The Pulse

India’s Companies Act: Legally Enforced Corporate Social Responsibility

A new law could make Indian business simpler and more responsible.

It’s painfully common knowledge that doing business in India is probably one of the toughest jobs in the world. India routinely finds itself at the bottom of the pack when it comes to ease of doing business, from incorporating a company and dealing with permits to getting credit and navigating through a crumbling (often non-existent) infrastructure. In fact, according to The World Bank, India comes in at 132nd place on their annual Doing Business survey of 185 countries.

Many of these challenges have been a consequence of outdated, out-of-context laws in the Companies Act, 1956. A new law to replace the old one has been in the works for nearly 20 years now, even as the existing legislation has been amended 25 times in six decades. It seems reasonable to hope that a new law will finally be enacted, now that the Rajya Sabha (Upper House) of Parliament has passed it, seven months after the Lok Sabha (elected Lower House) gave it the green light. The bill makes several sweeping changes in the way companies in India are defined, operated and are regulated. Most significantly, the new law is expected to bring greater transparency, free companies of excessive regulation and institute new ways of self-reporting and disclosure.

Many of the bill’s features have been debated, especially the stipulation that companies with a net worth of Rs 500 crore ($100 million) or more, or turnover of Rs 1,000 crore ($200 million) or more, or a net profit of Rs 5 crore ($1 million) or more during the past three financial years must spend at least 2 percent of their average net profits from the three preceding years on CSR, or corporate social responsibility initiatives. According to Union Minister of State for Corporate Affairs Sachin Pilot, this stipulation makes India the first country in the world to legally mandate corporate spending on social welfare.

Considering the social and development milestones that India needs to pass, few companies have come out in vociferous opposition of the clause – doing so would amount to bad PR. Several eloquent CEOs I spoke with admitted as much. Some of them said that the definition and scope of CSR was vague and unspecified; others said that maybe ploughing back each penny of profit into expanding and building the business was their biggest dharma (a Hindhu term roughly meaning “duty”)and the most powerful way to make an impact. The managing director of a Delhi-based construction chemicals company summarized it well when she echoed much of what I have heard from many of her peers.

“I think it's a very positive move as the parameters are clearly defined so companies which are making net profit of more than Rs 5 crores in the three preceding years are being asked to contribute to the improvement of our society,” she said. “Also the fact that it is those with a turnover of more than Rs 1000 crores clearly sends a signal that it is asking those in a financially strong position to share. This is clearly the need of the hour in India.”

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“However,” she added, “I would have liked to see a definition of CSR in order to prioritize where we need our corporates to help to prevent mishandling of funds.”