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Home > Business Ethics Viewpoints > The Companies Bill, 2012, and its Impact on the Future of Corporate Social Responsibility in India

Business Ethics Viewpoints

The Companies Bill, 2012, and its Impact on the Future of Corporate Social Responsibility in India

by Sudhir Singh Dungarpur

Background to the India Companies Bill, 2012

The peril of socio-economic inequality has become an urgent priority in India, especially over the last decade. Inequalities vary from region to region, between rural and urban populations, between social and ethnic groups, and most obviously between the rich and the poor. It is in recognition of these challenges that the Indian government has repeatedly articulated its commitment towards “inclusive growth.” There has also been a widespread recognition that critical to the push towards “inclusive growth” is the participation of a wide range of stakeholders in designing, financing, implementing, and evaluating development interventions.

With the Companies Bill, 2012, passed in the Lok Sabha in December 2012, discussions on its impact on corporate India have been gathering steam. The Companies Bill states that companies with a specified net worth, or turnover, or net profit during any financial year shall constitute a Corporate Social Responsibility Committee of the board of the company, and, accordingly decide the strategy and spend on corporate social responsibility (CSR) activities.

In this article, I outline the opportunities for CSR in India and the priorities on which companies should focus in the new regulatory regime. Companies should view this as an opportunity to expand their scope and reach towards society at large, by transforming themselves into model corporate citizens. This may very well be achieved through a strategic approach towards CSR and by incorporating rigorous standards of effectiveness in the projects funded as part of its CSR interventions.

Corporates and Inclusive Growth

India ranked a lowly 134 out of 187 countries in the UN Human Development Index 2011, with 30% of its population estimated to be living below the poverty line. Over the last decade therefore addressing socio-economic inequality has become an urgent priority in India. In its endeavor to counter this inequality among citizens of the country, the Indian government has initiated various social-sector schemes in education, public health, food security, and livelihood support in order to reach out to the poorest of the poor and facilitate their socio-economic development. At the same time, there has been a widespread recognition that critical to the push towards “inclusive growth” is the participation of a wide range of stakeholders in designing, financing, implementing, and evaluating development interventions.

The society looks at the corporation as a social organ for wealth creation. Peter F. Drucker had in the 1950s eloquently said that “even the most private of business enterprise is an organ of society and serves a social function … the very nature of the modern business enterprise imposes responsibilities on the manager … it can no longer be based on the assumptions that the self-interest of the owner of property will lead to public good, or that the self-interest and public good can be kept apart and be considered to have nothing to do with the other.”

There is a growing consensus that companies are expected to contribute to the welfare of the society in which they operate and wherefrom they draw their resources to generate profits. To meet its goal of inclusive growth, the Indian government has mandated CSR for all companies, including the private sector, through a statutory provision in the Companies Bill, 2012. This is a significant step by the government, given that in most developed economies there are hardly any jurisdictions mandating an allocation towards CSR. By and large, it is a voluntary initiative by the corporate sector. And while in countries like Denmark, Sweden, and France reporting on CSR practices is mandatory, investing in CSR is not.

India’s Companies Bill, 2012 and the Emphasis on CSR

Section 135 of the Companies Bill, 2012 mandates that companies having net worth of INR 500 crore (circa US$100million) or more, or turnover of INR 1000 crore (circa US$200million) or more, or a net profit of INR 5 crore (circa US$1million) or more during any financial year shall constitute a Corporate Social Responsibility Committee of the board constituted of three or more directors, out of which at least one director shall be an independent director. This section also directs the committee to:

  • formulate a CSR policy;

  • allocate funds;

  • monitor the progress of the CSR activities.

The Companies Bill, 2012, further directs companies to ensure the expenditure of at least 2% of the average net profit made during the three financial years immediately preceding the current year, or to specify the reasons for not spending the amount as part of the board’s report to the financial statement.

The Bill therefore attempts to make CSR a sustained and systematic activity by:

  • mandating the presence of an independent director, thereby encouraging companies to bring in people with specific social-sector expertise and an objective outlook;

  • formulating a comprehensive CSR policy as a strategic engagement, and not an episodic charitable activity;

  • encouraging companies not only to allocate funds for CSR, but also to monitor (and evaluate) progress and outcomes.

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Further reading

Book:

  • Drucker, Peter F. The Practice of Management. New York: Harper, 1954.

Websites:

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