Decoding the
CSR clause in Companies Bill 2012
Making an
attempt at decoding some significant facts of the bill for easy understanding
by CSR professionals…………..
Background
A new Companies Act has been in the pipeline for several years in India. The Bill revolutionizes several aspects of corporate governance including policies related to audit, transparency and requirement for independence of directors. One such pertinent change is the introduction of a mandatory corporate social responsibility (CSR) investment of two per cent provided in Section 135.
A new Companies Act has been in the pipeline for several years in India. The Bill revolutionizes several aspects of corporate governance including policies related to audit, transparency and requirement for independence of directors. One such pertinent change is the introduction of a mandatory corporate social responsibility (CSR) investment of two per cent provided in Section 135.
While the
concept of CSR is centuries-old in India, there has been little legislation to
enforce this responsibility. The only prominent CSR legislation India has seen
prior to this Bill is the Corporate Social Responsibility Voluntary Guidelines
2009.
In 2009, when
the compulsion of CSR investment was proposed, the hesitation of the
legislature was evident in the way the ‘voluntary’ section was framed. Now it
imposes a compulsory measure, yet the liability of the company is only to make
‘best endeavour’ to comply and then report.
How the Bill
defines CSR?
CSR has many
interpretations from a global perspective. However, as per the Bill it is
understood to impose a liability on the Company to contribute to the society
(whether towards environmental causes, educational promotion, or social causes;
Part III of this article will underline all areas with examples of
programmes to be undertaken) along with the reinforced duty to conduct the
business in an ethical manner.
Section 135
As per
Section 135 (Section) of the Companies Bill, the following companies will have
to abide by this requirement:
§ Companies having a net worth of rupees five
hundred crore or more
§ Companies having a turnover of rupees one
thousand crore or more
§ Companies having a net profit of rupees five
crore or more
Implementation:
Committee and Policy
§ To ensure that the company is setting
off this requirement as per the rules framed in this Section, the companies
will have to constitute a committee consisting of at least three directors, one
of whom shall be an independent director.
§ The committee shall also initiate a CSR
Policy (Policy) that shall stipulate how, where and when they want to invest
their funds with respect to this requirement. If the company does not abide by
this stipulation, the board directors (Governing Board) must provide an
explanation for the same.
Schedule VII
Given that
this is the first time that the Indian corporate sector is seeing such a
requirement, Schedule VII (Schedule) provides some direction on what will
constitute as valid expenditure under this Section.
As per this
Schedule of the Bill, social causes such as promotion of education and welfare
funds such as the Prime Minister’s National Relief Fund may be included in the
Policy of the Company. This Schedule aims only to give examples of options
companies can pursue under this Section. (read What is Schedule VII? in part
III of this series with examples of doable and impactful CSR programmes)
Will Companies Benefit Too?
Although a few Indian companies seem wary of this new regulation, neither wanting to be forced to spend on social initiatives nor very equipped to deal with the implementation of such a policy, there are numerous positives to this coin:
§ Development of ‘reputation capital’ for
capturing and sustaining markets. Therefore, corporate social responsibility
has developed as a new business strategy to reduce investment risks and
maximize profits by taking all the key stakeholders into confidence
§ Long-term gains as opposed to short term
profits, which are the outcome of good CSR policies
§ Environmental stability and
sustainability – being an important resource for companies – is ensured
§ Social stability
§ 
With
globalization, the negative aspects of businesses have been intensified, and
exploitation is widespread – CSR policies may work to counter this effect
With
globalization, the negative aspects of businesses have been intensified, and
exploitation is widespread – CSR policies may work to counter this effect
§ Lastly, a successful company cannot exist in
a society that fails, and therefore a company being a member of the society is
required to contribute
Google for
‘news’ on CSR and you’ll find almost all dailies writing something or the other
around what is happening and what may be done and what all may happen. While
some news articles are focusing on pros and cons of the bill (awaiting the
President’s nod to become law), with opinions from industry leaders, some
others are talking about opportunities in terms of jobs in the development
sector. You will also find how a dozen limited companies and non-profit
foundations have already introduced CSR awards, some of which have sponsors’
list quite similar to that of Filmfare or Stardust. Not to
mention the number of seminars, workshops, conferences and forums on CSR.
