Impact of the proposed CSR mandate

in the new Companies Bill

on Indian companies

Author – Truptha Shankar

Table of Contents

Abstract.................................................................................................................................................3

Introduction...........................................................................................................................................4

1. Corporate philanthropy in post-independent India...................................................................5

2. Priority socio-economic areas considered under CSR initiatives................................................6

3. Impact of short-term and long-term CSR activities....................................................................7

4. CSR focus areas and business linkage of Indian companies.......................................................9

5. Current CSR activities undertaken by Indian companies.........................................................10

6. Implications of the new Companies Bill...................................................................................14

Implication – Massive inflow of CSR funds may cause ripple effects...........................................14

Implication – Dedicated CSR department in each corporate company.......................................14

Implication – Drastic increase in budget will lead to higher NGO accountability........................15

Implication – Losing out on a great opportunity by resorting to creative accounting.................15

References...........................................................................................................................................17

1
Abstract

The enactment of a new legislation in 2013 could prove to be a turning point for Corporate Social
Responsibility (CSR) activities in India. The new Companies Bill 2012, which will change the rules of
governing, functioning as well as social responsibilities of corporate groups, has been passed in the
Lok Sabha and has been tabled in the Rajya Sabha.

Clause No.135 in the Companies Bill 2012 states that every company with a net worth of Rs 500
crore or an annual turnover of Rs 1,000 crore or a net profit of Rs 5 crore has to create a CSR
committee, of which at least one board director must be independent. The company’s board shall
ensure that at least 2% of its annual average net profit made during the three preceding financial
years is spent on CSR every financial year. If the company fails to spend such amount, the board shall
specify the reasons for not spending the amount. However, the bill does not specify any penalty or
legal implications for not adhering to the 2% CSR mandate (Businessworld, 2012).

This landmark regulation could force many Indian companies to rethink their social activities since an
analysis of CSR spend of the top 500 listed companies in India shows most do not spend even 1% of
their profits on CSR (CSRidentity, 2012). Increasing this spending to the government recommended
level, will in most cases, mean more than doubling of CSR budgets. Some Indian companies are well
positioned to move into the new paradigm due to their consistent focus on CSR activities over the
years.

While Indian private companies have been involved in various CSR activities, almost all their
activities are mainly short-term philanthropy (Gautam & Singh, 2010). Focusing on a particular social
theme for the long term is now emerging as an important aspect of their CSR strategy. The
Companies Bill stipulates that only UN Millennium Development Goals such as poverty alleviation,
healthcare, education and social business ventures will be considered as potential areas of
investment. However, detractors warn that the bill could commit a big blunder by enforcing
corporate entities to take up only certain activities for their CSR spend and ignoring the sustainability
of a CSR activity (Kapoor, 2013).

2
Introduction

The enactment of a new legislation in 2013 could be a turning point for Corporate Social
Responsibility (CSR) activities in India. The new Companies Bill 2012, which will change the rules of
governing, functioning as well as social responsibilities of corporate groups, has been passed in the
Lok Sabha and has been tabled in Rajya Sabha. This bill makes it mandatory for companies of a
certain size to spend 2% of their profits towards CSR activities.

This landmark regulation could force many Indian companies to rethink their social activities since an
analysis of CSR spend of the top 500 listed companies in India shows that most do not even spend
1% of their profits on CSR activities (CSRidentity, 2012). Increasing this spending to the government
recommended level, will in most cases, mean more than doubling of the CSR budgets. Some Indian
companies are well positioned to move into the new paradigm due to their consistent focus on CSR
activities over the years.

