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Everyone can be compassionate, but to be charitable costs money. The new companies bill passed in the Lok Sabha recognises that. That is why it has mandated financial thresholds for companies that have to take up compulsory corporate social responsibility (CSR).
According to clause 135 of the bill, "Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year" shall make "every endeavour to ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility (CSR) Policy."
These criteria mean less than half of the BS 1000 firms will be required to spend on CSR, once the new law takes effect. It is likely to pass through the Rajya Sabha in the Budget session. According to the Business Standard Research Bureau analysis, about 450 top companies will have to make provisions for spending. Based on the average profits of the preceding three financial years, these firms will have to spend a whopping Rs 6,751 crore in the first year after the act comes into force. Over half of this amount has to be spent by the top 30 firms alone. Fifteen of these firms will have to allocate spends of at least Rs 100 crore. State-owned oil and gas explorer ONGC has to allocate Rs 405 crore, while Reliance Industries has to spend Rs 377 crore, followed by State Bank of India (Rs 194.25 crore), NTPC (Rs 180.36 crore) and TCS (Rs 161.1 crore).
The Business Standard Research Bureau arrived at these numbers based on the average net profit of these firms for the financial years 2009-10, 2010-11 and 2011-12 on a stand-alone basis.
The bill prescribes specific activities which may be included by companies in their corporate social responsibility policies. These include activities relating to eradicating extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, combating HIV/AIDS, malaria and other diseases, ensuring environmental sustainability, employment-enhancing vocational skills, social business projects, contribution to the Prime Minister's National Relief Fund, or any other fund set up by the Central government or state governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.
The bill however requires that these companies forms a Corporate Social Responsibility Committee of the Board, "consisting of three or more directors, out of which at least one director shall be an independent director."
This committee is responsible for formulating CSR policy, recommending the amount of expenditure and monitoring performance. The board has to give reasons if the company falls short of CSR spending targets in a particular year in its directors' report.
Companies and individuals that have been helping corporations in CSR activities feel that making it mandatory would be a good opportunity for companies to do social good and the move may not be resented.
Sanjay Singh, vice president, public affairs, Tata Group, says that government and industry seem to be on the same page so far on CSR. And industry would like this to remain so. "Since the accent in CSR now is on reporting rather than actually spending two per cent of profits, industry would not like to come out with a nil report and look awkward," he says.
"Besides, many small- and medium-sized companies were confused so far as to what CSR was and what could be done under it. Now the guidelines bring clarity. It even suggests that companies can join hands to do CSR, which many may like to do," says Singh.
Anirban Roy of SEED Society for Educational Welfare and Economic Development, which does CSR for SAIL, Reliance SEZ, Jindal Steel and others, thinks the law will ensure that companies can do good without fearing anyone.
"No stakeholder would now be able to question the right of a company to spend money on the public good," he says, asserting that wealthy corporations are as keen to do good as any one of us.
He feels the CSR that was being done now was mainly of the kind that was necessary for them to do business in a community or a piece of land. "The Land Acquisition Bill with its rehabilitation provisions will now streamline whatever was being done as CSR," he says
"But the two per cent of profit that they are to spend on public good would be essentially what they would actually want to do, without the need to comply with anything," says Roy.
He calls for making a distinction between spending the two per cent and reporting to the government each year what the company did with the two per cent. The accent is on reporting and not on spending, he says.
Amita Joseph, Treasurer, Business and Community Foundation, another consultancy firm that helps companies with their CSR activities, says public sector companies were already mandated to spend two per cent of profit on CSR. "It is good that it is now applicable to the private sector too."
She feels that two per cent of profit is too little and companies ought to do more. "After all, companies do not make products from nowhere. They use natural resources like land and water, which belong to all," she says.
She also criticises companies which choose to do CSR through their foundations. This is a way to put the money meant for CSR into their own pockets, she says. There are 2.5 million non-governmental organisations (NGOs) that can use the funds to do development work. There are also academic and social institutions that can be partners of companies in CSR.
