The Social Net Worth

The “two percent rule” that makes CSR mandatory for India’s largest companies could be an audacious move

01 September 2013
Students in a school in Bangalore, funded by the Azim Premji Foundation. New CSR rules are expected to pump around Rs 100 billion annually into the social sector.
AIJAZ RAHI / AP PHOTO
Students in a school in Bangalore, funded by the Azim Premji Foundation. New CSR rules are expected to pump around Rs 100 billion annually into the social sector.
AIJAZ RAHI / AP PHOTO

ON 8 AUGUST, India officially embarked on one of the world’s largest experiments in converting cash into development. Some cheered it on, some feared it, and many argued that it should never have happened, but for better or worse, the Companies Bill cleared the Rajya Sabha with a small clause in the middle that orders India’s largest companies to spend a small but significant part of their earnings on corporate social responsibility (CSR) initiatives.

Clause 135, better known as the “two-percent rule”, requires companies “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” to give back two percent of their after-tax profits to society. (According to accounting firm Ernst & Young, there are about 3,000 such companies.) Schedule VII of the bill defines giving back: “eradicating extreme hunger and poverty; promotion of education; promoting gender equality and empowering women; reducing child mortality and improving maternal health; combating human immunodeficiency virus, acquired immune deficiency syndrome, 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 the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and such other matters as may be prescribed”. There are process requirements—appoint a board committee, develop a plan, monitor it—but no explicit penalty for not spending. The bill simply requires delinquent companies to explain, in their annual reports, their failure to spend two percent.

The new rule was not exactly a surprise. Corporate social contribution in some form has always been an implicit component of the public discourse of nation building, and companies have always been expected to “do their part”—at first a bit part in the 1945 Bombay Plan (incidentally, written by industrialists), then an increasingly large part in delivering ingredients for development beyond the businesslike private finance of public infrastructure. (For example, the prime minister himself urged industry participants of India Telecom 2012 to apply their minds to “develop strategies to expand teledensity in rural areas”.) The CSR discussion—which entered the scene in 2008 with a joint project between the Indian Institute of Corporate Affairs and the German technical agency and bilateral donor GIZ to develop “an Indian concept” for CSR guidelines and reporting—is the latest articulation of the notion.

Jessica Seddon is the founder and managing director of Okapi Research & Advisory, Chennai.

Keywords: development lobbying industry corporate ethics Corporate Social Responsibility SEBI Companies Bill disclosure norms
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