Raising living standards in rural India has always been a challenge, and traditionally the heavy lifting has fallen to government and non-governmental organizations (“NGOs”). Now, another sector of society will share responsibility: India’s large profitable companies. With the Companies Act 2013 (“the Act”), passed by both houses of India’s parliament and assented to by India’s president (1), India is set to become one of the first countries in the world(2) to mandate business contributions to charity, normally a voluntary practice, part of what is known as corporate social responsibility (“CSR”)(3). Under the Act, certain large companies will be required to give 2 percent of their average net profits to CSR causes, or report why they did not contribute as required (4). The message from the Act is clear: India’s large, profitable companies will be expected to contribute a share of profits to charity, or they will be publicly shamed into doing so.
The Companies Act 2013 has generated a great deal of controversy, and many companies and commentators wonder how certain provisions of the Act will be interpreted and implemented in the years to come. These inevitable clarifications present an opportunity to encourage companies to more closely align their CSR spending with the development priorities of the country, and to boost employment prospects for women in India’s rural areas.
I. The 2013 Act
The recent revisions to the Companies Act, found in clause 135, require that companies of a certain size or profitability (5) contribute at least 2 percent of their average net profits made during the three preceding financial years to CSR projects (6). Eligible companies must form CSR committees, composed of three or more directors, one of whom must be an independent director. The CSR committees must then develop company-wide CSR policies, which will include proposed CSR spending and monitoring (7).
The company’s board must then approve of the CSR policies, monitor progress and compliance with the law, and prepare a report concerning the company’s CSR activities (8). If a company fails to spend according to the priorities of the Act, the board as a whole will be required to report on the reasons for this failure (9). Many interpret this “comply or explain” provision as an indication that the CSR spending is voluntary: companies can either spend the required amount to comply with the law, or they can spend nothing at all and explain their inaction to the government, without suffering a financial penalty (10). Although the reporting provision is mandatory – with financial (11) and even criminal penalties (12) for non-compliant companies and their officers – the spending provision appears to be voluntary (13).
In Schedule VII, the Act offers guidance on where companies should focus their CSR spending, in areas that mirror the widely-accepted U.N. Millennium Development Goals (14). Along with “ensuring environmental sustainability and eradicating extreme hunger and poverty, Schedule VII encourages companies to use their spending to “promote gender equality and empower women.”(15)
The law also requires that companies spend only on CSR projects in India (16), and urges companies to develop or contribute to projects in the areas where their operations are based (17). It also allows companies to spend by funding local non-profits (18). As many of India’s largest companies are mining and energy companies operating primarily in rural, underdeveloped areas, this small provision could dramatically improve the lives of India’s rural poor (19).
II. Responses to the Act
a. Positive Responses
Many commentators have welcomed the new Companies Act, viewing it as a mechanism to provide focus and stability in a fractured CSR environment with unpredictable funding (20). Harsh Goenka, Chairman of industrial conglomerate RPG Enterprises, believes that the Act will lead companies to spend according to the needs of the country, not according to their own personal or family preferences, as has traditionally been the case in India (21).
Others have praised the bill for creating jobs (22) and for encouraging large companies to invest in underserved areas of the country (23). Others are optimistic that corporate expertise could be used to benefit society by, for example, having an oil company’s engineers focus on environmental cleanup activities (24).
b. Negative Responses
Some critics of the Act say that the CSR spending requirement is a tax, and it thus reduces efficiency (25). Some say the requirement forces business to do the job government should be doing (26). Other commentators say that the requirement jeopardizes the flexibility of the normally- voluntary CSR process, and disrupts a system of broader voluntary guidelines that encourage companies to also minimize their negative societal and environmental impact (27). Although it seems clear that the Act does allow companies to merely explain in a report why they did not comply (28), the Act does not in any way require that companies seek to minimize their environmental impacts (29).
III. Opportunities for Clarification and Progress
a. Practical Considerations
In addition to the principle-based concerns above, other commentators have more practical questions about the Act, concerns which could prompt the government to improve the Act through rulemaking. First, some believe that the CSR provisions are effectively toothless, as there are no penalties for non-compliance beyond the reporting requirement(30). Second, other analysts wonder about the scope and enforceability of the Schedule VII guidelines (31). In response, the Indian Minister for Corporate Affairs, Sachin Pilot, recently told the press that “the government would not like to say where [companies] must spend.” (32)
Another issue worthy of clarification is potential “greenwashing.” (33) Vedang Mishra and Hrishikesh Datar noted that, absent further clarification of the Schedule VII categories, companies could meet the spending objectives by categorizing normal business spending as “employment enhancing vocational skills” and “social business projects”, two of the Schedule VII categories (34). A. Didar Singh, the Secretary General of a leading Indian business advocacy organization, recently stated that he hopes the Act’s final rules permit companies to count government-mandated environmental remediation as CSR spending (35). The government could use regulation to guard against such double-counting.
