The two per cent conundrum

Business Standard, October 06, 2012

By Rijit Sengupta
The government’s business responsibility guidelines have not been linked to the legislative agenda

The implementation of public policies in India is often characterised by lack of convergence of ideas and processes, resulting in unnecessary duplication of efforts and loss of public resources. Such discordant policy processes not only baffle their implementers, but also reduce the anticipated benefits considerably. The development and implementation of the government’s “corporate social responsibility” (CSR) strategy seem to have followed this trend. As a result, there is a lot of confusion and misgivings about how to make it operational.

On the one hand, the Cabinet has just approved a provision in the new draft Companies Bill, 2011, that aims to make CSR compulsory (using a “comply or explain” approach) for a certain segment of the Indian private sector. On the other, a framework referred to as the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (or NVGs) is being promoted to guide India Inc on how to meet its expectations from society. While the former provides the necessary legitimacy for Indian firms to consider their contribution towards sustainable and inclusive growth, the latter presents a framework to guide firms on how to make such investments, for a better society.

Both these developments are unique and their proponents deserve praise. However, it seems that the complementarity of these two unique instruments is being sadly overlooked. Section 135 of the draft Companies Bill, 2011, makes it necessary for companies beyond a certain profit mark to allocate two per cent of their average annual profit after tax on CSR activities. Once the new Companies Act is adopted, “eligible” companies will scamper to the corridors of Shastri Bhawan (where the ministry of corporate affairs is located) seeking guidance on how to book the two per cent CSR expenditure in their accounts. They are likely to ask: which activities would qualify for such investments?

This is a question that the government doesn’t seem to be well prepared to answer yet. Some direction has been given in the draft Bill (Schedule VII) about activities that may be considered CSR. It, however, remains quite broad and a little ambiguous. The government’s preparation to answer this question should go beyond the usual thinking on CSR, and incorporate the thinking on business responsibility forwarded by the NVGs. It is critical that explicit guidelines are developed urgently for activities to be considered as CSR investments by firms, and are incorporated in the draft Companies Bill, 2011.

A possible answer to the question can be derived from the set of determinants of “responsible business” contained in the NVGs. The ministry of corporate affairs developed the NVGs and pushed for its adoption by the government of India. Quite surprisingly, however, the ministry itself seems to have moderated the discussions about the evolution and operationalisation of the NVGs, in parallel to the intense debate on the “two per cent CSR” issue. No link was created between these two (related) processes.

The government of India adopted the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business in mid-2011. The NVG comprise nine principles that define how a firm can be considered a “responsible business” entity in the Indian context. Indeed, as the name suggests, these are “voluntary guidelines” only. Firms are not bound to adopt or abide by these NVGs yet. However, the NVG principles present a set of nine “options” from which a company can choose to invest its two per cent CSR money. These principles can help the relevant government departments or agencies answer the key question that faces them today. The link might not have been so obvious.

The NVG principles go beyond the usual altruistic notion of CSR and can help a firm instil responsibility within its core model of doing business. A company’s responsibility towards society cannot be restricted only to building schools in the hinterland, providing medical facilities and planting trees around factories. While, these activities are indeed important, they cannot comprise the full set of a firm’s responsibility towards society. The responsibilities of a business comprise its responsibility in the workplace, the marketplace, the environment and in communities. Such holistic thinking and understanding about businesses’ responsibility towards society is crucial now, not only among firms but equally within the government and other key stakeholders.

A team of experienced practitioners and experts carefully framed the NVGs through a process that lasted nearly two years. Before Parliament reconvenes for the winter session, it is necessary for officers in the ministry of corporate affairs as well as law-makers to expand the otherwise narrow thinking about businesses’ contribution towards society by familiarising themselves with the nine NVG principles, and engineer their application in key sectors of the country. That will go a long way towards making the private sector’s investment in Indian society more relevant and impactful.

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