This post is in response to a column by a media person and friend featured in First Post.
The reason, of course, is to dispel the myths and mythology that seems to be surrounding common knowledge and understanding of Section 135, of the Companies Act, 2013, which makes CSR ( or much criticized as the 2 percent tax) which companies have to make as part of their reporting.
Not to mention, the complete unawareness of the developments in the space of CSR by the esteemed columnist, and the perpetuation of myths that make the Greek rendition of a Minotaur (Half Man, Half Bull) into complete bull!
Myth 1: 2 percent tax
Reality: there is none. Companies simply have to report that they have spent, or failed to do so, 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 Policy. If they haven’t, that’s upto them, but the mandatory part of the law is the reporting, and that’s it. As of now, while there are consultations afoot to make spends mandatory, but that will require an amendment of the law. To put things in perspective, it took 10 years to get this version of the Companies Act out as law.
Myth 2: Companies and their heads, or better halves, can choose whatever scheme they want
Reality: Section 135 lays down that the CEO’s, their wives, or related family members, or even heads of departments like HR, marketing and Corporate Affairs have no role to play. Read that again! You read that right. Nada! Zilch, Kuch nahin! No role, period.
The law clearly states, that the first responsibility of the qualifying entity (companies with net worth of INR 500 crore or more (approx.USD 100 million or more), or a turnover of INR 1000 crore or more (approx. USD 200 million or more), or a net profit of rupees five crore or more (approx. USD 1 million or more) during any financial year, is to report that a CSR committee with at least one independent member, has been formed.
Why? Clearly to take out the abuse of the system, so aptly described by the columnist quoted. No longer can there be CSR in the form of CEO philanthropy or “Noblesse Oblige”, or political patronage in the name of CSR.
So what will this board committee do? Simply, set out the CSR policy framework for the company. To quote, “This committee needs to formulate and set out the Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII of the above act, as well as recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and monitor the Corporate Social Responsibility Policy of the company from time to time.”
Somehow, I don’t see the role of HR, corporate affairs, or marketing heads here. And that is by design. The new Companies Act, which drew more debate on this one section than any of the others, has put the onus of responsibility at the level where it belongs, the representatives of investors, read Board members. And that one independent member, has the responsibility of upsetting the whole underlying assumption of crony capitalism, of parking money in local politician funded NGO’s, and CEO’s wives favourite ‘selfie’ moments, and taking the impact of CSR into where it really matters, into the lives of ‘the poorest of the poor”, “Daridra Narayan” as described by Prime Minister Narendra Modi, as per the recommendations of the board committee.
Myth 3: CSR funds are another form of buying favour
Reality: do you really need to? Schedule VII gives ample scope for companies to demonstrate their own understanding and imperatives. Have a look at the Schedule:
- Activities which may be included by companies in their Corporate Social Responsibility Policies:
(i) eradicating extreme hunger and poverty;
(ii) promotion of education;
(iii) promoting gender equality and empowering women;
(iv) reducing child mortality and improving maternal health;
(v) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
- (vi) ensuring environmental sustainability;
(vii) employment enhancing vocational skills;
(viii) social business projects;
(ix) contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the 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; and
(x) such other matters as may be prescribed ( and the latest notification allows setting up technology entrepreneurship cells within academic institutions)
- If you knew your meat from bull, you would notice the similarity with the UN’s Millenium Development Goals. But, obviously, the pre-meditated notions of people the columnist refers to having spoken with, or his underlying presumptions won’t allow for the need to read anything beyond 140 characters.
If you spend 2 percent of your average net profits, in any of the causes above, any and all politicians will be happy to oblige. Heck, you, your company, the project and people responsible would be touted by the UN, B20 summits, and the WEF, no less.
And now let me focus on the real power and implications of Section 135, which has confounded the columnist, and is the reason why corporate India and its minions are busy at work discrediting this legislation- unprecedented anywhere in the world.
- The CSR policy will decide activities which will consume two percent of average net profits of the previous three years. How?
- There will have to be a project. A measurable and benchmarkable project. For instance, your company decides to spend INR 100 Crore, or USD 17 Million dollars, at current exchange rates, on Swacch Bharat Abhiyaan, as part of your Board’s CSR policy around say, reducing child mortality, or combating diseases, or environmental sustainability.