India could be the first country in the world to mandate an expenditure on CSR activities across the
board. Some countries, like Malaysia, have mandated spending towards CSR for certain industries
such as mining (Shah, 2013). The bill is bound to have serious implications on the corporate sector in
India, since most companies have not dedicated resources for a sustained CSR activity. The proposed
law mandates that all companies with revenue greater than Rs. 1000 Cr or profits of Rs. 5 Cr must
spend 2% of the average of the last three years’ profits on CSR activities. The company board must
designate a 3-member CSR committee to ratify decisions on spending and employee expenses will
not be classifiable as CSR spending. Only UN Millennium Development Goals such as poverty
alleviation, healthcare, education and social business ventures are considered as potential areas of
investment (Shah, 2013). However, detractors warn that the Companies Bill could commit a big
blunder by ignoring the sustainability of a CSR activity and enforcing corporate entities to take up
only certain activities for their CSR spend (Kapoor, 2013).

In India, the services sector, especially banking, IT and BPO segments, has been in the forefront of
CSR activities in the last two decades (Tewari, 2010). This study makes an attempt to find out if
indeed the Indian companies are in a beneficial position as they would need to mandatorily invest in
CSR activities as proposed by the new Companies Bill. This paper gathers insights from significant
studies such as the 2012 CSRidentity study of top 500 listed firms, Times Foundation study on CSR
Practices in India and Karmayog’s annual CSR ratings.

This paper will cover the following sub-topics in a detailed manner –

1. Studies on corporate philanthropy in post-independent India

2. Priority socio-economic areas considered under CSR initiatives
3. Impact and outcome of short-term and long-term CSR activities
4. CSR focus areas and business linkage of Indian companies
5. Current CSR activities undertaken by Indian companies

3
6. Implications of the new Companies Bill

4
 1. Corporate philanthropy in post-independent India
India has had a long tradition of corporate philanthropy and industrial welfare which have been put
to practice since late 1800s. However, the last few decades of the twentieth century witnessed the
corporate sector moving away from charity and traditional philanthropy towards more direct
engagement in mainstream development and concern for disadvantaged groups in the society. Long
before the advent of the Industrial revolution in India, the private corporate sector had witnessed
businesses that were socially responsible to their various stakeholders; though the practices and the
standard definitions of CSR were different in their nature.

According to researchers, the concept of voluntary action in social well being by corporate
enterprises is an age old idea as the business itself (Vardarajan & Menon 1988). Sundar (2000), a
philanthropy researcher, refers back to history and gives an account in detail about the philanthropic
involvement of businesses in India against backdrop of the social, political, cultural and economic
developments. First, technically speaking, philanthropy in the country is mostly a story of Indian
businessmen as women historically did not play an important role. Second, the corporate
philanthropy activity is more a story of indigenous businesses than that of foreign entities. Even
though some overseas firms had major presence in India, their aim was to earn profits than focus on
the country’s development. However, there were exceptions: some organisations that have been in
India over a longer period of time and have become “Indianised”. Third, philanthropy was largely
associated with traditional family businesses.

Even with these differences, there are some underlying similarities between the development of
philanthropy in India and the West in the contemporary context. Aspects that led to the
development of modern philanthropy include religious beliefs and sentiments linked with capital
accumulation, industrial wealth and the social consequences as a result. Further, philanthropy
entities in the country such as foundations and trusts are similar in nature with those in the West
and elsewhere. Similarities apart, the basic fact is that what kind of philanthropy takes shape in any
society is largely dependent upon the country’s historical background. Although it seemed like
western corporate values such as CSR and triple bottom-lines were imposed on Indian private
businesses, Khan and Atkinson (1987), found that 71% of Indian companies and 69% of western
multinational companies had allocated budgetary provisions for social responsibility activities.

In India, corporate philanthropy is similar to that in the West as the idea was initially deeply based in
beliefs of religious nature. Business practices that were socially responsible took different shapes: it
could be to provide service to the community, promote religious conduct and beliefs, offer
philanthropic donations to charity, or boost welfare of employees. Large companies provided funds
to either charitable or educational organisations, promoting them as humanitarian deeds, but in fact
they are simply trying to gain goodwill among the communities in which they operate. In 1950s, CSR
was mainly based on a concept that it was an obligation of the business to society. During the early
days after independence, there was hardly any documentation of such initiatives in the country.
However, since then there has been a growing awareness to take up social activities internationally

5
to boost their presence in the immediate environment (Shinde, 2005). Moreover, it is a proven fact
that as companies shows genuine interest in socially responsible behaviour, public favour their
services and goods (Gautam & Singh, 2010).

