October-November 2013 BIZ@INDIA06

Feature Feature

India’s amendment to Companies Bill 2013, which has been recently cleared, has come as a whiff of fresh air. It heralds a new era in Corporate Social Responsibility (CSR), not just in India but internationally. India-EU business, if takes the CSR route, can become a big opportunity.

Rajendra Shende

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June 1992. I was reading chapter 30- titled ‘Business and Industry’. It is one of the 40 chapters of path-breaking

300 pages document, called ‘Agenda 21’ a historical outcome of Earth Summit in 1992, agreed by 174 Heads of State. Considered as the blue print and the road map for the sustainable

development in 21st century, Agenda 21, for the first time in long history of United Nations, attempted to broaden its stakeholders to include private sector.

I had just left a private sector assignment in India and joined United Nations Environment Programme in its Paris office to enable developing

countries to implement the global environmental agreement on Ozone Layer Protection. Going through the chapter gave me the hints of the transformation of the messages of United Nations. The writing in the chapter later became the foundation of the modern thinking on the Corporate Social responsibility or CSR.

Indeed, the Business Charter on Sustainable Development of the International Chamber of Commerce (ICC) and the chemical industry’s Responsible Care programme had already set the stage, but for the first time the United Nations succeeded in spreading a concept that business cannot prosper in an unstable society threatened and torn by wars between the states and degradation of the ecosystems. Peace and stability is essential for business to thrive in a sustainable way. Hence, it became evident that maintaining peace in the world is not only responsibility of the governments but also the private sector.

Later Kofi Annan, the then Secretary General of United Nations used the first words of the UN Charter, “We the Peoples” as the title of his report setting out the agenda for the Millennium Summit of 2000, at which political leaders from all over the world came together to reassess the challenges of a new century, and adopted a collective response, known as the “Millennium Declaration” where the role of the business corporations and their responsibility was made explicit in achieving Millennium Development Goals (MDGs). I felt that MDGs heralded changing the mindset of the United Nations; to both reflect rand influence the temper of the times, to make private sector an integral part of the sustainable societal development.

Private sector has made a spectacular journey since then. Emergence of the digital and mobile

technology, civil society activism, all round awareness on respecting the ecosystem and need for its valuation, science based policy making regime, board level bold decision on ‘giving back’ to the society and its whole hearted support to Corporate Social Responsibility principles have all contributed to set the transformational changes.

At the same time, there are challenges that seem to be pulling back and decelerating the progress of responsible business. First, the greed. It, we now know, resulted into the unprecedented financial crisis that engulfed almost the entire world. The spark of greed at Lehman Brothers and other investment banksin 2008, resulted into a worldwide fire, which spread with God-speed due to the ready fuel of unethical and dishonest corporate behavior thriving under the disguise of capitalism and open market. In 2013, the world is yet to recover from that crisis. The crisis has made the world relook and reflect atthe so-called ‘best practices’ of

capitalism and ‘open market’policies. The inertia of the private sector to

take urgent action on Climate Change, a defining challenge of 21st century is another challenge for the dynamic response to global crisis.

Revolution of wheels – the Indian way

India’s amendment to Companies Bill 2013, which has been recently cleared by the Indian parliament, therefore, comes as whiff of fresh air. It heralds a new era in Corporate Social Responsibility (CSR), not just

in India but internationally. The new Companies bill 2013 under its section 135 mandates companies having a net worth of 60 million euros or more; or a turnover of 120 million euros or more; or a net profit of 0.6 million euros or more to have a CSR spend of at least two per cent of their average net profit of past three years and to report those activities in their annual report. The companies are also required to constitute a Corporate Social Responsibility (CSR) Committee consisting of three or more directors, with at least one independent director. The CSR Committee is required to formulate CSR Policy and also recommend the amount of expenditure to be incurred on the CSR activities. The implementation is scheduled in the financial year 2014-15, with nearly 8000 companies falling under the new legislation with nearly 2.4 billion euros of CSR activities.

‘This is the first time, and historically it may be the first time in the world, that a country has considered mandating expenditures for the public good, rather than simply taxing companies or leaving them to their own devices,’’ Minister for Corporate Affairs Sachin Pilot said while introducing the bill in the Parliament.

