Forced Corporate Responsibility
The government is toying with the idea of making the CSR mandatory for companies to spend at least 2% of net profits on CSR through the Companies Bill, 2011 which is pending in the parliament since November 2011. Currently, businesses follow provisions of the Companies Act, 1956, which are no longer appropriate to the today’s business and economic environment. Thus, a revision process was started in 2003 and a Companies Bill 2008 was tabled in Parliament, but lapsed with the dissolution of the Lok Sabha in 2009.
Industry has been almost totally against a mandatory clause; it was suggesting tax breaks for those who meet the voluntary targets. Critics argue that companies may resort to camouflaging activities to meet such regulations, particularly during recessionary periods and economic downturns. Some NGOs and philanthropic community also have similar concerns. Some others have called it “outsourcing of governance.” They see it as government burdening its failure on the corporate.
In the Western nations, laws do not stipulate mandatory CSR quantum; they only make disclosure of CSR spending mandatory in the annual reports. Thus, once the Bill passes in the parliament India will become the first country to have CSR spending mandated by the law.
Poverty in India: Who Cares?
It is an open secret that the so-called economic reforms, initiated and led by international lending agencies, of past two decades are designed for GDP growth offering incentives to money lenders and corporate houses. As a result, in the past decade the rich-poor gap has only increased; creating a few hundred millionaires and a dozen more billionaires is being touted as a success story of India.
Another sad fact of governance in India is that the rulers appear to have no clues about how to make any meaningful dent in the poverty. It also fails to appreciate that population is not number problem; it is a “people development problem.” Corruption scams in India now routinely involve thousands of crores; gone are the good old days when bureaucrats-politician nexus would settle for few lakhs or few crores of kick-backs. This is sure sign of “economic” progress of India consisting of around 300 million people; this is the Rich-India known to the world. Economic reforms are designed only for them. For rest of the three-fourth population, there is a game of poverty-line played by well-fed bureaucrats whose hourly expense exceed many times the monthly income of people of the Poor India, below the poverty line.
Under the so-called economic liberalization policies, governments and bureaucrats have absolutely no compunction handing over lands, forests, water and other natural resources to the rich elites by displacing scores of poor landless farmers, tribals and other disadvantageous class who survived on them. Rich man’s hunger for wealth has become a problem for survival for those already poor. This is the development model rich nations have dictated and India proudly follows. As a result, GDP grows and those who are already well-off acquire more money and the people of Poor-India remain where they are – battling for survival.
A question everyone wants to ask, but no one answers, is: Is the trickle down model of US economy appropriate for a populous country like India? I wonder why no economist has ever commented on how the excluded and marginalized class of India can possibly benefit from the trickle down economy?
How will millions of poor people, who are more or less cut-off from the mainstream economy, gain any benefit from rich people’s activities which only suit the educated or those already with money?
CSR and the Companies Bill 2011
Corporate India may not be excited about the mandatory nature of CSR provisions of the Clause 135, but they are waiting eagerly for several other important features contained in the Companies Bill 2011.
The major aim of the Bill is to decrease regulation and to shift the onus of oversight onto shareholders. The Bill makes some effort to address corporate governance in general through Western mechanisms such as formal, impartial audits and an increased number of independent directors on boards. It also provides a safety net to the whistleblowers. The Bill also allows shareholders to band together and file class action lawsuits; this kind of tort framework is currently not available in India. It establishes a National Company Law Tribunal to expeditiously handle these corporate lawsuits. However, it is worth noting that class action lawsuits will only be available to shareholders—not to the average Indian. Companies themselves have long advocated for a more expeditious corporate law system, as it would reduce the uncertainty inherent in international litigation.
The listed companies shall have at least one-third independent directors on the board. They shall be responsible for all acts of omission that occurred with his knowledge or with his consent or connivance or where the director had not acted diligently. The Bill is certainly more pro-business than it seems at first glance.
While other provisions of the Companies Bill are of great importance to industry, it’s the CSR provision that has become the bitter pill for the corporate world. The Companies Bill, 2011 proposes that companies with net worth above Rs. 500 crore, an annual turnover of over Rs. 1,000 crore, or annual net profit of Rs 5 crore shall earmark 2 percent of average net profits of three years towards CSR. In the draft proposal, it was only declaratory which works through peer and public pressures as in many western nations but the Finance Committee added the mandatory 2 percent clause.
Is the Schedule VII really Vague?
The Schedule VII of the Companies Bill 2011 lists activities that constitute CSR from government’s perspective. Here is the Schedule VII of the Bill, as proposed:
In their CSR policies companies may include the following activities related to:
- 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;
- Social business projects;
- Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
- Such other matters as may be prescribed.
Many from the business community find these activities too vague and feel that it would open way for bureaucratic interpretations and meddling leading to unnecessary disputes. Some social activists fear that business houses might also resort to “creative accounting” to offset the 2 percent CSR financial burden. In fact, there is no end to such arguments as long as social responsibilities are seen as burden. People look towards businesses for such initiatives because they have the money, expertise as well as resources that can make social advancements easier.
India ranks 134, out of 183 countries on the World Bank’s index of ‘Ease of Doing Business’.
It is another well known fact that governance in India is highly poor. Laws only reflect high ideals and expectations of people but when it comes to implementation, bureaucratic ineptitude and corruption washes out all end results. Besides, a political broker class has evolves that has acquired mastery in siphoning funds designed for weaker sections of the society. People know very well that, of the numerous schemes designed for weaker sections, less than 20 percent of the government funds reach the actual beneficiaries; the rest goes into the pockets of intermediaries.
Given this scenario, people’s expectation from businesses has risen hoping that they would come forward to take initiatives towards sustainable development and look after people as well as the nature. For those business houses who are already taking social initiatives the CSR provisions of the Bill only make their task somewhat clearer. For them the nature of CSR provisions is immaterial.
Let’s hope that other business houses also learn to think differently and seriously. Today the world is sitting on a planet that has been badly damaged and polluted leading to global climate mess up. The pure money culture propagated by the western corporate world, and followed everywhere, has emerged as the biggest threat not just for the local societies but the world as a whole.
You may like to read a detailed report of corporate social responsibility: Mandatory CSR Proposal