IEMA fellow Lakshminarayanan Ramakrishnan gives an insight into new legislation mandating corporate social responsibility activities for certain companies
With the introduction of s.135 of the Companies Act 2013, India’s government has made history by being the first country in the world to make corporate social responsibility (CSR) a mandatory business activity.
The new legislation, which came into force on 1 April 2014, requires companies with assets of more than Rs 5000 crores (£500 million), annual sales turnover of more than Rs 500 crores (£50 million) or annual profits of more than Rs 5 crores (£500,000), to:
- have a company CSR policy;
- have a board committee responsible for CSR;
- spend at least 2% of the companies average net profit (over last three years) on CSR projects, programmes or activities as specified in Schedule VII of the Act (see below); and
- publish a report at the end of each year on CSR, as prescribed in the CSR rules.
It is predicted that s.135 will affect about 2,500 companies in India and that they will spend Rs 15000 crores (£1.5 billion) over the next year on CSR activities. Reliance Industries, the India’s largest corporation, alone predicted to spend around Rs 400-500 crores (£40-£50 million).
It is strange, however, that CSR report required from companies only needs to cover the details of the money spent on CSR projects, not any information on the nature of the project or any targets, performance indicators or social improvements it achieves.
It appears that the government has taken the legislative route to rope in the corporate sector to support its efforts on millennium development goals and other social sector initiatives. The government itself has generally failed in its efforts to address the nine areas which it identifies qualify as “CSR”, such as eradicating poverty and ensuring environmental sustainability, and seems to be trying to use corporate involvement as a last resort.
While it is expected that the corporate sector will spend the money raised for CSR more efficiently than the government, it is also possible that the money may be spent supporting foundations or non-governmental organisations (NGOs) created by those in power. This opens up the question of whether s.135 could, potentially open up a new avenue for bribery and corruption.
Given that the money cannot be used for projects in pursuance of business activities, companies could see s.135 as an extra 2% tax, when they are already being taxed around 34% on profits. Furthermore, 2% is a significant amount of money, more indeed than many companies spend on the research and development needed for their survival. I would not be surprised, therefore, if Indian corporates manage to find ways to avoid this “tax”.
Certain corporate groups in India, such as Tata, Birla, TVS, Wipro, Infosys and Reliance Industries, for example, are already known for their CSR activities. However, with a few notable exceptions, such as Tata funding the creation of the Indian Institute of Science in early 1900, these activities have not impacted the Indian society significantly.
It may also be noted that India’s public sector already spends about 2% of net profits on CSR activities. It’s possible that s.135 is meant to not only ensure businesses are spending money on CSR, but to ensure that their giving has a significant impact on society.
CSR activities as specified in Schedule VII of Company’s Act 2013, are those that aim to:
- eradicate extreme hunger and poverty;
- promote education;
- promote gender equality and empowering women;
- reduce child mortality and improving maternal health;
- combat human immuno-deficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
- ensure environmental sustainability;
- provide employment enhancing vocational skills;
- support social business projects;
- contribute to the prime minister's national relief fund or any other fund set up by the national or state governments for socioeconomic development and relief, as well as funds for the welfare of the scheduled castes and tribes, as well as other minorities and women; and
- support other matters as may be prescribed by the government.
Dr Lakshminarayanan Ramakrishnan, FIEMA CEnv, is an environment practitioner in India