After India’s independence, J.R.D. Tata, the then chairman of the Tata Group made the pioneering
effort in creating a socially responsible business model. Tata Iron & Steel Company was the first
Indian company to set up an entire township for its workers complete with residential quarters,
hospitals, schools, parks and other civic amenities. Similarly, in the public sector, Steel Authority of
India Ltd built townships and ensured all employee benefits and civic amenities were available to its
workers and their families as well. The first steel township built around the Rourkela Steel Plant in
1959 has been ranked 14th best city in terms of sanitation and cleanliness by the Union Urban
Development Ministry in 2010. Apart from engaging itself in the production and marketing of steel,
the company also has welfare schemes for its employees including housing, hospitals, schools,
concessional transport, recreational and cultural activities, and canteen facilities (Madhavi, 2002).

According to the national survey on CSR practices in India carried out by TNS India in 2008 on behalf
of Times Foundation, almost all the CSR activities in the private sector began after the year 1991
(TNS India, 2008). Nearly three-fifth of private companies in India initiated their CSR activities during
the 1991-2005 period. Obviously the liberalisation of the Indian economy in the early 1990s had a
significant role to play in stimulating CSR activities. Public sector units however, have had a much
longer association with CSR beginning right from 1971. Social clubs such as Rotary Club and Lions
Club played an important role in instilling a sense of social responsibility among Indian private
businesses (TNS India, 2008).

2. Priority socio-economic areas considered under CSR initiatives

Private firms in India take up diverse CSR activities such as in education, healthcare, sanitation, rural
development, women empowerment and microcredit. Analysis of many survey findings reveal that
although several firms have undertaken the universal language of CSR, most of these are primarily
philanthropy, or just its extension (Gautam & Singh, 2010). Focusing on a particular social theme is
now emerging as an important aspect of their CSR strategy.

FMCG companies in India such as Colgate-Palmolive, Godrej, ITC, Nestlé, Unilever, P&G have focused
on CSR initiatives centred on women and children (Rana, 2013). Most of their activities are in areas
such as community welfare, primary education, medical assistance, vocational training, adult
literacy, micro credit, public social campaign, etc. Steel industry is associated with mining activities,
which are mostly located in remote, underdeveloped parts of the country that are populated with
tribal or uneducated people. Hence, the industry has a natural responsibility of taking care of the
needs of the local communities and becoming a facilitator for social development and therefore, CSR
has the most prominent role to play in such cases. The philanthropic activities taken up by steel and
mining firms focus on family welfare, environment, health, cultural development, education, as well
as constructing infrastructure such as water supplies, sanitation facilities and roads (Tewari, 2010).

6
The TNS India’s national survey found that education was the prominent social theme with 82%
companies choosing it. This is in continuation with the historic preference made by Indian corporate
houses right from pre-independence days. The Tatas setting up the Indian Institute of Science and
Annamalai Chettiar founding the Annamalai University in Tamil Nadu in 1929 were the earliest
examples of educational endowment (Wharton, 2011). Education was followed by health with 77%;
environment with 66%; livelihood promotion with 57%; and women empowerment with 55% as the
other areas presently focused under CSR initiatives. The proportion of private multinationals and
PSUs taking up themes of microfinance and livelihood promotion are relatively very less The analysis
shows that the CSR initiatives depends on several factors such as mandate of the organisation (54%),
present relevance to the causes (51%) and demand and need (48%) of the community (TNS India,
2008).

Similarly, most Indian IT companies have chosen education as the most important theme for their
CSR activities. Environment and waste management as an activity is gaining momentum under the
blanket of responsibility towards the entire globe in response to the rising issue of global warming
(Tewari, 2010). While education, environment, and healthcare are the most prominent CSR themes,
microfinance is rapidly rising in prominence (TNS India, 2008).

