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Indian Government to Business: Spend 2% of Profits on CSR

Leon Kaye | Wednesday September 8th, 2010 | 1 Comment

Recently Triple Pundit engaged in the debate over whether corporate social responsibility (CSR) was the right path for businesses to follow.  Aneel Kamani’s recent article in the Wall Street Journal ruffled many feathers, but in the end was productive as it prompted many thoughtful articles on how the CSR movement can succeed.  I wrote that relying on regulation to solve the riddle over businesses’ role in society was simply passing the buck—and suggested that companies voluntarily disclose their effects on environment, social, and governance issues was the way forward.

One country’s legislature is evaluating the wisdom of mandating larger companies to spend some of their profits on doing good.  India’s Parliament is mulling a bill that if passed, would require over 3400 companies to set aside 2% of their average net profits over the next three years to funds dedicated to CSR initiatives.

Yashwant Sinha, a former finance and foreign minister, is advising the parliament committee that proposed the legislation, called the Companies Bill of 2009.  As the bill stands now, companies will be evaluated by their performance over the three previous fiscal years.  Companies that fit any or all of the following metrics would have to comply:  firms that have annual net profits averaging US$1.06 million the past three years; those with a net worth over US$106 million; and firms that have annual sales of at least $212 million will have to devote 2% of their net profits to CSR activities and disclose how that money is spent.  What defines a CSR-related activity, however, has not yet been defined.

The proposed law would not only target giants like India’s state-owned Oil and Natural Gas Corporate, Reliance, and Bharti Airtel, but would impose such a requirement on smaller firms that net high profit margins.

Not everyone is thrilled with the legislation.  When the idea was floated earlier this year, one commentator raised skepticism that that Indian government could do well by mandating social obligation for the private sector.  Bharti Artel’s CEO insisted that the government back off and let businesses be proactive in determining their participation in CSR activities.  But more Indian firms are finding themselves under the magnifying glass for various reasons; this same legislation could also include legislation that caps executives’ pay–another one of Sinha’s ideas that raised eyebrows within India’s business community.

It seems odd that a government notorious for harboring a bureaucracy, which Indians and expats are quick to criticize for creating red tape, is now suggesting that it keeps its eye on how privately-owned companies run their CSR programs.  CSR advocates around the globe may say that companies are not doing enough, but the evidence suggests that the private sector is making great strides, doing everything from greening the supply chain, to becoming more transparent about their operations, or looking out for employees who work for their suppliers.  And in India, there is the argument that the private sector is already undertaking more CSR activities, therefore more active than government programs—not to mention the thriving social entrepreneurship culture that is soaring, fittingly, in the world’s largest democracy.

As more stakeholders and consumers vet more companies’ operations, companies are responding in kind.  What they will not respond to is government meddling—the 2% levy may sound good on paper, but it may end up causing more administrators in government and business to simply push paper, touting dubious projects in order to provide an illusion that they are doing good for society and the environment.


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