it wants the companies to focus on, such as, eradicating extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases, ensuring environmental sustainability, employment-enhancing vocational skills, contribution to the prime minister’s national relief fund or any other fund set up by the Union government for socio-economic development and relief, and funds for the welfare of the scheduled castes and tribes, other backward classes, minorities and women.
While the government has limited the scope of companies to think beyond these fixed areas, it has provided a lot of clarity by removing confusing statements like “all other social development projects” and making it clear that political funding and employee-benefit schemes would not be part of CSR. This means the companies will have to take up only schemes outside the realm of their operations.
Arun Nanda, director of Mahindra & Mahindra, believes sustainability and financial inclusion are vital for corporate houses. “What we have is not what we have inherited from our ancestors but what we have borrowed from our future generations. Hence, sustainable operations are indispensable. Conserving water, growing acceptance of solar power, use of organic fertilisers and carbon emissions are a must on the list of sustainable development programmes,” he said at a recent seminar organised by the Confederation of Indian Industry (CII), which is actively mentoring companies to comply with the CSR rules.
He also stressed the need for financial inclusion due to the widening gap between the rich and the poor and the vulgar display of wealth by the rich. “By encouraging small and medium-scale enterprises and setting up industries in far-flung and backward regions, the rewards of financial inclusion can reach larger populations. He believes the government can only facilitate efforts at sustainability, while industry leaders should ensure that all their smallest acts are sustainable.”
Planning commission member Arun Maira said at the CII seminar, “It is important to ensure that the money used for the purpose of corporate social responsibility came from ethical means. As corporate citizens, businesses must be responsible for their behaviour and the consequences thereof.”
He added that corporations were responsible not only for their investors, customers, employees and suppliers, but also to external forces like environment and community.
He also believed that the mandatory spending alone would not make a huge difference to society, but doing business the right way would. Leaders needed to take responsibility for ensuring responsible growth, factoring in sustainability and inclusive development. He concluded by saying that if corporations lived by values, they could also create value.
Madhulika Gupta, founder and CEO of REPUTE, a company providing CSR solutions, says the imposition of mandatory spends for CSR is a wake-up call designed to nudge those companies that did nothing in CSR to ensure they did something.
“However, as of now, this move is bound to create a flutter among corporate houses because the ones that have robust CSR programmes see this as an unnecessary control mechanism, one that could only compound the complexity of board responsibilities and business reporting, and also because there lies an anomaly between ‘responsibility’ which implies self-motivation (which these companies have demonstrated) versus ‘rules and regulation’ which is an imposition and not required in their case.”
According to her the move is a good one, especially if one looks at it in the light of what collaborative strengths of private funds coupled with public funds and government support can achieve towards upliftment of the vulnerable and disadvantaged sections of society. “As in all, excellent ideas and schemes by the government or others. The proof will only lie in the implementation and execution of those ideas… so how it works out has to be seen.”
Harinderjit Singh, partner atPricewaterhouse said the CSR rules could have left it to the discretion of the CSR committees of the boards to identify the areas for CSR, as that would open up several new avenues for development.
“An important change in the rule is the mention of ‘rural development’ though they could have been more descriptive by outlining the areas like irrigation and water conservation,” said Singh.
Though a few issues have been left unaddressed such as taxability (if the CSR spend would be allowed as tax deductible expenses under the CBDT norms) and the definition of CSR in Rule 2(c) (it is confusing as it states the CSR would not be limited by Schedule VII and further Rule 7 states that CSR expenditure would include only activities under Schedule VII), there is enough in the framework for companies to start thinking positively towards the development of the society, Singh said.
However, would it be apt to assume that the rules would force companies to come clean and observe each and every rule mentioned in the Act when they are not coercive by nature.
Officials and experts accept that companies would be forced to think objectively and part with their profits that come from the use of natural resources for the overall development of society. This assertion is based on ‘apply-and-explain’ basis, which means there is no coercion or penalty for failing to achieve the objectives outlined at the outset. The companies would only be required to explain to the shareholders in their annual report.
“Although it is an attempt by the government to coax companies to attach part of their proceeds towards CSR, no real penalty for failing to achieve it is undeserving of the Act that was supposed to make it obligatory by nature,” said Gopal Krishna, senior fellow of Citizens Forum for Civil Liberties. “We expect the loopholes to be plugged once a new and stable government comes to power after the forthcoming elections.”
The intention of the policymakers is quite clear — to report business community's contribution towards fulfillment of social, environmental and economic responsibilities. While contribution to local community is a good objective, businesses should choose social, environmental and economic activities that contribute to society at large.
Mukund Rajan, member of the group executive council and chief ethics officer at Tata Sons that already deploys around Rs 1,000 crore towards various activities under CSR across companies annually, says many of the issues in social development properly fall in the domain of the government.
