India has become the first country to make corporate social responsibility (CSR) compulsory. Is this a good move for the country? The answer is a resounding ‘Yes’.
The Indian Companies Act was updated after more than half a century- a move way past its due. One of the most talked about provisions of the updated Act was Clause 135. As per this clause, companies are mandated to spend 2% of their net profits from the last three years on CSR activities. The companies that fall within the purview of this mandate are those with an annual turnover of at least 10 billion INR (~ $17 million), or a net worth of 5 billion INR ($ 84 million) and more, or a net profit that exceeds fifty million INR ($1 million).
The advantages of regulation
This is a good thing. To date, CSR activities undertaken by Indian corporates have usually had a philanthropic approach. Hence, even though a majority of companies today recognize community as a key stakeholder, the implementation of initiatives has mostly been piecemeal and without much clarity of purpose.
In order to comply with the new law, companies shall now be required to form a separate CSR committee, formulate a CSR policy, disclose the associated planned activities on its website and also have a monitoring mechanism in place. Failure to comply will require clarifications and invite penalties. The aim is to facilitate a more integrated approach to social responsibility and eliminate sporadic spending.
Also, Company Act lists the set of eligible activities, making it easier for an organization to recognize issues it wishes to support and work on developing long-term solutions for that particular sector. These new rules, effective from this April, maybe ambiguous in sections but if one concentrates on the goal in sight, it’s suffice to say that this is a step if not a giant leap in the right direction.
At present, CSR reporting is mandatory in some countries but making CSR compulsory on a global scale could bring much more funding to bear. It shall not only urge organizations the world over to follow a triple line approach but also provide a guiding framework. In short, it shall enable social responsibility backed by strategy and structure.
In theory, this seems like a great idea. Will the execution be practical? Even possible? Will companies the world over welcome the change? India provides the perfect case study: now we just have to see whether it works.