- The report will need to showcase a baseline assessment survey. Is there a need to sweep a city street which is already well served by the municipal corporation, for which your company pays taxes, or to take it where there is none, and your company’s board believes it is more effective.
- Not just a project, but with yearly monitoring and evaluation. For instance, the justification that comes out of spends on #MyCleanIndia program is that more children will be healthy and be able to attend school. The data that will be needed to be monitored by the board is “what percentage of children in the area where our project is, are now, for instance, able to do Class V math”. And this has to be monitored and reported, year on year on year, just like corporate profits. Call it what you may, project or program mode, I call it “mission mode”, and am sorry corporate boards now have to wake up and smell the coffee.
- Rupee denominated social projects. This is perhaps, the first time anywhere in the world, that corporates have to demonstrate their social commitment in terms of rupees spent. Most global corporates and a few of Indian origin, have fallen into the trap of compliance reporting, I call it checkbox reporting. Try doing it with PR , or branding but avoiding any mention of any real percentage of corporate profits. After all, corporates and their investors are simply interested in the profits, the market cap and dividends these enterprises provide, right? Now, wake up and smell the masala chai! The country which will be making the highest investment in renewable energy anywhere in the world, in the next 10 years, is India. Is that CSR or a compelling business case for social investment in times of climate change?
But, there’s a caveat. The same telecoms and retail giant quoted in the column ran in to trouble with tax authorities when they tried to claim the signboard at their school toilet project, a brilliant input from their hugely competent marketing team, as part of its CSR spend. And so will a number of others, who think that the advertisement for a tournament for disabled, or monies spent to bring a filmstar to inaugurate a slum cleanliness drive, or even high spends on TV for sanitation will pass off as CSR under section 135. The answer, my friend, is baseline impact. Did that money change any of the metrics the Board set out to monitor, or was it pure fluff?
The questions, that will be asked, as part of the report filling in process will be:
- What was the ground necessity for the project at that location? Did you do a baseline assessment of requirements
- What is the CSR project expected to achieve? What goals are you shooting for and by when, and what will you report every year
- How much money will it cost? How are you monitoring and evaluating your investors’ money being spent (can you afford to be irresponsible with CSR funds carved out of you investors incomes?)
And here’s an example of a large, say, public sector giant with running average net profits of INR 30,000 Crores, or an annual CSR fund commit of INR 600 Crores ( Above USD 100 Million). This is no longer the flower show, or local jagran sponsorship level activity, it’s almost as much as an annual budget of a major product line, and it will be the Key Responsibility Area of the CEO with Board committee oversight.
Am sure, HR, Corporate Affairs, or marketing heads, will not have these answers, or even the data points or projects to develop and sustain such projects year on year. And yes! Maybe CEO wives and movie stars could look good on annual reports and while inaugurating the programs, but make no mistake, the law as it stands is designed to ask tougher questions from the Board CSR committee, and the quicker they learn to upskill and design their policies for their own growth and sustainability the better it will be.
So, the question is no longer whether the CA, or the CEO, or the auditor can design or drive CSR reporting in India. It will require a completely different level of understanding among company directors, those who are Board members, and also require companies to access or develop the design, monitoring and reporting skills required to comply. And am afraid no traditional MBA program can help with those. As I said earlier, this law is unprecedented anywhere in the world. The speed, skill and scale required to comply will have to be developed in India, for India, and then the world.
Disclaimer: presently, a digital entrepreneur, I have nursed my connections with the CSR space throughout my corporate and entrepreneurial career. I am founder Trustee of READ India ( an NGO which supports rural education projects via local social enterprises), I am also co-author of the then International Business Leaders Forum report on LEADERSHIP IN A RAPIDLY CHANGING WORLD- How business leaders in India are reframing success, and more recently, master trainer with the Indian Institute of Corporate Affairs, set up by the Ministry of Corporate Affairs, having co-authored the courseware for creating a new cadre of CSR professionals, who now will be better equipped to fill the need gap on CSR policy formulation, project design, monitoring and evaluation, to provide support to India’s corporate boards.