Saturday, February 19, 2011

Legislating CSR

(The following post has been contributed by Satvik Varma, who is an Advocate and Corporate Counsel based in New Delhi. He holds an LL.M. from Harvard Law School and is licensed to practice in India and in New York. He can be contacted at
Enclosed below is the link to my latest article titled "Coercive Social Responsibility" published in the Economic Times. This article analyses the mandatory CSR spend being proposed in The Companies Bill 2009 and questions whether any kind of social responsibility can be enforced with an iron hand.

I would like to highlight that the Ministry of Corporate Affairs, along with the National Foundation for Corporate Governance, had organised an "Interactive Session With Corporate India" in New Delhi yesterday. This session was chaired by Cabinet Minister Murli Deora, along with Minister for State RPN Singh and D K Mittal, Secretary Corporate Affairs, was leading the discussion. I was present at this session, which was attended by all the Industry Chambers and also had select practitioners.

The hand out from the session included 2 broad categories under which the discussion was divided.

A. Comprehensive Revision of the Companies Act, 1956; and

B. Convergence of Indian Accounting Standard with International Reporting Standards.

Under the category of Comprehensive Revision of the Companies Act, 1956, the issues highlighted for discussion were:
"1. Keeping in view the developments taking place nationally as well as internationally and with a view to modernize the structure for corporate regulation in India and represent a major reform statement by the Government to promote the development of the Indian corporate sector through enlightened regulation, a decision was taken to revise the existing Companies Act, 1956 comprehensively.

2. Accordingly, the Companies Bill, 2009 was introduced in the Lok Sabha on 3rd August, 2009 and was referred to Hon'ble Parliamentary Standing Committee on Finance for examination and report. The Hon'ble Committee consulted various Experts and stakeholders on the provisions of the Bill and received a large number of suggestions. The Committee also heard the Ministry of Corporate Affairs on a number of occasions.

3. After examination of such suggestions and consultation with various stakeholders, the Committee submitted its Report to the Parliament on 31st August, 2010.

4 . Subsequent to the submission of the Report by the Parliamentary Committee, some of the Industry Chambers and Experts have drawn attention towards some of the issues like:-
· Norms (Numbers/Attributes/Tenure/Liability/Renumeration) relating to Independent Directors

· Rotation of auditors/audit firms

· Corporate Social Responsibility

· Restrictions on Layers of Subsidiaries

· Issues of Equity Shares with Differential Voting Rights

· Number of maximum directorships

· Managerial remuneration limits
5. Various recommendations made by Hon'ble Committee in its Report and the view of the Stakeholders thereof are under examination in the Ministry. The revised Bill is proposed to be introduced in the Parliament in the ensuing Budget Session. The intention is to move forward and bring the long pending legislative reforms on the comprehensive revisions of the Companies Act, 1956. This interaction will give useful inputs to take a decision on various matters relating to the Companies Bill".
With particular reference to the Corporate Social Responsibility, the pointed question from D K Mittal, Secretary Corporate Affairs was whether CSR is a good business proposition? The unequivocal response from across the participants was that CSR makes good business sense, but based on the responses it was clear that there exists ambiguity on what constitutes CSR and a lot of the delegates still seem to confuse CSR with charity or philanthropy. The consensus from the delegates was that CSR is desirable and should be encouraged but doubts were expressed on whether it is wise to mandate an arithmetical spend. Concerns were also voiced that more needs to be done to incentivise CSR and create greater awareness about it. Some participants also expressed concern that nothing should be done which will make CSR a check-the-box provision and results in being counter productive to what is hoped to be achieved.

- Satvik Varma


Tarun Mitra said...

I have read your article and concur fully with yours thought. Keeping triple P bottomline aside. It seed to me that in India CSR is enforced because government has failed to do its duty for providing basic infrastructure facilities. Having said that it would be pertinent to mention that scope of CSR is undefined and it would allow companies to siphon off funds. There has being instances earlier about the same.

In P.Sainath's book "Everybody Loves a Good Drought" the first chapter itself points out towards such misdemeanor. Though business interests have a responsibility towards the society, but cannot it be only met by following the laws and rules in letter and spirit.

Someone has rightly pointed out
"More severe the law, more dangerous its abuse"

vswami said...

Going by my limited understanding, the thrust of the entire discussion/debate is directed against the proposal to ‘mandate’ CSR, but only in that it fixes a minimum ‘spend’ on that account; notwithstanding that there is a rider thereto, intended to reduce the rigor. If that is really so, then the objection raised is not so much against the concept of - CSR itself, but only against its monetary aspect.
While on this subject, one may usefully recall what a widely acknowledged constitutional law expert (with the wisdom of a ‘nationalist’, so also of a ‘humanist’, of our times) – late N A Palkhivala had to say.
As may be recalled, in one of his published writings (or speeches), he said to the effect that,: any business man enters into business with a view to make profits; but cannot afford to stick to that view if he wants to stay in business.

The same message, it seems, has been underlined in his helpful prescription to our nation-
To quote:
A prescription for the Sick Man of Asia
India is today the Sick Man of Asia. But this nation will come back to health and grow strong and puissant-
when every class of citizens puts the nation above the party and the group;
when businessmen and professionals realize that there is more to life than success, and more to success than money;
(More: ‘The mess we are in” –published in the Illustrated weekly of India, August 11, 1974 – reproduced in the book – “WE THE PEOPLE”).
There can be conceivably no scope for denying that, what he prescribed in 1974 has not, even now, albeit given the modern thinking, lost its utility or potency.
As regards the concept of ‘mandate’ by law, - on which the entire controversy has seemingly come to be raised, and sought to be perpetuated, one has to dutifully ask oneself: - is it not the ‘fundamental responsibility’, as envisaged by the Constitution, of every one of ‘the people’ (that should, for obvious reason, include – a group, such as ‘corporate’) to concur with, also abide by any enactment, both in letter and spirit, if not for any other reason, at least to keep/maintain the image that we still are left with the faith, and firm belief, in our ‘Constitution’ and in turn, in our ‘democracy’.
Of course, as is human nature, everyone has or will prefer to go/be guided mostly by his own, if not profound ‘vision’, views and counterviews,- which ,to my mind, is at the bottom of it all – ‘the mess we are in’.

vswami said...

To save myself from the hassle of repetition, reproduced below are my comments sent by me to ICAI wrt an eticle recently published in its journal (latest Issue) on the same topic:

" Among the few write-ups on the topic one has read in recent days, the subject one, which , in my opinion deserves to be called an 'article', stands out, in its merits, for more than one reason:

1. The presumably detailed study she has made before marshalling her thoughts and putting her views down for publishing.'

2. The truthful and righteous manner in which the chosen topic, - or any other topic of this kind, requires to be, - has been analysed and submitted, so that it makes for a profoundly useful reading for those who expect , not without justification, to be really enlightened - not just entertained."