India's move towards making companies engage in philanthropy has prompted confusion among many firms and has not been welcomed by all.
Parliament this month approved a law that asks companies with a net worth of more than 5 billion rupees (Dh298 million), a net profit of more than 50m rupees, or revenues of more than 10bn rupees, to spend 2 per cent of net profit on corporate social responsibility (CSR).
The bill has been in the pipeline for some time and is only awaiting presidential approval. It would make India one of very few countries in the world to make philanthropy part of its law.
"When you're asking somebody to do something which is not being done by that individual voluntarily, the first reaction is: 'Why am I supposed to do this?'," says Sonali Pradhan, the managing director of RBS Financial Services India. "The immediate reaction that comes from the corporates is that they have an additional thing on their plate to kind of work on. There are corporates who are not happy - not because their intentions are bad. Nobody is underestimating the need that we have as a country to get these kinds of contributions."
Companies that fail to spend 2 per cent of their net profit on CSR have to explain why they have not met the requested target, according to the law.
Analysts say that one of the major problems with the law is that it measures philanthropic work in purely monetary terms. They say that CSR activities could come in many forms and might include a company making efforts to reduce its environmental footprint or donating its expertise to worthy causes.
"There are a lot of companies that are doing philanthropical work which is not in the form of money per se," says Ms Pradhan. "They are doing a lot of work when it comes to contributing the skillset that they have in the employees or in-kind support to NGOs. This kind of work nowhere gets recognised by this bill or least that's what the prima facie impression is of the bill. We'll have to wait and see the final details. The concerns which genuine donors have is what do they do with the projects which they have already undertaken, where they are doing a fair bit of good work."
Many companies are already making CSR a more important part of their strategy, so the new law might have little effect on them, she says.
"This bill was much anticipated by most of the corporates and there are already a lot of steps that have been taken proactively."
But many companies might not have the expertise to explain their philanthropic activities to meet the law's requirements, which means hiring consultants to take over this function, analysts point out.
"Companies will now be required to spend money on structured activities rather than, say, on religious causes," Pavan Kumar Vijay, the managing director of Corporate Professionals Capital, a legal and financial services firm based in New Delhi, told the business newspaper Mint. "This would mean that there is a big scope for CSR consulting and we expect this activity to grow."
Philanthropic activity in India has increased substantially in India over the years.
A report by Bain & Co revealed that private donations in India to philanthropic causes increased by 50 per cent between 2006 and 2011.
"What's happening in India over the last 10 years, [is that] more and more corporates are getting richer, in the sense that the GDP has grown," says BR Manjunath, the director general of the Sir M Visvesaraya Institute of Management Studies and Research.
He says that if companies invest money in healthcare and education, the corporates themselves reap the benefits because this helps to create a more productive workforce and customer base.
BVR Mohan Reddy, the chairman and managing director of Infotech Enterprises, a major outsourcing company, says that he welcomes the move by the government. He says he believes that corporates should put back into their society, especially in countries such as India, where development is much needed.
"An invisible pillar of strength which makes an organisations successful is the society," Mr Reddy says. "I'm a firm believer that the companies have a responsibility to pay back to the society."
Infotech spends 1 per cent of its net profits on philanthropy, particularly on education in India, and plans to increase that to 2 per cent this year, Mr Reddy says.
Ms Pradhan notes that the charities that benefit from the money should be scrutinised.
"If you talk about philanthropy there are two sides to this coin," Ms Pradhan says. "With this bill, the government has tried to take care of the first part, which is the donor, but at the same time they will have to probably work on building some kind of accountability or bringing discipline among the NGOs to whom this money will basically go."
Indian companies and corporate social responsibility:
The Tata philanthropic trusts own 66 per cent of the shares in Tata Sons, the holding company, and these make up India’s largest philanthropic organisation. “The wealth that accrues from this asset helps the trusts to support an assortment of causes, institutions and individuals in a wide variety of areas, such as the uplift of the poor, education, health, art and enhancement of civil society,” Tata says.
Aditya Birla Group
The Indian multinational conglomerate says it spends more than 1.3 billion rupees (Dh77 million) annually on CSR with a focus on helping to develop rural areas of India. Its spending includes the running of 42 schools and 18 hospitals. “Our rural development activities span five key areas and our single-minded goal here is to help to build model villages that can stand on their own feet,” the company says.
Reliance is one of India’s biggest private business with assets of more than 1.8 trillion rupees and a net worth of 890bn rupees. “For us, being socially responsible is not an occasional act of charity or that one-time token financial contribution to the local school, hospital or environmental NGO,” says the company. “It is an ongoing year-round
commitment, which is integrated into the very core of our -
business objectives and
Mahindra & Mahindra
One of India’s biggest vehicle manufacturers, the company highlights reducing its environmental impact, including creating fuel-efficient vehicles, as an important part of its approach to CSR. “Beyond conducting business consciously and responsibly, we support our communities through many environmental and social initiatives,” it says. “We build schools and support educational programmes for students of all ages. Our environmental initiatives include building greener facilities and planting one million trees across India.”