Corporate governance and controversial CSR rule dominate update of India’s 50 year-old Companies Act

Expected ratification will bring in The Companies Bill, 2011.

India’s fifty year old Companies Act is being updated, but not without controversy. Passed by the Lower House of the Parliament (Lok Sabha) in December 2012, the Upper House (Rajya Sabha) is expected to grant its approval shortly. The Companies Act, 1956 will then cede to the Companies Bill, 2011, bringing in legislation that is meant to better align corporate management in India to global standards. This includes provisions for better disclosure and accountability, a fixed term for auditors, enhanced shareholder participation, and guidelines for directors’ remuneration. But what has garnered the most attention has been the Corporate Social Responsibility (CSR) provision which mandates that companies must spend a portion of average net profits to meet their social responsibilities. The scope of these responsibilities has been left to the discretion of each company following broad guidelines. It is applicable to all companies with a net worth greater than USD five billion, a turnover of more than USD 50 billion, or net profit equal over USD 0.5 billion. These companies are required to set aside two percent of their average net profit of the preceding three years to conduct their CSR activities. A clause that would have made the CSR spend mandatory was removed in the most recent version of the bill, but reporting and disclosure is still compulsory on a comply-or-explain basis. Companies that fail to show the required outlay for corporate social responsibility will be required to explain why. These companies are also required to form a committee to oversee sustainability activities. If the bill passes, India becomes the only country in the world to have a defined corporate contribution to social welfare. This has led to much discussion in India and internationally on whether the proposed regulation represents excessive government interference with companies, misplaced responsibility on the corporate sector, or may even send negative signalsto international investors. It is important therefore to understand the evolution of the Bill. In what may be a case of misplaced semantics, CSR in India is understood to be synonymous with philanthropy and charity as opposed to responsible or sustainable business. The law does little to make the distinction clear. The ambit of its suggestions for CSR activities covers eradication of hunger, promotion of education and gender equality along with social business projects. Traditionally, CSR in India is marked by education and health projects, which, though welcome, have little to do with the damaging effects that a mining company may be having on the environment, or weak labour relations that may lead to protest and unrest. The definition of CSR in India has changed over the years. The Gandhian model of running the business like a family unit switched to the Nehruvian Statist approach that called for the State to define corporate responsibility, which then mutated to a version of Milton Friedman’s liberal model with the economic bottom line as the primary responsibility of a company, before mixing with the current stakeholder approach that calls for companies to acknowledge and fulfil their social obligations in a holistic and bottom up-manner. However, the Ministry of Corporate Affairs (that drafted and presented the bill) has left the interpretations of social responsibility open to each company, assuming that it can best identify its own contribution to social welfare. How well this will work remains to be seen. Semantics play a role again. Since we already know that the term ‘CSR’ is relatively limited in scope in the Indian context, labelling the provision as ‘CSR’ as opposed to ‘responsible business’ or ‘sustainable business’ can contrast directly with the impact of a given company’s ‘externalities’. At present, most Indian companies have stuck to the traditional philanthropy-related understanding
of CSR by directing a portion of their profits towards charitable causes in health, education or funding old age homes. Asian Paints, one of India’s largest paint companies, provides details on health and safety of employees, employee training and research on environmentally compliant products. But it is separate from its CSR activities, which include healthcare, education, care of the elderly and water conservation. Similarly, Coal India Ltd., India’s largest, and among the world’s top 5 mining companies, details its CSR activities separately from safety in its mining operations, environmental safeguards and community development. CSR at Coal India Ltd. is centred on literacy promotion, health awareness camps and environmental initiatives. This division, however, leaves the door open for companies to expand their CSR activities while important ESG measures such as employee safety and environmentally friendly product development take a back seat. Of the 118 Indian companies that are a part of the 800 plus companies covered by Solaron’s emRatings product, only 30 had published a separate sustainability report by the end of March 2012. The new law stipulates that companies need to formulate and publish their CSR reports on websites every year. Estimates by a business newspaper in India reveal that if the law comes into effect for 2013-14, USD 1.3 billion will be spent by the BSE 500 companies on CSR in 2013-14. That’s a significant rise, given that at present, a mere 0.2 per cent of company profits are being used for CSR activities.
Will this fluidity in CSR definition aid or mar long-term sustainability? Some companies may direct money towards philanthropy even as their own operationscontinue to risk employee safety and the local environment. Are Indian companies equipped to implement this CSR provision effectively? Will the lack of clear definition and guidelines lead to a continuation of the community development model of CSR, irrespective of the company’s actual operations and impacts? Or has the government embarked on a suck-it-and-see model, an extension of the socialist aura that the left of centre UPA party that leads India’s Congress has assumed? The UPA has focussed on social welfare in the form of rural employment guarantees amongst other initiatives. Social sector spending in the 2011-12 Budget stood at USD 30.89 billion, a 17 per cent hike over the preceding year. Of this, 36% has been allotted to improving roads, power supply, irrigation, housing, drinking water and the telephony network in rural India. These policies may, however, be compromised in the upcoming budget given the fiscal constraints of the Indian economy. Many see the timing of the new Companies Bill as an attempt by the government to pass on a share of its responsibility to corporate India even as it continues to gain political mileage for its social welfare model. The new bill has, as expected, elicited a mixed response from industry. Some companies have demanded tax concessions for the additional expenditure. Others are concerned that the provision may become another mechanical exercise without any real contribution to sustainable business. For India perhaps the most crucial question is how to define corporate socially responsible behaviour. This should operate at multiple levels: how the company makes money, what it sells, where and how. India’s focus, however, seems to be limited to how the company spends its money.

Radhika Mehrotra is an Analyst, Stakeholder Engagement at Solaron Sustainability Services in India.