This is remarkable, especially in the context of India’s business community, though supportive of the amendment has been slow and not consistent in adopting CSR. It is also known to take a more traditional philanthropic approach.

GenesisIt may appear that ‘giving back’

concept has origin in recent Gates-Buffet syndrome. However, Indian history has long known to embed such principle in its Hindu, Buddhist and even Moghul kingdoms. The concept of earmarking CSR funds from profits lies in the consensus that now exists in India both in business (especially larger companies such as Tata, Wipro, and Infosys) and wider society that business should ‘give back’ to society, and has an important role to play in

A good business

opportunity

CSR in India

Two Decades of Public Debate on private sector.

It said: “Responsible entrepreneurship can

play a major role in improving the efficiency of resource use, minimizing wastes and protecting human health and environmental quality. Business and industry, including transnational corporations, and their representative organizations, have a critical role in helping the world achieve the Agenda 21 goals for sustainable development.”

Once travelling by a taxi in Mumbai, the taxi driver showed me the 27-storeyed house of a leading industrialist. I was awed. I exclaimed ,“Wow, this man must be having everything that he indulges in!” The taxi driver responded, ‘ He has every thing except one, which I have’. I looked at him with raised eyebrows. “ Enough”, he responded.

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Srategy and trade Srategy and trade

October-November 2013 BIZ@INDIA

helping to alleviate India’s persistent poverty and inequality.

India is home to the largest number of poor people in the world, despite the massive economic growth that the country has witnessed in recent past. Faced with the choice of higher business taxes on the one hand and mandated CSR on the other, the government, through dialogues and consultative process, has decided that mandatory CSR with flexible approaches is a better solution.

In fact, the Companies Bill is far-reaching, and not just for making CSR mandatory. It seeks to liberalize and align the archaic Indian business legal framework with those of more liberal mechanisms, partly with a view to enhancing the flow of foreign investment into the country, a need of the country starved of the foreign exchange and burden of an ever-increasing Current Account Deficit. So it is not just intended to benefit the civil society and the companies that will be impacted by the CSR measures, but also those of foreign inward investors like from the EU seeking to gain the goodwill of the communities (or the consumers in business language) they will be working with.

Will the new CSR legislation be a game changer?

The answer could be yes, no or may be. The Indian government has skillfully decided not to ‘police’ around the implementation of legislation. It recognizes that CSR has been already ongoing in a number of corporations of the size covered under the Act.

Surely, the legislation will not engender a new love of philanthropy. The legislation is inherently difficult to enforce and some businesses will undoubtedly seek to implement it cynically. Many will welcome the absence of strict implementation and definite regulations, but surely they would be drafted in future.

Yet the measure has its wide business supporters too, and CSR is likely to become a part of an inevitable march towards more responsible

governance in all areas. There are many businesses already, in India and elsewhere, which see CSR as a win-win opportunity to both do good for the community and for their business. Ultimately it will be the interested stakeholders (customers, communities and shareholders) who are driving this march. As they become more knowledgeable through the communication revolution and social media about which businesses are really trying and which are only pretending, they will punish the latter through customer disloyalty or in other ways. Once that starts to happen, genuine CSR will rapidly become the norm and businesses will ignore it at their peril. The pace of change may be tempered by the need to focus on growth and overcoming recessionary pressures, but nonetheless it will accelerate in the months ahead.

FDI between EU and India –a CSR’s spin-off?

It is perhaps exporters and inward investors that will lead the way. It is they that have the most to lose and win in the short-run. On the one hand, Indian companies seeking to export will be facing increasing pressures not just at home, but also in their export markets. EU economic policy and that of its members, not to mention the expectations of

customers, are increasingly requiring effective socially and environmentally responsible corporate governance. For these companies, effective CSR is already becoming a license to trade, and they had better become good at it quickly or they will find penetrating, or retaining share in, the EU market more and more difficult.

On the other hand, European companies have fared poorly in exporting to India. Their effective CSR activities oriented towards Indian society as a part of these companies’ investment strategy could help change that. Of course, the CSR measures of India may be seen as protectionist in this context – adding through these CSR measures yet another barrier to trade. Yet European businesses have in general been more advanced in adopting CSR than Indian businesses, and may surprise at their ability to surmount this obstacle, given the opportunities they have in India known for its ‘social diversity’.

