Monday, 21 April 2014

An analysis of CSR provisions in companies bill 2013

Corporate Social Responsibility is defined as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. Section 135 of Companies Bill 2013 sets norms for CSR provisions to be implemented by a company. The CSR spending requirement would apply to companies registered in India with a net worth in excess of Rs 500 Crore, a turnover of Rs 1,000 Crore or more per year or a net profit of Rs 5 crore or more per year. These companies will be required to spend at least 2% of their average net profits in the last 3 years on CSR activities. The bill makes several sweeping changes in the way companies in India are defined, operated and are regulated. Most significantly, the new law is expected to bring greater transparency, free companies of excessive regulation and institute new ways of self-reporting and disclosure.
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CSR is a relatively old concept, however it was Harvard Business School dean Donald David’s quote from the inaugural address to the incoming MBA class of 1946 that “Future business executives should take heed of the responsibilities that had come to rest on the shoulders of business leaders” that pitched the idea of social responsibility of business leaders. Howard Bowen’s book “Social Responsibilities of a Business man” published in 1953 set the agenda upon which the modern day concept of CSR firmly rests. One may even arguably say he is the father of CSR. Over the latter half of 20th century CSR became the hot topic in the business world. India too has had a long tradition of corporate philanthropy and industrial welfare has been put to practice since late 1800s. This practice though like its western counterpart was deeply rooted in religion. Post Independence industrial leaders like J.R.D Tata emphasized the many ways in which industrial and business enterprises can contribute to societal development. Like in the west CSR has evolved as business concept in India. It’s an indubitable triumph for India to become the first nation to legally mandate corporate spending on welfare the world however, will have its eyes glued on the 16,245 registered companies who will be covered under this law from 1st April 2014. The implementation of this clause will pump around an estimated of 20,000 crore rupees into the nation’s economy giving it a much needed boost.
CSR follows a triple bottom-line approach: Sustainability in Environment, Social Community & Business .CSR is not just about business enterprises’ responsibility towards society. It’s about sustainable development and in today’s environment long term sustainable development is not just a need but also a challenge. CSR today is in a state of confusion where still companies are engaging in corporate philanthropy in the name of CSR activities. The companies’ bill is now expected to cover more than 16000 listed firms in India and the business world is waiting to see how they can play their cards right once they’re covered by this act. Also we will see a lot of CSR consultancy firms in the future as the clause also states about a companies’ forming a CSR committee from the board of directors with at least one independent director. This clause is a good way for engaging social organizations (NGO’s) into the business world and inculcating CSR strategies into their business plans.
Snap Deal in 2011 installed water pumps in Shiv nagar in UP, the village overwhelmed by this gesture renamed itself snapdeal.com nagar. This was a clever marketing mix cum CSR strategy of the firm that won them accolades and also got them publicity. It was empowering to see a business model barely a year old was engaging in CSR activities. Snap deal has now adopted that village and will soon electrify it. The compelling case of snap deal makes a daring statement that CSR when implemented in the right manner can be used for corporate branding, publicity and also be an effective marketing strategy. In words of Americus Reed, Professor of Marketing at Wharton” Companies invest in CSR to manage their risk, recruit employees, bolster their brand in the eyes of investors and consumers, ease their supply chains, save money, increase access to capital, differentiate themselves from competitors and –sometimes — because it’s just the right thing to do”. Globally CSR initiatives have helped companies elevate their brand image, retain customers & employees, attract investors, increase sales & profits and earn the goodwill of the society at large. The Companies Bill 2013 however does not make CSR initiatives mandatory rather it calls for a through explanation in the AGM as to why they did not engage in CSR spending. The Bill also emphasizes on CSR spending in the local community around their business areas. Now there have been no clear cut sanctions from the government as to how this spending will be litigated. Companies have to find their own way out of the tax maze in CSR spending.
In my opinion the Companies Bill is a landmark initiative that calls for inclusive growth of all the stakeholders. This is the first time in the country that CSR has been included in a legal framework. Well that saying, the bill does have some loopholes. The section does not specify what explanations are legally acceptable if the company does not engage in CSR spending while having net profits of more than 5 crore. Also ensuring CSR spending without providing tax incentives can be dawdling for the corporate world that are already slapped with a corporate tax rate of 32.45% which is one of the highest in the world. The government should come up with a CBDT notification for allow ability of these expenses while providing tax incentives for the same. This will be uplifting specially for the small & medium scale enterprises and give them more motivation to engage in CSR activities. The tax incentives shall also increase India’s stand as an investment destination of the future. There is also a need to measure the impact of CSR activities. Simple training workshops cannot come under promotion of education and profitable investment in energy efficient machinery cannot come under promoting environment sustainability. Many companies interpret and implement CSR in their own ways; the government must declare some high priority sectors where CSR spending is needed to make a positive impact on the environment.
CSR as a concept needs to be re introduced to enterprises as a tool for long term development. The focus needs to be on sustainable development through societal impact only then we can see the full benefits of CSR initiatives. In Europe and North America they have instituted CSR awards to reward CSR efforts of the companies. Indian companies and the government can also follow the suit if they are to see positive results from such initiatives since as of now not even 50% of top 100 companies report their CSR activities. Nigeria has standardized their CSR and sustainability practices NIS ISO 26000. This move can be replicated in India as well as it will give a clarity to companies how they can operate to be sustainable and responsible. If they can do it we can too. Last but not the least there is a need for analytical tools to be developed which will monitor the impact CSR companies have had on the society and environment with the aim of long term sustainable development. These tools shall tell us how our spending has an impact on the ecosystem as a whole and how much ROI can be generated if any. These tools shall also allow assessing, analyzing and monitoring of CSR spending of the company.
In the end this bill is a unique proposal which help us create a better socio-economic environment in the country. The focus though, should always be sustainable development.