Originally Published 2014-07-24 06:11:42 Published on Jul 24, 2014
While mandating CSR operations for large companies was a more justifiable social policy programme by the UPA-II than others, some of its provisions and recommendations reflect a lack of understanding of the Indian social and economic environment and of the real needs on the ground.
Changes required in CSR clauses in Companies Act
"The previous UPA government, led by Dr Manmohan Singh, had taken many quick, stop-gap measures aimed towards helping its social agenda. Its focus seemed to be more on winning votes in the general elections rather than easing social and economic strains plaguing large sections of society. These measures were not only removed from ground realities but were in fact lacking basic research or analysis. In its quest to create such policies, the UPA-II government alienated not only its target population, but other key stakeholders, including industry, non-government organizations and civil society. If the country is to return to its inclusive growth agenda, the new government must quickly correct this trend. One of the better examples of the perverse policy creation was within the Companies Act 2013. In Chapter IX, Section 135 of the Act, the government stipulated that a company with a net worth of Rs 500 crore or more, annual turnover of Rs 1000 crore or more and/or net profits of Rs 5 crore or more must initiate Corporate Social Responsibility (CSR) programmes. It was further mandated that companies must invest 2% of net profits toward CSR operations. The government, in its attempt to simplify the process, even went as far as listing the social programmes that would qualify for CSR operations of these companies. While mandating CSR operations for large companies was a more justifiable social policy programme by the UPA-II than others like the LARR or Food Security Bill, some of its provisions and recommendations reflect a lack of understanding of the Indian social and economic environment and of the real needs on the ground. For example, while it is the prerogative of the company’s board to decide on what social activity it engages in, sub-section 5 of Section 135 stipulates that any company investing in a CSR operation must give highest preference to the local area where it operates. Although no fixed radius for operations is provided, it is relatively safe to assume that a local area around the company operation would not extend to more than a 100 km radius. By stipulating these conditions, it has strengthened the already present tendency of companies to confine their social activities to areas around their operations. Only now, what should have been done by companies will be done under the banner of CSR. The provision has thus limited the scope of the impact that CSR could have had in tackling some of the pressing social and economic issues facing the poor and impoverished households and groups. Though CSR activities would immensely benefit the local population, especially given the exhaustive list of social activities prescribed in the Act, the potential impact of such policies would be limited to smaller geographies. The industrial corridor in India, especially for the type of industries that could fit the revenue criteria mentioned in Section 135, is in a narrow band that starts from North India around Delhi NCR and follows a westerly crescent encompassing parts of Gujarat, Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu. These areas are known for industries such as automobiles, cement, pharmaceuticals, IT, engineering and power. Taking the recommendations of sub-section 5, while some industries may be in higher population centers such as IT in Bangalore or Cement and Steel around Mumbai, higher population density centers such as Uttar Pradesh, Vidarbha, Rajasthan and Bihar would be outside the recommended area for CSR operations. Uttar Pradesh and Bihar, both in dire need of social programs, have numerous MSME units, but lack the type of industry that fits the criteria to have CSR operations. To better illustrate the limitations of the CSR section of the Companies Act 2013, the map below shows the current presence of heavy, high-value industry superimposed on population density. The black areas are places of heavy industries that would fit within the mandate of the CSR section of the Companies Act. It is evident that the location of heavy industries is largely, with some exceptions, concentrated in areas of low population density. The highest population density areas (dark red) show hardly any sign of heavy industry. If CSR operations are centered close to industry or concentrated in the local area, it is these high population density low industry areas that will remain ignored. By no mean does this analysis imply that no CSR activities will be undertaken in areas outside the jurisdiction mandated by the Act. E-Choupal by ITC or Tata Steel Rural Development Society are clear examples of CSR activities in other areas. Rather, this analysis aims to explain that by the new mandate, the companies for whom it will now be mandatory to conduct CSR operations, will be encouraged to only focus on a narrow corridor and ignore large population centers that possibly need CSR interventions. To avoid such an impact, the new government must remove this provision. To further encourage social investments in the hitherto underserved and needy geographies, it could create incentives within Section 135 that attracts CSR investment in certain areas of the country. Tax waivers on investments for CSR purposes or exemption from certain laws like LARR when acquiring land for CSR operations can be used to attract industry participation. Similarly, specific areas of intervention as provided in Schedule VII of the Act, such as education of the girl child, skilling of underprivileged youth, social business projects etc, can also be encouraged through a system of incentives and tax breaks. The advantage of CSR operations is that it provides social programmes without costing the national accounts and can be conducted at a scale which may be difficult and unsustainable for public finances. It is thus necessary for a country and economic system like that of India, especially as it encourages the active and engaged participation of the industry in social development. But limiting these operations to smaller communities and narrow geographical areas is not only restricting its capacity as a tool of social intervention but also negating the potential impact it can have on social and inclusive development. (The writer is an Associate Fellow at Observer Research Foundation, Delhi) "
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