In about 56% of the cases, people residing close to the organisation are covered under the CSR
programmes. The other groups that are covered under these initiatives include the downtrodden
population from rural locations (42%), tribal people (16%), and communities selected following
consultations with NGOs (11%) and randomly picked communities (11%). PSUs’ CSR initiatives are
undertaken to benefit communities staying close to the industry and rural population, while in case
of the private sector, selection of communities are done following consultations with NGOs (non-
governmental organisations).

3. Impact of short-term and long-term CSR activities

With so much of confusion about what constitutes a short-term or a long-term CSR activity, there is
no definite definition of the term. It may be defined by looking at its dual aims — the benefit offered
to firms and communities, and the kind of potential benefits in each of these cases (Keys et al, 2009).
Several firms undertake CSR activities that can be called ‘pet charity projects’, as they only indicate
the personal interests of the senior executives in the management. Although such activities may be
showcased with enthusiasm, they provide minimal benefits to both the firms and communities. For
example, donations from the corporate enterprises confer the majority of benefits on society,
though it is questionable about the benefits to the firms. Similarly, CSR activities are primarily focus
on building a company’s reputation and little focus is paid to the real benefits offered to the society.
According to cynics, this form of CSR takes up the role of advertisement and it could be dangerous, if
there is a gap between the company’s propaganda and ground realities (Keys et al, 2009).

7
 Benefit to society

Partnering

Mckinsey’s CSR Landscape Model

Philanthropy

pet
charity Propaganda
projects

Benefit to business

Short-term CSR activities such as one-time donations to disaster victims, felicitating sportsmen for
achievement, donating school kit for deprived children were some of the regular activities
conducted by Indian companies. While companies spend a sizeable amount on these short-term CSR
activities, but soon they realised that their impact wears out pretty fast. A hodgepodge of
uncoordinated CSR and philanthropic activities disconnected from the company’s strategy will
neither make any meaningful social impact nor strengthen the firm’s long-term competitiveness
(Porter & Kramer, 2006). Concentrated activities over the last decade indicate that a long-term focus
is emerging Indian corporate enterprises. The annual Karmayog CSR Ratings given for India's Largest
500 Companies indicates that spending on CSR has steadily increased over the 2007-2010 period.

Karmayog CSRRatings -2007-2010

250

200

150

100

50

0
2007 2008 2009 2010

Level 0 Level 1 Level 2 Level 3 Level 4 Level 5

Karmayog CSR Ratings found that the number of companies that do not indicate any CSR spending in
their annual reports (Level 0 firms) has rapidly fallen from 221 companies in 2007 to 113 companies
in 2010. The number of companies that have initiated a CSR program and dedicated budget (Level 1
firms) has steadily increased from 93 in 2007 to 148 in 2010. Similarly, there has been a steady rise
8
in the number of Level 2 and 3 companies, who have been running a long-term focused CSR
program. However, the number of Level 4 companies has stagnated and there has been no company
rated with Level 5 CSR activity. This indicates that while there is a rapid expansion in the scope of
CSR activity, they are far from reaching a level of maturity (Karmayog, 2010).

Karmayog CSR Ratings expects a company to spend at least a minimum of 0.2% of its profit after tax
on CSR activities. Well defined expenditure on CSR has been shown by very few companies, which
are rated Level 3 and above. However, most of the companies did not mention the amount spent in
any of their balance sheets or annual reports. Several firm take up their CSR activities in an short
term manner, not related or integrated with their businesses and disperse the funds in several
activities, which ultimately erodes the focus of the main idea. Most often, either the companies are
unaware or don’t bother. However, still there is an upward learning curve for all companies on this
aspect. The overall approach to CSR is driven by philanthropy than connecting it with business as in
the West (Gautam & Singh, 2010).

