The Union Cabinet, on October 4, approved certain amendments to the Companies Bill, 2011, based on the recommendations of the Parliamentary Standing Committee on Finance and inter-ministerial discussions.

One of the amendments relates to making CSR obligatory on part of companies by removing the passage ‘make every endeavour to’ from clause 135(5). It may be noted that the CSR clause was voluntary in the draft Companies Bill, 2009, but companies were mandated to disclose their CSR spending to shareholders.

Proposed features

The qualifying criterion that would make CSR spending mandatory as per the Companies Bill, 2011, are: Companies having a minimum net worth of Rs 500 crore or turnover of Rs 1,000 crore or a net profit of Rs 5 crore during any financial year.

Such companies are required to constitute a CSR committee of the Board comprising at least three directors, of which one shall be an independent director.

This Committee will formulate the CSR policy, including the activities to be undertaken and the related spending. The Board shall disclose the content of policy in its Report and on the Web site. The modified Bill further says that the Board shall endeavour to ensure that at least two per cent of average net profits of the company during three preceding financial years shall be spent on such policy every year. If the company fails to do so, the Board shall give reasons for not undertaking such spending.

The Accounts of the Company would include the details about the policy developed and implemented by the company on CSR initiatives taken during the year.

Industrial Policy

There are a number of issues related to the present approach to CSR that need deeper probe.

Big industrial start-ups involve displacement of people. As the livelihoods of people are threatened in the process of setting up the industry, it is obligatory that the promoters take care of the rehabilitation and resettlement (R&R) of the affected people. Yet, some companies include the spending on R&R as CSR activities. Given such practices, CSR works as a cover-up for some of the uglier aspects of industrialisation.

There is a need to align CSR with the broader objectives of industrial policy. Treating CSR in isolation serves limited purpose. There is also a need to distinguish between the CSR approach of manufacturing units and service-oriented industries.

At present, one finds a myriad of CSR patterns. CSR initiatives in many instances have become more a case of tearing a leaf out of a cheque book to donate a specific amount towards social-cultural-religious activities, without really going into the outcomes of such philanthropy. One of the amendments, which treats contribution to Relief Funds at the States or Centre as eligible CSR spending, will only encourage the cheque book approach.

Family-owned business houses have developed a practice whereby the male folks devote their time to running the business and the women folk address CSR initiatives.

The real issue is not how much a company spends on CSR initiatives but the manner in which the amount is spent. It is necessary that companies move away from the philanthropic/cheque book orientation to a more strategic approach, whereby the CSR initiatives are aligned with their core competencies.

For instance, an IT company is better off developing software for adult literacy than sponsoring a project on child immunisation. Similarly, a bank may be better placed to handle an initiative on financial literacy than a community health project.

A related aspect is, should corporates integrate CSR into their organisational structure or outsource it?

Bring MSMEs in

The Bill is essentially limited to covering big corporates. What about micro, small and medium enterprises (MSMEs), which account for half the industrial output? Should the scope of the Bill be extended to them?

Generally, MSMEs, which are part of the supply chain of big companies, are likely to embrace CSR practices once the Companies Bill is ratified in Parliament. There is a view that MSMEs operate on the fringe and it may not be appropriate to overburden them with CSR. This kind of reasoning may not hold much water if CSR activities are aligned with the business model. Nothing should stop an MSME from behaving in a socially responsible manner.

At present, in MSMEs, one finds the approach to CSR is governed by the ethical values of the proprietors rather than any structured mechanism. Without prescribing a specific percentage of profit, it may not be a bad idea to ask MSMEs to institutionalise CSR practices.

Though a formal approach to CSR is of recent origin, informal CSR initiatives have been an integral part of the traditional business culture in India. For instance, setting aside one-sixth of the profits as a token of gift to the Almighty, finds expression in the form of various community activities.

Jamshedji Tata, in a letter to his son Dorabji way back in 1902, had written that business owes its existence to the community. The Government’s approach should be to encourage corporates to pursue CSR activities by providing incentives for meaningful contribution to society.

The Bill, in its present form, stipulates a specific percentage of profits should be earmarked for CSR activities. Corporates will find innovative ways to fudge such quantitative norms. Besides, the problem with such a residual approach to CSR is that important CSR initiatives can be held up if profits fluctuate significantly from one year to another.

A better approach would be to sensitise corporates about the benefits that would accrue from CSR activities.

(The author is Associate Dean, Xavier Institute of Management, Bhubaneswar. The views are personal. blfeedback@thehindu.co.in )

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