Corporate
social responsibility (CSR) has started to sound like the new cool. The
social sector does not meet khadi kurta and desi jhola anymore. A young creed
of social entrepreneurs can now be seen pitching around CSR departments of
corporate groups with ideas that they believe can bring about the change while
fulfilling the company’s CSR obligation. This was expected. Any
business-oriented yet socially thinking mind with common sense will want a
share of the Rs 15,000 crore pie – the expected size of this new responsibility
sector – this being a rough estimate if all companies in the ambit spend two
per cent of their net profits towards CSR (as per Section 135 in the new
Companies Bill).
Whether or
not they deserve a part of the pie is another question altogether. Before
moving on to that (Decoding CSR Bill – Part 3), let’s have some clarity on Section
135 – what it says, what it means and what companies are actually expected to
do.
Who falls in
its ambit?
Every company
having net worth of five hundred crore rupees or more, or turnover of one
thousand crore rupees or more, or net profit of five crore rupees or more
during any financial year shall constitute a CSR committee of the board
consisting of three or more directors, out of which at least one director shall
be an independent director.
Step1: Form
CSR committee – it is a must Now that you fall in the bill’s ambit, the first thing to do is to
create a CSR committee. The bill says that the company’s board's report, under
Sub-Section (3) of Section 134, shall disclose the composition of the CSR
committee. This means that the names, designations and responsibilities of the
members of the committee have to be a part of the annual CSR report. Yes,
this also means that the company shall bring out an annual CSR report.
Step 2:
Assign responsibilities to the committee
As per the
bill, the CSR committee shall: (a) Formulate and recommend to the board a CSR
policy that shall indicate the activities to be undertaken by the company as
specified in Schedule VII. [What’s schedule VII? It is basically a list of
issues around which your CSR activity should be conceptualized. Read about it
in detail with examples of doable and impactful CSR programmes in Part 3 of
this series.) (b) Recommend the amount of expenditure to be incurred on the
activities. (c) Monitor the CSR policy of the company from time to time.
Responsibilities
of the company’s board
CSR shall be
sharing the berth with finance, marketing and brand positioning decisions of
the company. While the programmes and their impact analysis may be done by the
CSR committee along with outside partners (including consultants or voluntary
organizations), the review, the scrutiny and the approvals are to be done by
the board of the directors. The board has to closely monitor and evaluate the
‘impact’ of each penny of the organization that is going towards the
development of the grassroots. Here, the return on investment (RoI) for the
company will not be seen in a rise in revenue but in terms of change on the
ground – this will inevitably impact the way the company will be looked at from
the outside.
- After taking into account the recommendations made by the CSR committee, the board shall approve the CSR policy for the company and disclose the contents of the policy in the CSR report, and also place it on the company's website in such manner as may be prescribed.
- The board shall ensure that the activities included in the CSR policy are undertaken by the company.
- The board shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR policy.
It
should be noted here that while defining the responsibilities of the board
(Point ‘c’ above), the bill says that the company shall give preference to the
local area and areas around it where it operates, for spending the amount
earmarked for CSR. Also, these programmes shall preferably be implemented in
association with non-government organizations, voluntary organizations, social
societies, members of the civil society and social entrepreneurs.
Here, the
bill also says that if the company fails to spend such amount (two per cent of
the said amount), the board shall in its report specify the adequate reasons
for not spending the amount.
After one
quick read of Section 135 in the Companies Bill, you will think how simple and
practical it is. Then, if you will think again, you will realize that the 10
points in Schedule VII which are written on the last page of the Bill are the
core of Section 135, and focus on them is a must for the country’s progress.
Yes,
naysayers do exist, but they are in the minority and most of them are business
owners. They are crying foul, saying governments have passed on its duties to
businesses. (It may be noted here that the ministry of corporate affairs has
clearly said that none of them will be penalized for ‘not’ spending on CSR –
just that they will have to give concrete reasons for their inability to do
so.) Do these people have concrete reasons, is yet another story.
For the rest
of us, here are the 10 points to follow in Schedule VII – elaborated with
examples of possible programmes to make them read and sound better and, of
course, make a meaningful impact – benefitting the company as also the
programmes’ intended beneficiaries.
What is in
Schedule VII?
Every CSR
activity of the company, starting from the creation of the policy to the
writing of the impact report, will depend upon the objective and the intent of
the company, and these 10 points will help in shaping the same. No, the 10
activities do not justify the CSR spectrum and scope as per global CSR norms
and practices, but they are relevant in the Indian context – the country needs
development at a fundamental level, beginning from the grassroots. The most
interesting part here is that if the first 8 of the 10 prescribed points are
implemented with zeal and enthusiasm, the country can expect to see the
beginning of the change process that it really wants to see. All of these
causes or issues are interrelated.