“Corporate houses do have the ability to introduce efficiencies and better planning in many government-run schemes, and to the extent companies have the bandwidth, including the ability to nominate resources and volunteers for such activities. It is a very good idea to engage and involve the corporate sector in such programmes of the government." (Read interview in this issue).
Big corporate houses such as Tatas, Birlas, M&M, HUL and Godrej apart from public sector companies are already conscious of their image and have been undertaking CSR activities on a regular basis, though there are very few companies who have committed a percentage of their profits towards CSR.
M&M has undertaken CSR and philanthropic activities since 1950s and since 2005, it has committed to spending 1 per cent of the net profit on CSR, says a senior official of the company. Now, with the passage of the new Act, they will have to spend around Rs 172 crore towards CSR across companies.
“Earlier, our contribution at 1 per cent was around Rs 62 crore, but with the new rule in place we have taken a conservative estimate of 2 per cent of the profit before tax, which would ideally put the figure at Rs 172 crore, almost triple the amount we were spending earlier,” said Rajiv Dubey, president, Group HR, corporate services and after market, M&M. (Read interview in this issue.)
Godrej Group says it spends even more than 2 per cent on CSR though it may not be happening at the individual company level. “But the company is conscious of its responsibility,” says Adi Godrej, chairman of Godrej Group. (Read interview in this issue).
According to an estimate by the ministry of corporate affairs, companies could end up spending up to Rs 30,000 crore on CSR activities following the new recommendations. Even at that rough estimate, the BSE500 companies would have to shell out around Rs 8,000 crore.
The issues that would start to bother many companies now after the recommendations have become a rule would be around channeling the resources towards specific causes. In the case of known and established brands, it would be about increasing the quantum of funds and identifying additional areas, but for companies that were really not serious earlier, it would mean setting up an entire infrastructure for the purpose.
It is believed it might serve the companies well if they stick their projects and programmes with companies that already have an expertise and save on time and building the resource capacity individually.
“It would be a real challenge for small and medium enterprises to shell out more than Rs 50 lakh every year towards CSR. It would be advisable for them to align with bigger and better-known companies. They would only have to identify the projects they wish to fund and the rest would be taken care of by the experts in the field. SMEs would just be required to mention it in their annual report at the end of the year,” said Dubey.
In terms of building capacity by companies, it is also argued that the role of NGOs that help companies in achieving their objective cannot be diluted. Most of these NGOs currently lack skilled staff that could understand the economics and financial aspects of the projects and take forward the additional responsibility.
“It serves to first train the staff at the NGOs before they are funded. At the Dasra Philanthropy Week, we discussed how the CSR funds and employee-engagement initiatives would need to be utilised intelligently. NGOs with substantial staff would certainly need a separate setup of HR, communications, finance and accounts teams to handle the organisation properly. Hence, companies must first pay attention towards skilling the staff, such as providing them right capacity building support and executive education that can then help in raising additional funds for the projects,” said Deval Sanghavi, partner and co-founder, at Mumbai-based Strategic Philanthropy Foundation, Dasra.
The organisation has provided philanthropists with investment strategies directing over $40 million into the Indian social sector over the past 14 years.
Indian companies will also have to be more serious towards the activities they promise under CSR. The reputation of lots of mining companies and companies involved in bigger projects that require largescale displacement of people will have to considered more humanely and with the sensitivities involved.
There is a perception that companies involved in mining have never really committed any percentage of their profits towards corporate social responsibility. Even companies that said they had undertaken horticulture activities on their abandoned mines after they were exploited fail to give the location where they did so, says Gopalkrishna of Citizens Forum for Civil Liberties.
He cites the glaring example of a company in Jharkhand that is in the process of acquiring 1,778 acres for a steel plant, and has reportedly claimed that it would take the responsibilities of the 50 families that alone live in the area under its CSR obligations. However, voting records suggested there were more than 5,000 families living in that area. This is gross exploitation of people, which should be stopped. How many generations can survive on the same land, he asked.
Gopal Krishna also cited the example of Kolar gold mine, which once boasted facilities such as hospital and school. But once the production declined and the mine was closed, the facilities and the residents suffered. These activities could not be sustained despite all the promises, he said.
NGOs and organisations that implement the projects will only support companies or corporations with a clean image.
Pradeep Banerjee, executive director for supply chain at Hindustan Unilever (HUL), said businesses needed to be sustainable so that we can leave a legacy for the future generations. He said there was an urgent need to add an additional element of being ‘responsible’ to the current 3-G model of growth followed by companies based on consistency, competitiveness and profit.
“We would be very open to partnerships with other companies, non-profits, the government and indeed overseas funding agencies that seek to improve the social milieu and are concerned about community development in India. As a group, we have demonstrated capability and credibility through the initiatives we have undertaken over many decades, and we would be happy to provide the benefit of our deep understanding of social issues to other entities that wish to align with our activities,” said Mukund Rajan of Tata Sons.