4. CSR focus areas and business linkage of Indian companies

India being a developing country with numerous socio-economic problems to deal with, private
companies have a plethora of issues to choose from. Diverse issues such as healthcare, education,
rural development, sanitation, microcredit, women empowerment, etc., are chosen for carrying out
CSR activities across India. While some companies consider their interaction with stakeholders and
impact of its business on society as significant for choosing issues, most of them work in various
social issues simultaneously. Among them education is the most prominent with almost all Indian
companies having some focus on this theme. A survey by TNS India indicated that 82% of companies
chose to work in primary and higher education, healthcare stood second with 77% companies
choosing it. Environment (66%), livelihood promotion (57%) and women empowerment (55%) were
the major thrust areas currently covered under various CSR initiatives (TNS India, 2008).

There is a debate about whether to have a CSR initiative well integrated into a company’s model or it
should deal with a social issue without any connection to a company’s main business activity (Lys, et
al., 2013). Some believe that CSR projects with a direct link to a company’s business are sustainable,
since they can be measured and their output encourages companies to invest further in these social
programs (Kapoor, 2013). While most of the CSR programmes run by FMCG companies in India have
a long term vision on societal change and upliftment of the poor, some of these are considered as
marketing tools of corporate entities. Some of these CSR programmes do have a direct or indirect
connection of the company’s main business activity. The following examples are illustrative –

 Colgate-Palmolive India’s oral health awareness activity through its School Dental Health
Education Program
 Unilever’s Shakti micro-enterprise programme that creates opportunities for women to sell a
range of affordable products in rural areas
 Nestlé’s Healthy Kids Programme focuses on providing nutrition education to adolescents

9
  P&G's Parivartan – The Whisper School Programme helps adolescent girls adopt the right
feminine hygiene practices
 Tata Tea’s Jaagore campaign focuses disseminating a social public message on civic rights,
women empowerment, etc.
 ITC’s e-Choupal initiative attempts to eliminate intermediaries and help fragmented farmers

Companies in other industries such as banking, IT, engineering choose a social theme that is not
connected to their business. Spending such CSR activity does not directly help build their business
activities. For instance, Deshpande Foundation deals with integrated rural development, Azim Premji
Foundation focuses on child education, while Indian Oil Corporation works on cultural heritage
conservation. Meanwhile Karmayog CSR Ratings found that around 26 companies have reported
environmental activities such as energy efficiency and waste management as CSR.

While each company can define its own path for its CSR initiative, both the government mandate
and international guidelines are specific about the choice. As per the new Companies Bill, companies
are mandated to commit their CSR activities in the areas covered by UN Millennium Development
Goals such as eradication of extreme poverty and hunger, achieving universal primary education,
promotion of gender equality, reduction in child mortality, improvement in maternal health, etc.

5. Current CSR activities undertaken by Indian companies

Typically, any kind of philanthropic activity by corporate companies is looked at contemptuously.
Journalist P Sainath dismisses Indian CSR programs as a marketing tool of corporate entities. His
assessment of NGOs in India is even harsher as he alleges that as many as 70% NGOs are either tax
shelters or tools for corporate market research (Kaye, 2013). However, this accusation of a hidden
business motive has not tainted all CSR activities by Indian companies due to two main reasons.
Many of these companies take up activities such as child education, poverty alleviation, healthcare,
etc, which are not directly linked to their business activities. Activities such as integrated rural
development by Deshpande Foundation, child education by Azim Premji Foundation, sports
scholarship by Tata Steel are good examples for CSR changing the perception on Indian companies.

The second major reason for the philanthropic involvement of Indian services companies is that the
industry does have a high stake in sustaining and building a healthy, cosmopolitan culture to attract
the best talent available in the market (Jatana & Crowther, 2007). However, a 2012 study conducted
by CSRidentity in association with the Forbes India Magazine revealed some interesting facts.
Despite the hype about consistent CSR spending by Indian companies, actual figures show that they
fall way behind the 2% profits after tax (PAT) mandate suggested by the new Companies Bill. The
study by CSRidentity considered the revenues and PAT figures of the top 100 companies during the
Financial Year 2011-12. Based on that, the actual spend indicated by various companies stood at an
average of Rs. 32.09 crore per company, while the 2% PAT mandate turns out to be Rs. 61.84 crore!
It is clear that despite the decent CSR spend indicated, companies have to double their spending in
order to catch with the mandated figure (CSRidentity, 2012).
10
Tata Steel stands as a stalwart among top 100 companies with a Rs. 146 crore spent on CSR in
FY2012 as compared to the mandated Rs. 78 crore. Similarly, Jindal Steel & Power has spent Rs. 88
crore on CSR in FY2012 as compared to the mandated Rs. 76 crore. Apart from these two companies,
there are a few other companies that spend cross 100% of the mandated figure. They are: Jaiprakash
Associates, Hindustan Petroleum Corp, Jindal Steel & Power, JSW Steel and MMTC, which have spent
anywhere between Rs.3 crore to Rs. 88 crore in FY2012 (CSRidentity, 2012).