Old Challenges and New Opportunities

It is always difficult for the companies in EU to assimilate in India’s way of doing business, Indian culture and mindset. EU-enterprises would have an opportunity to understand the civil society in India and its communities, which would be

consumers for the enterprises. While CSR for them was voluntary, now its mandatory nature would prove to be a blessing in disguise. Number of EU schemes like carbon trading, carbon credits, applying EU imposed targets (like Renewable energy) could be piloted by relevant companies in India.

All of this signals interesting days ahead for those in EU-India business, government and civil society engaged in defining and implementing the CSR activities. The challenges and opportunities will exist, not just for those companies who embrace the legislation (many companies do support it in fact), but also for the communities and agencies that they must work with to make their CSR initiatives a reality.

Compared to the normal model, where taxes are paid to the state, and the state invests in social improvement, the Indian model, in mandating CSR spend from profits made holds interesting advantages. Part of the thinking behind the Bill is that companies might best focus their CSR contributions in the area of their expertise. So, for instance, EU-Indian telecoms companies might focus on telemedicine and chemical companies on alleviating pollution. This should in principle facilitate innovative initiatives based on strong know-how.

Experience shows, however, that to make this happen will require a combination of enlightened business

BIZ@INDIA October-November 2013 33

leadership on the one hand, and strong community representation on the other. A recent survey in India showed that it was not just business that was backward in its adoption of CSR, but also local agencies representing communities who could benefit from CSR who are poor at knowing how to negotiate CSR initiatives effectively. There is then the job of work to be done both in briefing the CEOs and community leaders on the changing paradigm and the implications for them, as well raising awareness of roles and responsibilities in business and agencies. Work also needs to be done in skilling CSR managers in business and the community in the tools for developing and implementing appropriate CSR initiatives. Finally, there is a need to create an effective market to match up the supply side – the resources of companies implementing CSR - with the needs of communities for social or environmental improvements. India’s bottom of the pyramid (BOP) has a very large base. That it self is spells huge opportunities for EU-

India collaboration though CSR. It is CSR that will help identifying BOP needs.

Green Shoots NetworkThe TERRE Policy Centre in

India and France, with its focus on brokering practical solutions to sustainability between business and community stakeholders, and its location in Maharashtra the second largest industrial region of India, is strategically positioned to contribute to these challenges. It is for this reason that we are launching a much-needed initiative, the Green Shoots Network, to support business and communities in their CSR endeavors.

The word ‘free’ in the term ‘free trade’ may in the future turn the connotations it currently has among many for ruthless business practice, into a connotation of a new business led enlightenment, of new green shoots of economic growth. TERRE considers that the moment has come that Green Shoots will transform into Green Industry and Green Societies. It is a dream well worth pursuing. Q

It is always difficult for the companies in EU to assimilate in ,QGLD¶V�ZD\�RI�GRLQJ�business, Indian culture and mindset. EU-enterprises would have an opportunity tounderstand the civil society in India and its communities, which would be consumers for the enterprises

The bill requires companies that meet certain set of criteria, to spend at least two per cent of their average profits in the last three years towards Corporate Social Responsibility (CSR) activities. But only companies reporting 0.6 mn euros or more profits in the last three years have to make the CSR spend.

The Bill allows companies the freedom to choose areas of work for CSR and the mandate of a rotation in auditors every 5 years gives the process added credibility.

Thus the bill makes it compulsory to not just earmark the funds but also form a CSR committee (of board members consisting 3 or more directors out of which atleast one is an independent director), formulate a CSR policy , allocate the amount to different activities and monitor the implementation from time to time. Further, the CSR policy is to be disclosed on the company website.

With regard to implementation, only project based investments, and not mere donations, will be accepted as CSR which involve innovative social inventions/initiatives that factor in hazards, risks and vulnerabilities. Baselines surveys, social impact assessment and meticulous evaluation including documentation is mandatory along with training and re orientation of the staff.

The CSR amount unused/unlapsed in a particular year will be carried forward to the following year. CSR budget itself hence is non-lapsable.

With regard to failure to spend the requisite amount, the bill states that the company shall have to provide sufficient reasons for not spending the allocated CSR budget. While no specific penalties are contemplated in the Bill with respect to CSR, sections 450 and 451, provide for general penalties for flouting the rules and repeat offences.

Highlights of the Companies Bill 2013