"Why can't companies trust a third party with money and work? A third party being involved is better for transparency and democracy," she says.
"CSR has to be guided by a policy and it should not be just money passing hands. Can we give one district to each of the 100 leading firms to understand the development deficit? The companies have the money, expertise and tools to make the right assessment," she says. However, Roy feels that in a few years one many see many developments in CSR, including companies putting their work together to achieve scale.
If Warren Buffet and Bill Gates could do it, why can't our industrialists also come together? he asks.
NGOs are likely to reap some of the several thousand crores that is going to be spent on CSR. NGOs mix cheer with caution as they welcome the possibility of an expanded CSR bounty that may come from the proposal.
According to an estimate by the NGO Charities Aid Foundation and Copal Partners in 2000, domestic corporate donations to NGOs totalled just Rs 200 crore. In 2004, industry and individual donations to NGOs together comprised about Rs 3,000 crore. These figures have been mostly cited by NGOs to show that they have not been the preferred philanthropy partners of industry so far. However, CAF, which did the study, now feels that times have changed and there is reason for optimism.
"There are huge prospects there. Corporates with more evolved CSR are coming with strategies for philanthropy," says Avijit Kumar, who heads grant- making in CAF India.
While bigger companies may have their own foundations, the small and medium ones will still go to NGOs to get their CSR done effectively, he says: "NGOs will remain the main vehicle for driving community work. Nothing can change that. If doers are there, I would need them. I think there is a tremendous prospect for NGOs here."
The challenge however is for NGOs to shape up, and improve their capacity not only to absorb money but also to use it properly, account for it properly and see that it produces results, says Kumar.
CAF, which has been building the capacities of companies to be effective in their CSR, feels that NGOs have to seize the challenge and opportunity. CAF raises resources from donors, including corporate donations, and gives them to NGOs. "I definitely see CSR flow to NGOs picking up," he says.
Mathew Cherian, chief executive of Helpage India, is not so optimistic. The money spent on NGOs by companies in CSR work so far does not inspire hope, he says, citing the CAF findings: It may not go beyond Rs 6,000 crore, which is a "pittance".
Firms have created their own foundations. The increased amount may see half or a quarter of a per cent of their profits going to NGOs. That's a pittance. Even the two per cent that is being made mandatory is too small, says Amita Joseph of Business Development Foundation. They give their funds to their foundations or to fellow corporates. For example, DLF gives its funds to its foundation or to Bharti Foundation…So NGOs don't figure at all, except in the margins, says Mathew Cherian.
But he adds that Helpage has been receiving funds for CSR in the past from companies like Asian Paints and GMR. These may increase in future. But they may not involve grassroots organisations so much, he feels.
Rajesh Tandon, founder of the NGO PRIA, says companies are too scared of empowering grassroots organisations - if the NGOs do their work too well, they would educate people, who may then question industry's ways. "So we don't hope to get much from CSR."
Tandon does not share the optimism of CAF that NGOs will be natural vehicles for carrying out CSR activities. What has happened is that companies have been hiring social workers from NGOs and paying them four-fold, which is very good for the worker but bad for NGOs, says Tandon.
Consultants say there needs to be more clarity before there is some serious activity. A recent report by Ernst & Young said, "It is not absolutely clear whether a company will need to create provision in the financial statements toward unspent amount if it fails to spend two per cent amount of the CSR activities in a particular year."
E&Y thinks the resolution of this issue may depend upon the legal and other consequences which may follow, if a company fails to spend the requisite amount in a particular year. "For example, if a company can get away with an explanation in the board's report and need not make good past shortfall in the future period, there may be no need to create provision. However, if the company needs to incur the amount currently unspent in future periods legally, a provision in accordance with AS29 may be needed."
The tax treatment of expenditure incurred on CSR activities is also uncertain. One argument is that it is in the nature of allocation of profit, and therefore will not be allowed as deduction for tax purposes. However, the counter argument is that there is a legal obligation on the company to incur such expenses, though they are determined as a percentage of net profit.