Surprisingly, the regular CSR award winning companies and other new economy companies that
have built a reputation in corporate philanthropy in India are not prominently visible in this list. For
instance, some winners of Businessworld FICCI CSR Corporate Citizen Award winners such as Tata
Steel, SAIL, ITC, MSPL are noticeable in the list of the top 15 companies in the CSRidentity study
(FICCI, 2011). However, others like Bharti Airtel, Neyveli Lignite Corporation, Zensar Technologies are
not visible. Similarly, new economy companies such as TCS, Infosys, Wipro, Cognizant, Reliance
Communications who are listed among the best employers in India, do not feature in the top CSR
spenders.

Table 1: Leading CSR spenders among top 100 Indian companies

Company Revenue Avg. PAT Actual 2% of Difference
(Figures in Rs. Cr) Spend PAT

Tata Steel 135,976 3,895 146 78 187%

Jaiprakash Associates 15,651 1,396 47 28 168%

Hindustan Petroleum Corp 195,891 1,118 27 22 123%

Jindal Steel & Power 22,473 3,184 88 76 116%

JSW Steel 36,964 1,569 32 31 103%

MMTC 67,023 129 3 3 100%

Oil India 17,215 2,988 50 60 83%

Hero Motocorp 25,235 2,179 33 44 75%

Larsen & Toubro 64,960 4,818 70 96 73%

Gail (India) 44,861 3,891 54 78 69%

Reliance Industries 368,571 21,138 288 423 68%

Steel Authority of India Ltd 51,428 5,153 61 103 59%

Indian Oil Corporation 442,459 7,783 83 156 53%

Coal India 78,410 11,759 119 235 51%

Source: Forbes India - CSR Identity Report Card, 2012

11
The reason for this anomaly can found if we categorise the industry sectors of the major CSR
spenders listed in the CSRidentity study. Incidentally, all the top 15 spenders come from either
mining, energy or manufacturing industries, where there is large scale utilisation of natural
resources such as coal, oil, iron ore, etc. So when these companies expand their manufacturing or
mining operations, they need to give large scale compensation for the rehabilitation of the displaced
people. Similarly, they have to allocate a large budget for reforestation, pollution control, effluent
treatment facilities and other sustainable business practices. Since these companies include such
expenses under CSR activities, their CSR spend seems to be much higher than others.

This anomaly is addressed in another set of data compiled by the Assocham Eco Pulse study on CSR
by Indian companies in 2009. This study found that FMCG and Chemical sectors are the leaders in
terms of number of CSR initiatives. Chemical companies led with 12.11% share of CSR activities in
environment and education areas. FMCG companies stood a close second with 10.15% share of CSR
activities in community welfare and education. Textiles and IT sectors followed next with 8.5% share
in the number of initiatives. While leading sectors in CSR spend such as oil & gas, metal & mining lag
behind in the 10th and 11th positions. This variance in data clearly indicates that a company’s CSR
spend itself does not depict the ground reality about its actual CSR activities.

