It isn’t often that two per cent can capture 98 per cent of the attention!
CSR or corporate social responsibility is the flavour of the day what with Sachin Pilot’s ministry of corporate affairs (MCA) mandating that qualifying companies must spend a minimum two per cent of their average net profit for the past three years on such an activity. Companies have to comply even if their group makes a consolidated net loss.
The Companies Act mandates companies that have a net worth of Rs 500 crore or more; or a turnover of Rs 1,000 crore or more; or a net profit of Rs 5 crore or more to conform to the prescribed CSR spends. Draft rules are up on the internet and Pilot expects comments to reach him by October 8. A second set covering 9 chapters has been made live for public comments until October 19.
India has become the first country on planet earth to mandate such an adventure (see report by KPMG** and copy of draft rules**). Estimates of annual spends under mandatory CSR vary: Rs 6,500 crore is the estimate by Business Standard from companies that sit on the BSE500. Rs 12,000-15,000 crore is the estimate by CEll, the Centre for Ethical life and leadership, a new Section 25 entity led by former chief election commissioner SY Quraishi. The ambit for this figure covers 8,000 companies, who will have to conform to the new 2-per-cent rule.
A cake of this size must vet a thousand appetites. Predictably, the jostle isn’t limited to the Big Four advisories or chartered accountants. Many have created trusts and shadowy vehicles overnight. But the drift is positive. For example, S Ramadorai and Ashish Kumar Chauhan of the Bombay Stock Exchange ltd (BSE) Monday joined hands with Bhaskar Chatterjee of state-backed Indian Institute of Corporate Affairs (IICA) to develop a corporate social responsibility (CSR) index.
With 5,200 companies listed under their wing, BSE sees the need for a more comprehensive perspective on CSR practices, capacity building, education and awareness programmes. For context, over 450 out of BSE-500 companies are expected to conform to the “2-per-cent rule.” Talking of rules, can ambiguities in the draft up for comment be far behindIJ
Three simple illustrations:
1. The rules up for comment mandate that every company sets up a CSR committee. This committee is to be manned by two directors and an independent director. But not all companies, even as they trigger the qualifying criteria on CSR, presently need to have independent directors. Some exist below the threshold limits for mandatorily having independent directors. This is also the case with private companies. They too don’t need to have independent directors.
Is Pilot’s idea therefore to ensure that even such companies now need to have an independent director only to satisfy the CSR RulesIJ Perhaps not.
2. The present year-end for purposes of calculation of first CSR reporting is proposed as March 31, 2014. What of companies, albeit just a few of them, who have a different year endIJ
Is the way out to apply the year-end that the company followsIJ
3. The draft rules rightly suggest donations or activities exclusively benefiting a company’s own employees and families will not qualify as CSR. “Only activities which are not exclusively for the benefit of employees of the company or their family members shall be considered as CSR activity,” they say.
But what of spends by companies on, say, salaries of their CSR departmentIJ
Or spends in territories outside India – an important enough dilemma for those Indian companies that have a global footprintIJ
For those just tuning in, the draft rules are proposed to be implemented from 2014-15, while companies are required to do the first CSR annual reporting based on the three preceding years ending on or before March 31, 2014. Apart from CSR, the draft rules also cover norms for auditors, appointment of directors, declaration and payment of dividends, besides setting up of National Financial Reporting Authority.
(The columnist is CEO & Co-Founder, India Strategy Group, Hammurabi & Solomon Consulting. Tweets @therohitbansal).