With little notice in the West, India has just launched the most far-reaching corporate social responsibility (CSR) program in the world. The CSR law, which took effect April 1, requires large and mid-sized firms to contribute at least 2% of their pre-tax profits (averaged over the previous three years) to social, health, educational, or environmental causes. It also requires companies to prepare a formal CSR policy and to report annually on their CSR activities. The CSR law, section 135 of the Companies Act of 2013, was part of the first major overhaul of Indian corporate law in nearly sixty years. In February, the Ministry of Corporate Affairs issued regulations implementing the new law.
The money involved is huge for India. The CSR requirement is expected to raise $2 to $5 billion annually for the social sector. A comparable 2% spending requirement in the United States would raise more than $48 billion per year, assuming it applied only to corporations. Even more money would be raised in the U.S. if such a requirement applied to “pass through” entities such as partnerships.
The 2% mandatory spending provision essentially operates as a tax, but it relies on an unusual mechanism: companies themselves will choose the recipients of their funds. Companies obtain some flexibility under the system as well as the public relations benefits that come from community giving.
No other country in the world has made it compulsory for companies to prepare a CSR policy and contribute a fixed percentage of their profits. Given the active debate in the U.S. and in other countries about what, if anything, corporations owe to their communities, India is an important test case for the social consequences of ramped-up corporate giving.
The law is sweeping. It applies to any company incorporated in India, including the Indian subsidiaries of foreign corporations. The threshold for being covered by the law is quite low. Companies are subject to the CSR requirements if they have, for any financial year:
a net worth of at least 5 billion rupees (approximately $80 million)
revenue of at least 10 billion rupees (approximately $160 million) or
net profits of at least 50 million rupees (approximately $800,000)
The CSR requirements could potentially apply to hundreds of thousands of mid-size companies throughout India, such as auto dealers, retailers, small manufacturers, and real estate developers. Each company is required to appoint an internal CSR committee of its board of directors, prepare a formal CSR policy, and publish an annual report on its CSR activities. If the 2% is not spent, the board is required to disclose this fact in its annual report, along with the reasons for failure to comply.
The new law is a boon to educational, health, and social institutions in India. Permissible areas for funding include public health, hunger and poverty, education, combatting AIDS and other diseases, cultural initiatives and the arts, gender equity, and environmental protection. A company can meet its obligations by undertaking projects itself or by contributing to charities, trusts, or foundations.
With an estimated 3.3 million charities and NGOs in India, there will be no shortage of groups lining up to receive the funds. And the social needs are immense in India, where a third of the population of 1.3 billion earns less than $1.25 per day.
In the U.S., thousands of large companies have voluntarily adopted CSR policies, which range from allowing employees paid time to volunteer in communities to reducing the company’s environmental impact. Many large companies have also established affiliated foundations for corporate giving. Few companies in the U.S. devote 2% of their net profits to CSR programs, however. Wal-Mart’s foundation, for example, gave away about 0.7% of the company’s net profits in 2012.
Many corporate leaders and scholars contend that corporations have no social obligations to their communities. Milton Friedman, for example, famously argued that the “social responsibility of business is to increase its profits.”
The Indian CSR law will test whether corporations are better situated than government to identify and address social needs in their communities. India has a notoriously inefficient tax system and bureaucracy, so the CSR law can be seen as a way to avoid funneling money through centralized government agencies and to keep money in communities.
Moreover, the Indian law mandates that a committee of the board of directors create a CSR policy and report annually on the company’s progress. Through this mechanism, high-level board attention to community needs could become as institutionalized as board attention to quarterly profits and securities regulations. The Indian CSR program will have the most impact if companies go beyond making individual grants to non-profits and instead band together to address longstanding social problems that require collective action, such as water scarcity, inadequate education, and poor sanitation.
It’s too soon to predict the impacts of the Indian CSR law and the groups that will ultimately benefit. But U.S. lawyers and policymakers should closely watch this experiment in mandatory corporate spending for social goals.