Table 2: Leading sectors in number of CSR initiatives

Rank Sectors active in CSR areas Share (%)

1 Chemicals 12.11

2 FMCG & Consumer Durables 10.15

3 Textiles 8.67

4 Software & ITES 8.18

5 Construction 8.02

6 Cement 7.86

7 Power 7.86

8 Engineering 7.36

9 Fertilisers 5.89

10 Oil & Gas 5.56

11 Metal 4.42

12 Automobiles 4.09

13 Logistics 3.6

14 Telecommunications 2.29

15 Media & Entertainment 1.15

12
 16 Computer Hardware 1.15

17 Jewellery 0.82

18 Retailing 0.82

Total 100%
Source: Assocham Eco Pulse, 2009

Increasing focus towards CSR activities and higher concentration on specific themes indicate that
Indian corporate enterprises have realised the value of returning their profits to disadvantaged
sections in the society will significantly help in building their reputation and customer base. Both
shareholders and stakeholders of a company are increasingly playing a key role in bridging the gap
between compliance and responsive behaviour. In the new market economics, the financial market
is being evaluated on the basis of the CSR aspect attributed to the financial proposals received
(Reddy, 2010).

13
 6. Implications of the new Companies Bill
The new Companies Bill 2012, which will change the rules of governing, functioning as well as social
responsibilities of corporate enterprises in India, has been passed in the Lok Sabha and has been
tabled in Rajya Sabha. While there are various contentious issues in this new bill, the most
controversial among all has been the mandatory CSR spending clause.

Clause No.135 in the Companies Bill 2012 states that every company with a net worth of Rs 500
crore or an annual turnover of Rs 1,000 crore or a net profit of Rs 5 crore has to create a CSR
committee, of which at least one director must be independent. The Board of every company shall
ensure that the company spends in every financial year, at least 2% of its annual average net profits
made during the three preceding financial years. Information about the implementation of the CSR
policy has to be published in the annual report and displayed on the company website as well
(Companies Bill, 2012). If the company fails to spend such amount, the board shall specify the
reasons for not spending the amount. However, the bill does not specify any penalty or legal
implications for not adhering to the 2% CSR mandate (Dubey, 2012).

Implication – Massive inflow of CSR funds may cause ripple effects

As mentioned earlier, the actual CSR spend indicated by various companies stood at an average of
Rs. 32.09 crore per company during the Financial Year 2011-12, while the 2% PAT mandate turns out
to be Rs. 61.84 crore (CSRidentity, 2012). According to an estimate, if all the Indian companies with a
net profit of Rs 5 crore dedicate 2% of their PAT on CSR activities, it will open up nearly Rs. 25,000
crore worth of funds (Shah, 2013). In a more realistic sense, the top 1,000 publicly-listed companies
are expected to dedicate sizeable amount of their PAT on CSR activities, which may or may not
match their 2% mandate. Going by the government’s 2% norm, around Rs 6,300 crore is expected to
flow in from India’s top 500 listed companies (Bapat, 2013). Either way, corporate spending on CSR
activities is bound to increase drastically in the coming years.

Implication – Dedicated CSR department in each corporate company

Typically, in any Indian company, the CSR activity is handled by the human resources or the
corporate communications department. These managers tend to split their time between CSR and
other corporate responsibilities, which hinders them from focusing on sustained CSR activity. Most
of the CSR activities in India tend to be ad-hoc activities that are either managed by an NGO or by an
external PR agency. Evidently, there is widespread lack of commitment for the strategic aspects of
CSR (Karim et al., 2012).

Further, another serious issue with CSR practices is that companies usually don’t have a CSR
strategy, but rather numerous disparate CSR programmes and initiatives being managed across the
country. Some CSR programmes will lend themselves to the company’s core business strategy, but
many others will not. Instead of attempting to weave them all together, it is better to bring some
discipline and structure to the many fragmented components of CSR (Karim et al., 2012). The new
Companies Bill’s stipulation of constituting a CSR committee made up of three or more board of

14
directors surely provides some direction in the creation of a dedicated CSR department and a
strategy.

