In an effort to properly position the Indian economy for the remainder of the century, India is on the verge of replacing its fifty-seven-year old Companies Act of 1956 with the pending Companies Bill, 2012. Already passed in India’s lower house of parliament in December of 2012, the Companies Bill is expected to become law by the end of 2013.
How Will the Law Affect Corporate Philanthropy in India?
Harmonizing with international norms, fraud reduction measures, new government powers, and accountability provisions are all important new facets of the Bill. However, in a crucial move, India is setting itself apart from other Asian countries by instituting mandatory corporate social responsibility (“CSR”) reporting for qualifying corporations. Clause 135 of the Companies Bill requires that qualifying companies spend a prescribed formula-based amount on CSR, report on these activities, or explain why they failed to do so. The CSR Clause is a type of regulatory law commonly referred to as a “comply or explain” law.
While estimates vary widely, the accounting firm Ernst & Young estimates that the law would directly impact at least 2,500 companies, including the top 100 companies across several sectors, and generate an estimated US $2 billion in CSR spending.
Overview of the Two-Percent CSR Law
Below are highlights of the law and steps that qualifying companies must take to comply:
- The board of directors must create a special Corporate Social Responsibility Committee, which will devise, recommend, and monitor CSR activities for the corporation.
- The company must adopt a CSR policy formulated by the CSR Committee and that policy must be disclosed or posted on the company’s website. The law states that companies should give preference to CSR spending to local areas where the company operates.
- The company must spend at least two percent of its average net profits made in the preceding three financial years (the “Two-Percent Formula”) on government-approved categories such as education, environmental sustainability, or fighting hunger, among others.
- CSR activities developed and implemented during the financial year by the company must be detailed in the annual board report. If the company is unable to spend the required amount on CSR, the company must explain why in its board report or be subject to liability.
Fines and Liability
Failure to explain or report is punishable by a fine on the company of not less than 50,000 rupees (about US $900) and up to 25 lakh rupees (about US $46,000). Further, officers who default on the reporting provision could be subject to up to three years in prison and/or fines of not less than 50,000 rupees (about US $900) and as high as 5 lakh rupees (about US $9,200).
Applying the Law
Directors and officers having CSR responsibilities within Indian companies possess little guidance in implementing the law. This is partly due to the lack of a statutory definition of what constitutes CSR in the CSR Clause itself or the Companies Bill at large. Other areas of concern include:
- No guidance as to what constitutes a sufficient or statutorily valid explanation for spending, or failure to spend, in the board report.
- The government-approved CSR categories are development-focused and generally interpreted as charitable spending on NGOs. However, there is no mention of employee volunteerism. Does employee volunteerism count towards the Two-Percent Formula and, if so, how are volunteer hours valued?
- How does a company know if a project truly fits into a government approved CSR category? Would internal work-place trainings on gender equality count, or investment in green technology that ultimately saves the company money?
Qualifying US companies registered in India or operating through Indian subsidiaries must comply with the CSR Clause. The law should not be viewed as an onerous reporting requirement. Instead, companies should look to the CSR Clause as an opportunity to offset their impact in the communities where they operate, as well as means to communicate and strengthen their brand and reputation.
The CSR Clause should also be implemented and conducted strategically. Failure to do so can result in CSR projects doing more harm than good to intended beneficiaries as well as unlimited reputational damage for the corporation both in India and abroad. Unfortunately, the Companies Bill conspicuously leaves out how companies should evaluate and measure impact in complying with the law. Therefore, to ensure projects are tailored to meet the needs of beneficiaries and overall corporate CSR strategy, companies must (at minimum) exercise proper due diligence procedures on CSR projects and partner with reputable NGOs.
CSR Laws: Future Outlook
India will be at the forefront of CSR law should the Companies Bill pass with Clause 135 intact. As such, India will be a testing ground for CSR laws of this kind. Indeed, a trend is already apparent in CSR law as the European Union is considering a law that would require CSR reporting and disclosure for certain companies, something the European Union calls “non-financial information.” While the EU law does not require CSR comply-or-explain spending, it demonstrates that governments are expecting companies to do more than simply conduct business, provide services, and make a profit within their borders.
Read the 2% CSR Clause: New Requirements for Companies in India by Kordant Philanthropy Advisors
About the Author
Charles R. Ostertag is Special Counsel at Kordant Philanthropy Advisors. He provides technical and legal support to clients on matters relating to expenditure responsibility, equivalency determination, and emerging laws affecting philanthropic projects in Asian countries. Charles also authors firm publications to help simplify the legal aspects of philanthropy and make giving abroad more efficient and effective. He graduated from UC Berkeley and Tulane University Law School. He is a member of the State Bar of California.