Here are the
listed activities. Note that all the activities undertaken by the company have
to be focused at the outside public and not at the company’s employees or their
families.
THE 10 POINTS
1. Eradicating
extreme hunger and poverty
Well, the
Food Security Bill has been passed, but the government surely knows the
implementation hassles and practical limitations thereof. So, a larger and
focused role has to be played by the corporate groups in eradicating hunger and
poverty.
(Is it a
business function? Well, the moment you will think like this or ask similar
questions to yourself or the governments, the intent with which the CSR should
be done will suffer and so will the social programme. Let’s accept the law the
way it is and not compromise on what we ‘really’ have been wanting to do – that
is, our bit towards bringing about the change.)
So, what all
can a company do? Well, one simple way is to adopt a few families in abject
poverty and start giving them food – funded by your CSR budget – on everyday
basis. But if the company decides to pull the plug for whatever reasons, the
hunger will remain. Hence, a sustainable CSR programme wherein the poor are not
given a fish to eat, but are trained to do fishing as well as taught to sell it
in the market, will make some difference. Create self-help groups, train them,
and then fund them for micro businesses and use your business expertise in
developing their business alongside. How about creating a self-help group that
can somehow be a vendor of the company? Who’ll not benefit?
No, those
langars and bhandaras, and food for Amarnath and Vaishno Devi pilgrims or
biryani at Haji Ali will not eradicate hunger. It rather makes its eradication
more difficult and cannot be considered a part of corporates’ responsibility,
or of the Bill in this case. For charitable purposes and with regard to
religious respect, they may make some sense.
2. Promotion
of education
Yes, the
country has a Right to Education wherein schooling is free for all, but since
the government does not want us to continue to crib about inefficient systems,
they have given the baton in the hands of businesses.
How can a
corporate group help? One of the best case studies on ‘promotion of education’
by a corporate group’s foundation is the Satya Bharti School Program. It is a
rural education initiative of Bharti Foundation, the philanthropic arm of
Bharti Enterprises. You can Google and see the sustainability and scalability
aspects of the same.
For a smaller
business, who just about falls within the CSR Bill’s ambit, adopting a running
school in a remote village and upgrading its infrastructure as well as running
campaigns across villages to inform and educate people to pursue them to send
children to schools shall make a difference.
Something to
note: It is not that most children or their parents do not want to avail of
free education, but there are multiple factors, primarily the poverty-generated
troubles, that stop them. So, the education programme cannot be deemed a
success unless every child in its vicinity is attending the school.
3.
Promoting gender equality and empowering women
We need not
delve into the Women’s Reservation Bill for the same reasons as mentioned for
the free food and free education acts. We all know the condition of women in
the hinterland and understand why this needs attention.
To begin
with, identify the humiliated and exploited women at the grassroots and empower
one so much that she becomes a role model for the ones around her. This has
always worked.
How? There
are plenty of ways. The women empowerment project should follow these steps (in
the given order): motivation, introduction to freedom, creation of union,
education and employment.
Over 95 per
cent of the self-help groups are being run by women. More than 99 per cent of
them are successful and growing.
4. Reducing
child mortality and improving maternal health
Crores of
rupees have been earmarked for Nirmal Bharat Abhiyan, which promises to ensure
toilets in the remotest of villages in India. Numerous funds have been pumped
into developing primary health centres and setting up of anganwadis across the
country. (We need not discuss their impact here.) The corporate groups have
been given an opportunity (that is how we shall look at it) to contribute, and
it is a serious cause.
The root cause
of infant as well as child mortality in India is the ill health of the mothers.
The CSR programme can help in creation of necessary medical facilities or
upgrading of the existing ones, and ensure they are being used appropriately.
How about
engaging the company’s medical staff or hiring one to maintain health records
of all – especially the ones who are pregnant – and ensure assistance until the
infant becomes a toddler. Such programmes cannot be self-sustaining. Hence, a
programme to empower the women shall run alongside, so that the women can earn
what they deserve. The success shall be measured not on the basis of reduced
mortality but on the basis of ‘how many women paid to avail of the facility’.
5. Combating
human immunodeficiency virus, acquired immune deficiency
For those who
do not know: The US$2.5 billion National AIDS Control Plan III (NACP) was set
up by India in 2007, while NACP IV is in the making. The programme also
received support from UNAIDS, while charities like Clinton Foundation, with
strong financial backing, are also engaged in eradication of the disease.