India’s Companies Act, 2013 introduces mandatory CSR reporting for India’s largest companies, and encourages them to spend 2 percent of their average net profits on CSR. Many commentators have expressed concerns about the Act which could require the government to clarify through rulemaking. The government could take this opportunity for further clarification to also encourage companies to focus on employment and educational opportunities for India’s rural women. Such a focus could have a dramatic impact on the development prospects of India’s rural areas.
By Robert B. Fitzpatrick and Andrew J. Hass, Robert B. Fitzpatrick, PLLC (Washington DC)
1) Umakanth Varottil, Companies Act, 2013 Receives Presidential Assent, INDIACORPLAW (Sept. 3, 2013, 10:53 AM), http://indiacorplaw.blogspot.com/2013/09/companies-act-2013-receives.html.
2) See, e.g., Introduction to Corporate Social Responsibility, GOV'T OF MAURITIUS, 2009, at 1, available at http://www.nef.mu/csr/documents/guidelines/INTRODUCTION TO CORPORATE SOCIAL RESPONSIBILITY.pdf (last visited Dec. 1, 2013).
3) See Shreyasi Singh, India’s Companies Act: Legally Enforced Social Responsibility, THE DIPLOMAT, Aug. 27, 2013, http://thediplomat.com/2013/08/indias-companies-act-legally-enforced-corporate-social-responsibility/; India Soon to Enact Corporate Social Responsibility Requirements, ASIAN PHILANTHROPY FORUM, June 18, 2013, http://www.asianphilanthropyforum.org/india-corporate-social-responsibility-requirement/.
4) See infra text accompanying notes 6-14.
5) For the Act to apply, a company must have either (1) a net worth of rupees 500 crore (approximately $90 million) or more; (2) a turnover of rupees 1,000 crore (approximately U.S. $180 million) or more; or (3) a net profit of rupees 5 crore (approximately U.S. $900,000) or more. The Companies Act, 2013, No. 18, § 135, Acts of Parliament (India), 2013, available at http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf.
6) Id. Ernst & Young has estimated that the Act will cover more than 2,500 companies in India. ERNST & YOUNG, Corporate Social Responsibility in India, July 9, 2013, at 22, available at http://www.phdcci.in/images/studiesreports/1375427084_CSR-in-India-Final.pdf.
7) The Companies Act, 2013, No. 18 at § 135.
8) Id. Neither the Act nor the draft rules proposed by the Ministry of Corporate Affairs address what the precise contents of these reports must be.
10) See NISHI DESAI ASSOCS., Corporate Social Responsibility & Social Business Models in India, Nov. 2013, at 10-11, available at http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Corporate_Social_Responsibility___Social_Business_Models_in_India.pdf.
11) See The 2% CSR Clause: New Requirements for Companies in India, KORDANT PHILANTHROPY ADVISORS, 2013, at 2, available at http://www.kordant.com/assets/2-Percent-India-CSR-Report.pdf (last visited Dec. 1, 2013) (“[O]fﬁcers who default on the reporting provision could be subject to up to three years in prison.”).
12) The Act allows for sentences of up to ten years for auditors who engage in fraud. See The Companies Act, 2013, at § 447 (p. 227).
13) Id. § 135.
14) Millennium Development Goals: Background, UNITED NATIONS, 2013, http://www.un.org/millenniumgoals/bkgd.shtml (last visited Nov. 26, 2013); Towards Achieving Millennium Development Goals, India 2013, GOV’T OF INDIA, Oct. 17, 2013, at 14-17, available at http://mospi.nic.in/mospi_new/upload/MDG_pamphlet29oct2013.pdf.
15) The Companies Act, 2013, at Sch. VII (p. 294).
16) See GRANT THORNTON INDIA LLP, Implications of Companies Act, 2013, Corporate Social Responsibility, http://gtw3.grantthornton.in/assets/Companies_Act-CSR.pdf (last visited Nov. 24, 2013).
17) Id. at 4.
19) See Krishna Kant & M. Saraswathy, Listed Companies Liable to Put Aside Rs 8,100 cr in FY13 for CSR, BUS. STANDARD (Oct. 7, 2013, 12:50 PM), http://www.business-standard.com/article/companies/listed-companies-liable-to-put-aside-rs-8-100-cr-in-fy13-for-csr-113100600288_1.html.