Establishing a dedicated CSR wing is bound to increase the number of people employed specifically
for CSR activities. Since corporate executives lack the knowledge of managing social sector activities,
more number of Master in Social Work graduates would be employed by private companies as field
officers. Their role will be similar to agriculture graduates who are employed by banks as field
officers to study the farming sector and advise on loan distribution. When it comes to engaging with
communities, corporate enterprises often underplay the strength of their biggest asset – their
employees. Employees, who regularly volunteer among various NGOs can be utilised to coordinate
and implement various CSR activities (Bapat, 2013).

Implication – Drastic increase in budget will lead to higher NGO accountability

NGO accountability is a highly contentious issue and a key complaint against Indian NGOs is their
overspending on overheads. According to NGO watchdogs, almost half of the funds are misused,
mostly for supporting high administrative costs of running organisations. While NGOs who raise
Indian funds are accountable to the Indian public and corporate entities, there is no accountability
for funds taken from foreign donors who are abroad. A government report on utilisation of foreign
funds by Indian NGOs showed that out of the total $2.15 billion in foreign aid received in 2008,
around $680 million was used for organisational expenses. While groups like Credibility Alliance,
iCongo and GiveIndia are working towards increasing NGO accountability through annual reviews
and accreditation, they still have a long way to go (Bhowmick, 2010). There are other uncomfortable
issues such as businesses using NGOs for money laundering, which calls the credibility of a lot of
Indian NGOs into question.

The CSR mandate raises a big question in the minds of the corporate enterprises: are non-profitable
organisations really capable of absorbing the huge capital inflow estimated at $5 billion in the right
way? In spite of the 3 million NGOs that exist in India, there is a popular perception that many are
inefficient and disorganized. This new capital will call for quick scaling of systems and processes by
the sector. While not in print, the subtext seems to suggest that the government wants Indian
corporations to not just fund, but also prepare social enterprises for scale and sustainability (Shah,
2013).

Implication – Losing out on a great opportunity by resorting to creative accounting

The biggest impact will have to be seen in the mindset change among the Indian corporate
leadership, which still believes in maximising profits for shareholders and minimising any connection
with the harsh Indian reality. There is no provision to penalise the companies that violate the CSR
mandate, they only have an obligation to explain the reason for not meeting the requirement. While
the mandate considers a company that has earned Rs 5 crore of net profit or more on an average
over the last three years, the bill lacks clarity on what happens if a company has reported a mix of
profit and loss during three preceding financial years. This provides ample opportunity for fudging
profit data and finding ways through creative accounting (Chattopadhyay, 2012).

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CSR obligations take companies out of their zones of core competence, which is to make money and
more money. It comes down to what we think companies are here to do: just make money for
shareholders, or serve a wider public interest. The law doesn’t seem to agree with this narrow view
(Dubey, 2012).

Dubey presents three main reasons why Indian corporate enterprises must take up CSR obligations
regardless of the CSR mandate becomes the law or not –

 Legislated CSR mandate is becoming an acceptable norm across the globe, with disclosure
on environmental, employee, social and community matters becoming part of triple bottom-
line reporting. So India and other emerging countries will follow suit.
 Disgruntlement among the masses is becoming widespread, right from the Naxalite
movement in the jungles to the trade unions killing factory managers. Every bit of work done
to reduce this frustration will help create a better society for business to flourish.
 The Indian government has abdicated a great many sovereign functions, leave alone the
directive principles of state policy. If the government has not discharge its basic duty to its
citizens, that provides a great opportunity for the corporate citizen to step in and present a
better alternative of a well-managed capitalistic market caring for the society as compared a
socialistic bureaucratic machinery which is not even providing the promised subsidies.

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Gautam, Richa & Singh, Anju, 2010. Corporate Social Responsibility Practices in India: A Study of Top 500 Companies.
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Jatana, Renu & Crowther, David, 2007. Corporate Social Responsibility: Theory and Practice with Case Studies. Deep &
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Rana, Namrata, 2010. FMCG-Companies-CSR initiatives for Women & Children-2010. Futurescape

Tewari, Ruchi, 2010. Information And Technology Sector – A Champion In CSR: Myth or Reality. Great Lakes Herald. Vol 4,
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Wharton, 2011. India Knowledge@Wharton | http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4598

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