CSR in India

What can we learn from India when it comes to CSR?

Much, if my recent trip there is any indication.

CSR in India Part 1 – India’s Companies Act (the 2% rule)

India both leads the world in some areas of CSR and trails a long way behind in others. Part 1 (in a 5 part series) explores the requirement of the CSR parts of India’s Companies Act 2013.

In 2013, amid a flurry of legislative activity including replacing much of its Companies Act, India became one of the first countries to mandate that companies spend a certain amount of money on ‘CSR’. Of course most CSR professionals would want to label the 2% spend as corporate philanthropy or social investment and almost certainly not CSR.

In any case, it’s true to say India’s new CSR law has sparked debate among NGOs and businesses. So why all the controversy?

First, let’s look at what’s required.  2-Percent-RuleIndia’s Companies Act (the 2% rule)

The legislation requires companies of a certain size (see Table 1, below) to spend 2% of pre-tax profits on ‘CSR’.

Table 1 – Organisational Thresholds for Companies Act (the 2% rule)

Table 1

Estimates of number of companies caught by those thresholds range from 2,000 – 16,000. If companies reach the threshold, then they must:

  1. Set up a CSR board committee with:
    1. At least three Directors
    2. At least one Director must be independent
  2. Set up a plan for CSR
  3. Ensure that the committee spends at least 2% of average net profits (from previous three years) on CSR activities in India – OR – explain why it has failed to do so (although the legislation doesn’t specify what will be acceptable in this regard)
  4. Submit a prescribed report on CSR activity spending.

Failure to meet the relevant requirements is a punishable offence (although it’s not entirely clear what the punishment will be).

Table 2
Source : http://www.ey.com/Publication/vwLUAssets/EY-Government-and-Public-Sector-Corporate-Social-Responsibility-in-India/$File/EY-Corporate-Social-Responsibility-in-India.pdf

Table 2 – Spending Limitations

Table 2aThat’s a rather long list of possibilities, which seems appropriate given the scale of challenges in India.

Companies have an array of ways to implement their 2% rule spend.

Table 3 – Implementation Vehicles

Table 3Estimates of mandated spend fall somewhere in the range of $3bn – $10.6bn. That is a very large number on any measure.

The 2.9% rule?

The quantum of the required spend could also be framed in terms of post-tax profits, as follows. Because the rule applies to profits pre tax (mostly, there are some exceptions), and India’s corporate tax rate is nominally 30% on profits, that means it is really a 2.857% effective figure on post-tax profit.

A sample set of numbers look like this:

Profit 100
Tax   30 30% of Profit for Domestic companies
Post Tax Profit   70
CSR spend     2 2% of profit
Profit for Distribution   68

 

Calculating from the above numbers, CSR when expressed as % of Post Tax Profit is:

CSR Spend  ÷  Post Tax Profit  x  100 (to give percentage)

          2         ÷              70            x  100 = 2.857%

The 0% rule

0 percent Corporation TaxOf course if companies don’t make any profit under the formula, then they don’t have to pay any of the 2%. This may prove to be problematic for companies who unexpectedly make a loss, and may also lead to cheque-book (and non-strategic) philanthropy at the end of any given financial year. Such short term donations will, in turn, make it difficult for charities to effectively plan their own budgets and might introduce unintended inefficiencies.

Also, it means that companies that are already avoiding paying tax (because they have IP licenses or service contracts with ‘headquarters’ in no/low tax jurisdictions and related transfer payments) will also avoid paying any of the CSR 2%. Avoiding tax was also a topic of a previous post, in which I opined that it was more than a little dangerous to avoid paying taxes. All of that reasoning seems to apply here, except more so.

Volunteering

Volunteering can be counted, although it isn’t clear yet what methods of calculation of the value of time will be used. I can sense an LBG-like controversy brewing among people who think that Executive time should be valued at something like their hourly cost, even while they paint fences (a job which they will, might I boldly suggest, do less well than significantly more cost-effective and better trained professional painters).

Core Activities

Excluded from CSR spend are activities undertaken by the company in pursuit of the normal course of business. That means for many businesses they can’t use their core products or skills to meet social needs, at least not without some clever use of structuring and/or collaboration with other organisations.

Core ActivitiesIt also means that some R&D activities will be allowed to be used in calculating the 2%. This will hopefully drive innovation in the CSR space in terms of new product and service development. India has already done much to make itself the centre of Frugal Innovation (google it, you’ll be surprised how frequently India appears on the first few pages). And there are plenty of IT companies in India that would do well to learn from examples like HP and its partnership with Akshara Foundation.

So things like Tata Swach water purification technology seems likely to continue, but companies can’t make losses on sales of such things and claim that they are CSR spend. It’s a mix that strikes me as quite an odd way to implement social benefit.

Foreign Troubles

Although not a problem for most foreign-owned entities in India, some companies will need to be careful when it comes to complying with the 2% rule and also steering clear of anti-corruption legislation.

Interestingly, the 2% Rule seems likely to redress the imbalance of higher spending by foreign companies on CSR than by national companies.

Average CSR spendSource : http://www.epw.in/web-exclusives/analysis-corporate-social-responsibility-expenditure-india.html

Next Post

In the next post I’ll explore India’s History and Culture of CSR.

[6 April 2015 – Dr. Renginee Pilay (@rgpillay, who features in the CSRLegal50)  got in touch to clarify that Mauritius passed similar legislation in 2009, and the first paragraph of the main body of the article was modified accordingly.]

Appendix: Other countries that have mandatory CSR spend requirements:

2007     Indonesia     5%     Extractives only

2009     Mauritius     2%     ALL

2011     India             2%     ALL

2013     Seychelles  0.5%   ALL

 

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2 comments

  1. Kishore Kavadia says:

    1. It is wrong to put in words in Indian National Flag and should be respected. Would author dare to write similar wording in American Flag.
    2. Issue of 2.9% etc. does not mean anything since 2% is defined as profit before tax.
    3.Foreign Companies need to also check that CSR Projects are as per Schedule VII so that their CSR Activities are in line with other Corporate Activities of Indian based.

    • 1. I certainly dont mean to cause offence. In answer to your question, yes I almost certainly would!
      2. Its a very complex calculation – certain things are excluded from other calculations of profit. the distinction will certainly matter to shareholders, Executives and any others who rely on distributions of profit.
      3. Agree!
      Kishore – I’d be interested in your views about how its affecting business in India.

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