Gunpoint charity: How India Inc can rescue the CSR idea

by R Jagannathan Jan 3, 2013

If charity is demanded at gunpoint, would that be charity? But this is precisely what the Companies Bill passed by the Lok Sabha last December, and which the Rajya Sabha will probably approve, proposes.
Clause 135 of the Bill says companies with at least Rs 5 crore of net profits should earmark 2 percent of their average net profits in the preceding three years for activities lumped under the term “corporate social responsibility (CSR)”. In fact, CSR will have to be done even by loss-makers, for the other criteria for compulsory CSR are a minimum net worth of Rs 500 crore or turnover of Rs 1,000 crore. This means, if a Rs 1,000 crore company made a loss in the latest year, but still had a positive average net profit in the previous three years, it will have to do CSR.
According to a Business Standard computation, 457 of the 500 companies on the BSE 500 Index will have to provide for CSR, and based on the average net profits for three preceding years, they will have to fork out Rs 6,751 crore in CSR spends. ONGC would have to spend around Rs 405 crore a year and Reliance Rs 377 crore, the newspaper says.

The only obligation is to earmark the funds, form a committee, formulate a CSR policy, and spend the cash. If you don’t spend the money, you have to explain why in the annual report.AFP

Let’s be clear. CSR is always a good thing for corporate image if done well. It is an even better idea if it genuinely tries to address serious development issues – from providing drinking water in villages, to improving farming techniques, to training school teachers, to even running low-cost rural hospitals.
Even a legal nudge – gunpoint charity – is not such a bad idea though.
But the real issue in mandating 2 percent spending on CSR is that the Bill makes no effort whatsoever to define CSR – only that companies should create a committee from among their directors, of whom at least one director will be an independent one. So, it seems the law has no problems whether I think feeding beggars on Mumbai’s streets or building temples in Rajasthan is part of my corporate social responsibility.
The only obligation is to earmark the funds, form a committee, formulate a CSR policy, and spend the cash. If you don’t spend the money, you have to explain why in the annual report.
The Bill also does not take cognisance of the money already being spent on CSR. For example, the profits of Tata Sons go substantially to charity. But would that count as a Tata Sons CSR when Tata Sons is not an operating company?
Clause 135 on CSR is probably mere political posturing to show us the government is doing something without bothering to understand the how, why and what of CSR. A law is legislated without defining the goalposts of CSR except in terms of spending.
The only real specification is that “the company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for corporate social responsibility activities.” (Read the full Companies Bill here)
If the government had thought through the idea, it could have integrated India Inc in many of its social projects, most of which are facing huge leakages and chronic inefficiencies.
For example, the Right to Education Act focuses on the 10 percent of privately-run schools that are better run than the state-run schools. But this won’t solve the problem of educating the poor. To dent that problem, you have to fix the 90 percent of schools that are not in the state sector. What prevented the government from allocating all public schools in one district to one major corporate to upgrade them to minimum standards – with private inputs and teacher training and better course material?
In rural areas, the big issues relate to excess use of urea due to heavy subsidies on this fertiliser. What prevented the government from allocating several districts to corporates to economise on fertiliser usage and/or improve soil conditions – and thus enabling the government to reduce the fertiliser subsidy? Why couldn’t Wal-Mart be asked to pay for all the fertiliser subsidies in a few districts allotted to it in return for the privilege of opening more stores in cities?
In urban areas, water, sanitation and transport are pathetic. Why shouldn’t urban companies be given the responsibility of running private bus networks or low-cost urban housing not only for their own staff, but the public, at subsidised rates? That would soak up most of the CSR money earmarked by the big companies even while reducing urban congestion and pollution caused by private cars.
An even bigger idea would be to allot one district to India’s top 600 companies to provide multiple social infrastructure – from schooling to healthcare to vocational training. Why not experiment with public-private partnership in managing NREGA?
Clearly, the idea of CSR itself is not bad, given the poor ability of the Indian state to deliver services to its citizens.
What the CSR provision actually tells us is that there is an absolute poverty of ideas in India’s legislating class.
The best thing India Inc can do is to take the CSR nudge in the right spirit and show the netas what can be achieved with corporate management and a results-oriented approach. There is no shortage of social causes and opportunities to spend the 2 percent on. Corporate India just has to make sure that the money really goes to support important social goals, and not dubious private purposes.
Go for it.