20) Subaskar Sitsabeshan, Indian Businesses Will Soon Have to Spend 2% of their Earnings on CSR by Law, THE CLIMATE GRP. (Oct. 30, 2013), http://www.theclimategroup.org/what-we-do/news-and-blogs/indian-businesses-must-spend-2-of-their-earnings-on-csr/.
21) Harsh Goenka, Op-Ed, Why It Is a Good Idea to Mandate Corporate Social Responsibility, THE ECON. TIMES (Sep. 1, 2012, 4:48 AM), http://articles.economictimes.indiatimes.com/2012-09-01/news/33535456_1_net-profit-companies-bill-crore-last-year.
22) CSR to Make Available 50,000 More Jobs in the Sector: Experts, BUS. STANDARD, Oct. 13, 2013, http://www.business-standard.com/article/economy-policy/csr-to-make-available-50-000-more-jobs-in-the-sector-experts-113101300181_1.html.
23) See PARTNERS IN CHANGE, Section 135 (the New Companies Act 2013) CSR Spending Estimates - BSE Top 100, 2013, at 7, http://www.ngobox.org/wp-content/uploads/2013/10/CSR-Spending-by-BSE-100-and-BRRs-Analysis-Partners-in-Change.pdf (last visited Nov. 25, 2013).
24) See Syed Mafiz Kamal, The “2%” Impact of India’s Companies Bill: “Creative Capitalism” for Development, INDEP. SKIES MAG., Sept. 16, 2013, http://independentskies.com/the-2-impact-of-indias-companies-bill-creative-capitalism-for-development/.
25) See Aneel Karnani, Mandatory CSR in India: A Bad Proposal, STANFORD SOC. INNOVATION REV., May 20, 2013, http://www.ssireview.org/blog/entry/mandatory_csr_in_india_a_bad_proposal.
26) See Shashank Sharma, Making CSR Mandatory in India - A Flawed Approach, 3 INT’L J. OF SOC. SCI. & HUMANITY 33, 33 (2013), available at http://www.ijssh.org/papers/188-G10016.pdf; Mark Hodge, Two Elephants in the Indian CSR Room: Time to Focus on Business Impacts and State Duties, INST. FOR HUMAN RTS. & BUS., Aug. 20, 2013, http://www.ihrb.org/commentary/guest/two-elephants-in-the-indian-csr-room.html (“The stark truth is that human rights abuses … require the state to do more than mandate corporate philanthropy.”).
27) See Poonam Madan, CSR Law Too Narrow in Scope, HINDU BUS. LINE, Oct. 16, 2013, http://www.thehindubusinessline.com/opinion/csr-law-too-narrow-in-scope/article5240851.ece; see alsoAm. Bar Ass’n Int’l L. Comm., Corporate Responsibility (White Paper) 7 (2007) (“It is not realistic to expect corporations to incur significant economic losses or abandon valuable properties or opportunities in circumstances where the character of governmental policy is controversial and perhaps even ambiguous.”).
28) See supra notes 10-13 & accompanying text.
29) India’s environmental laws do make such requirements, however. See, e.g., The Environment (Protection) Act, 1986, No. 29 of 2003, India Code (2012), vol. 1, available at http://envfor.nic.in/legis/env/env1.html.
30) See Kamal, supra note 24.
31) See, e.g., KPMG, Companies Act 2013: New Rules of the Game, 2013, at 23, available at http://www.kpmg.com/IN/en/Documents/KPMG_Companies_Act_2013.pdf (last visited Nov. 27, 2013).
32) Puja Mehra, Government Clarifies on CSR Spending, THE HINDU (Nov. 6, 2013, 11:28 AM), http://www.thehindu.com/business/Industry/government-clarifies-on-csr-spending/article5320157.ece.
33) “Greenwashing” is the marketing tactic of claiming that a product or practice is environmentally sound when in fact the product or practice is no better for the environment than an alternative, and could be much worse. See Greenwashing, INVESTOPEDIA, http://www.investopedia.com/terms/g/greenwashing.asp (last visited Nov. 27, 2013).
34) See Vedang Mishra & Hrishikesh Datar, New Company Law: Doing Business with the “Compulsory” Corporate Responsibility, YOUR STORY, Aug. 14, 2013, http://yourstory.com/2013/08/new-company-law-doing-business-with-the-compulsory-corporate-social-responsibility/.
35) A. Didar Singh, Op-Ed, CSR: A Winning Proposition, HINDU BUS. LINE, Sept. 15, 2013, http://www.thehindubusinessline.com/opinion/csr-a-winning-proposition/article5131620.ece