The India Companies Act was passed by the Indian parliament in August 2013 and has imposed far-reaching changes to the governance of both India-based companies and foreign companies operating within the country. The CSR section of the New Act came into effect on April 1, 2014, and effectively declared that both domestic and foreign-owned companies must make CSR obligations to help remediate poverty and social problems in India.
Companies are subject to the CSR requirements if they have, for any financial year, in India:
- A net worth of at least $80 million,
- A turnover of at least $160 million, or
- Net profits of at least $800,000.
Companies that meet any of these thresholds are required by the law to develop a CSR strategy and policy, select an implementation mechanism and partner, develop a project plan, and report on these CSR activities.
We talk with Namrata Rana and Utkarsh Majmudar about this law. Namrata Rana is a Director at Futurescape. She has a Masters in Sustainability from Cambridge and an MBA dedree from IIM Ahmedabad. She has worked extensively in sustainability, CSR, livelihoods, healthcare and mobility. She also conducts workshops on CSR and sustainability practices of businesses. (Follow @namratarana on Twitter)
Prof. Utkarsh Majmudar is a professional with experience encompassing academics and administration at top business schools in India (IIM Lucknow, IIM Udaipur and IIM Bangalore) and working with large corporations. His interest areas include corporate finance and CSR. (Follow @utkarshm on Twitter)
1) In your opinion, is the India CSR Law a progressive law? What are the expectations of Indian business and society?
Corporate India has seen in the last decade that the path towards growth is not linear. Constant expansion also means a constant hunt for resources that go into manufacturing and invariably a conflict between man and nature. However Climate Change, while important is not the only challenge.
A developing country, like ours, has other objectives to contend with. Food and health for all, education for our children and work for an increasingly young population are objectives that are not optional. One must also remember that much of the growth that companies see is in developing countries. There is a need to balance opportunity and responsibility. While good governance and far reaching policies are part of the answer, much more needs to be done and the new Companies Act has asked companies to step in with the provision that they invest 2% of their net profits in CSR.
With this, the conversation in corporate circles has moved beyond ‘should CSR be mandatory’ to ‘what should we do and how’? The need to change from business strategies to “Responsible business strategies” is urgent if we are to tackle issues such as health, nutrition, education, water scarcity and climate change, particularly with India’s population of over 1.2 billion people.
Our study of India’s top companies (www.responsiblefuture.in) looks at understanding how companies are strategically investing in a multi stakeholder approach to rebuild businesses that can withstand the challenges of the 21st century.
Corporate India has a role to play in the global stage and in their contribution to society. In a connected globalised world, intent and action counts. And this new bill is an opportunity. The task, now, is to convert the opportunity to tangible outcomes that not only comply with the law but also highlight the larger vision of the organisation.
2) The Ministry is considering provisions to penalise companies that fail to comply with the rule for two or more years, after deciding against publishing a list of these companies on the Web. Do you think that firms prefer paying a fine instead of being on a black list? Is this a commitment to a gradual implementation of the law?
The law as it stands today does not provide for penalties for not complying with the rule. The law is expected to nudge companies towards a more integrated approach to opportunity and society.
Both penalties and blacklisting have a history of varied responses by companies and it is difficult to predict which way things would go. Black-listing for CSR is tricky area. By nature CSR is a voluntary action. Companies that are low on CSR are likely to be punished by market forces rather than a process of blacklisting. The assumption, also, would be that the area mandated by the government are co-terminus with the company’s priorities. Thus, blacklisting may not be a viable option in all cases.
The rules framed for enabling the law are being constantly fine-tuned to ensure adequate coverage. The industry has, also, been in regular touch with government to apprise it of its concerns and issues. Companies need time to adjust to the “new normal.” The companies are figuring out their strategic thrust towards CSR and penalties at this stage would be counterproductive.
3) In the European Union there is a debate currently going on over including women on the Boards of Directors of Companies, but presumably the New Directive will not set compulsory quotas. Instead, Section 149 of the Companies Act makes it mandatory for all listed and public companies with over 100 crore Rupees of share capital or over 300 crore Rupees of turnover to appoint at least one woman director. We would like to know your opinion about how professional women can improve the economy and gender empowerment in India.
Inclusion of women in Boards aims towards increasing diversity. Women account for only 4.7% of board seats in India relative to 16.9% in United States and 40.5% in Norway that leads the pack. Given this scenario, we believe the new provision is a positive step.
Many aspects of inclusion of women at board level need to be taken care of which include creating a steady pool of talent. Currently there aren’t enough women in senior management of companies that could fill the director level shoes.
A study by Harvard indicates “men in countries with quotas supported them in higher numbers than men in countries without them.” We hope that this applies to India as well and would lead to strengthening diversity in Indian boards.
There are also frequent news reports of women family members being inducted into boards.
4) In your opinion, will the CSR Law promote foreign investments in India?
The CSR law is about a positive contribution to society. There are other laws that talk of promoting foreign investments in India – ‘Make in India’ is one such scheme, where the country is inviting companies to set up manufacturing base in India.
5) Finally, what are the main challenges for CSR in your country?
1. Responsible Manufacturing
The new thrust towards Make in India shifts focus from services to manufacturing. It includes both Indian as well as foreign companies catering to both domestic as well as international demand. This has a number of implications: Manufacturing companies require larger investments and are more likely to fall in the mandatory CSR bracket. The CSR lifecycle for manufacturing typically starts with local community driven inventions. This is likely to see a surge.
- Increased demand for ethically produced products
International markets demand greater focus on social interventions. This is manifested in no child labour, humane working conditions, environmental safeguards. This will force companies to spend more on CSR in India.
- Growing Talent Gap
The talent pool for CSR managers is limited and several CSR jobs at all levels lie vacant. The big questions in these nascent CSR departments includes what causes to support, how to scale efforts and how to implement without losing focus? The demand for trained CSR managers will continue to increase multifold
- Green Supply Chains
Increased scrutiny and public awareness will lead to a thrust towards efficient supply chains. Sustainable supply chains will demand attention.
- Increased Disclosure and Improved Governance
Support system for improved disclosure and CSR governance will be in demand.
CSR will be more about genuine impact that simple philanthropy. It will be about connecting causes to brands and people. Genuine inside out responsibility for the world we live in built into product lifecycle, communication and on ground engagement.
6. CSR managers will need insight and adaptation not just knowledge and skill
Linkages of CSR to core business and strategic intelligence management will help companies navigate the quickly changing landscape and even manage unexpected twists. Though this can only happen if the CSR manager of tomorrow has not just knowledge and skill but insight. Insight into stakeholder groups, customers, suppliers and communities.
7. Innovate, Transform and Engage
Indian companies will need to build, innovate and transform on a regular basis. Our study of India’s top companies has revealed that companies are investing in products and services that will build sustainability at the core. New Technologies, Dematerialisation, Reuse and Recycling will drive business innovation. This will continue to grow.