And now,
businesses are expected to join the league. Well, yes, awareness campaigns
help. Street plays and campaigning at the grassroots have been cited as the
best communication tool. Adopt an area, engage with its youth, and create
awareness teams comprising the company’s representatives, local influencers,
theatre artists and, if possible, a celebrity, and reach as many people as you
can, and as many times as you can.
The idea
should be this: The team should be able to sit on a cot with the AIDS patient
and announce that this man/woman will be the last one to have AIDS.
6.
Ensuring environmental sustainability
The country
has a full ministry to ensure environment sustainability, which is an aspect
that by all means is a part of the basic hygiene practised by professional
companies.
All large
corporations, at least the ones who bring out their annual sustainability
report, have been ensuring this for a long time now. From using various means
for conservation of all natural resources to engaging in replenishment
activities including plantation, harvesting and recycling, corporate groups
have been doing their bit.
However,
these activities now have to move out of the company’s premises, to places
where these are most needed. For example, developing the waste patches of land,
adopting the barren grounds, and joining hands with conservation projects are
some of the ways of fulfilling your CSR obligation.
Yes,
programmes focused towards conservation of natural resources, anti-pollution
activities and biodiversity conservation, especially the endangered species of
animals, birds and plants, too can be included under this header.
7. Employment-enhancing
vocational skills
Hundreds of
vocational courses are being conducted in thousands of government institutes
and polytechnics across the country. And now, businesses are expected to create
more such programmes, if not centres. Or at least help some of the existing
ones run. This is important. How can you otherwise empower the individual?
The best way
to go about this will be to find what sort of workforce you need on a regular
basis and what skills are required. Identify the underprivileged individuals,
train them in a particular trade, and hire them. If you do not have the space
to accommodate them all, set up an employment exchange, communicate with your
vendors and clients – the chain can go up to their vendors and clients – and
help in finding jobs for them.
The programme
should be deemed successful when the exchange has more offer letters and worker
seekers than job seekers.
8. Social
business projects
Now, what are
these? Shouldn’t your business be also called the same since a considerable
amount of your profits will be channelled towards social projects?
Well, any
argument on this front will lead you nowhere as ‘social business projects’ here
clearly means the projects whose return in investment (ROI) is not in terms of
the revenues but in the form of social impact.
No, social business
project should not be confused with social media projects. Facebook and Twitter
campaigns alone cannot make a full impact, they can only support one. Do not
think of spending the CSR fund towards a social media campaign.
Businesses
like microfinance in rural areas, setting up of direct retail channels for
rural artisans, cooperatives that empower the women and youth, modern
businesses focused at people and planet – basically the businesses that earn to
sustain themselves as well as the cause that they are working towards need
corporate groups’ assistance. They fall in the CSR Bill’s ambit.
9. Contribution
to the Prime Minister's National Relief Fund or any other fund set up by the
central government or the state governments for socio-economic development, and
relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes,
other backward classes, minorities and women
This point
should not be that difficult to decode. It simply says that if you are not
being able to choose a CSR programme, let your funds go the government. It
knows where, how and when to spend for a cause.
However, when
CSR programmes have a lot more to them than just spending towards a social
cause, this second-last point should be the last option for a corporate group
to look at.
10. Such
other matters as may be prescribed…
Like it
always happens in most of the government’s documents – it is a screw that has
been left loose so that it can help in tuning (or tweaking?) whenever needed.
For instance, if a company is spending/spends towards a programme that does not
fall in the categories listed above but still makes a social impact that the
makers of the Bill failed to see/visualize when the Bill was being drafted,
such spends or that particular programme can fit in the last point.
This also happens to be the last point on the
last page of Companies Bill 2012.
Some companies are already reviewing existing programmes to have a more
independent professional league of people in CSR, a move that could
lead to competitive salaries, job creation and need for more
heavyweights at the top. “The amendment will help the social
responsibility sector in India get more corporate attention. That may
trigger greater investment of financial and human capital,” says Milind
Sarwate, group CFO, Marico.
As Thermax director Anu Aga puts it: "There are enough causes
staring at us in India, like malnutrition, women's empowerment, rural
development and even city planning. I can't think of a single area where
we cannot contribute." Thermax, which spends about 3% of its net profit
on CSR activities, has invested Rs 24 crore on education and other
development projects in the last six years, says Sanyal.