In an effort to encourage socially responsible companies, a bill before the Indian legislature would require companies to spend two percent of their net profits annually on Corporate Social Responsibility (CSR) activities. The Companies Bill, 2012, includes a CSR annual spending requirement, amongst several other requirements that aim to strengthen corporate governance. The lower chamber of the Indian Parliament, the Lok Sabha, passed the bill on December 18, 2012, and it is now being considered in the Rajya Sabha, the upper chamber of Parliament. Support for the bill is strong.
CSR activities are specified in Schedule VII of the bill and include ensuring environmental sustainability. The bill may promote better environmental management especially when read in conjunction with the a corporate environmental responsibility requirement issued by the Ministry of Environment and Forests (MoEF). The MoEF recommends a Corporate Environmental Policy (CEP) as a prerequisite to obtaining an Environmental Clearance (EC). The EC evaluating committee can require a mandatory CEP on a case-by-case basis. An EC is required for industrial and construction operations.
Regarding the Companies Bill, 2012, the CSR spending requirement would apply to companies registered in India with a net worth in excess of Rs 500 Crore (about US $92 million), a turnover of Rs 1,000 Crore (about US $184 million) or more per year or a net profit of Rs 5 crore (about US $920,000) or more per year. The bill would require companies to form a Corporate Social Responsibility Committee to recommend and monitor CSR policy. The committee would submit recommendations to the corporation’s board of directors, in order to undertake Schedule VII activities. Companies would be required to submit annual reports documenting their CSR activities or provide a legitimate reason as to why CSR spending is not possible.
CSR spending is not limited to environmental management. Other CSR activities specified in Schedule VII are:
- eradicating extreme hunger and poverty;
- promotion of education;
- promoting gender equality and improving maternal health;
- reducing child morality and improving maternal health;
- combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
- employment enhancing vocational skills;
- social business projects; and
- contribution to the Prime Minister’s National Relief Fund or any other fund set up by the central government or the state governments for socio-economic development and relief and fund for the welfare of the Schedules Castes, the Scheduled Tribes, other backward classes, minorities and women.
As of March 2013, the Women’s Act 2012 must be signed by the president and published in the official gazette to take effect. The act requires companies to establish an internal complaints committee to evaluate claims of sexual harassment in the workplace. The internal committee is vested with powers of a court to gather and evaluate evidence and enforce monetary damages by withholding pay from an offender in order to compensate the victim. Committee members must be selected from management, employees and women’s non-governmental organizations, so at least half of the members are women. Companies must provide adequate resources to the committee to conduct its work.
The Women’s Act 2012 also requires companies to create a safe workplace for women through workplace policies and training. The act requires companies to:
- Generally provide a safe workplace;
- Display penalties under law and/or internal policies for sexual harassment;
- Organize workshops and awareness programs;
- Provide adequate facilities for internal committees to conduct their work;
- Assist in securing attendance of respondent and witnesses at inquiries and hearings of the internal committees;
- Assist women in filing complaints under the Indian Penal Code or any other law in force; and
- Define sexual harassment as misconduct under the internal service rules of the company.
Requirements to prevent sexual harassment in India have developed since the Supreme Court case of Vishaka, et. al. v. the State of Rajasthan, in 1997. In that case, the Supreme Court established a definition of sexual harassment, now codified in the recent act. The Court established guidelines for the protection of women in the workplace, including recommending a complaints mechanism and notification to workers about the prohibition of sexual harassment. The Ministry of Labour further detailed legal requirements in a policy document published in October 2011 related to the function of the Women Labour Cell within the Ministry of Labour.
Prior to parliament passing the Women’s Act 2012, the Supreme Court’s guidelines coupled with statutory requirements under the Equal Remuneration Act, 1976, and other sector specific acts (e.g. Contract Labour Act 1970, Maternity Benefit Act 1961, Factories Act 1948, etc.) created an affirmative duty for employers to protect women from harassment. This requirement is more clearly affirmed in the Women Against Sexual Harassment in the Workplace Act, 2012. Companies can use its CSR spending allocation for workplace training, development of policies and assisting internal complaint’s committees to promote gender equality in the workplace.
If the Companies Bill, 2012, passes with the CSR spending requirement, India would be the second Asian country to impose such a requirement. Indonesia issued a similar requirement in August 2007, with the very functional title, “Law Number 40 of 2007.” Like the proposed Indian requirement, Indonesia requires annual reporting. However, Indonesia neither stipulates a percentage of revenue for annual CSR spending, nor does it designate income thresholds that trigger the requirement. Rather, the requirement applies generally to any limited liability company. Government regulation authorized by the act creates a vague limit to application, limiting the requirement to businesses whose main function is to manage or use natural resources or that have an impact on natural resources. See Government Regulation No. 47 of 2012.
Although support for the bill is strong, critics of the bill are concerned about the potential for corruption in channeling CSR funds. Critics are particularly concerned about the provision that allows CSR spending on government charities. Critics worry that CSR contributions may get channeled into government-created funds that do not serve a legitimate charitable purpose. Perhaps, CSR contributions may even be misappropriated for political campaigns or for personal use by politicians. Critics note a failure of oversight and administration to prevent corrupt practices.
The CSR spending requirement can also advance gender equality and the safety of women in the workplace. Parliament further promotes the rights of women in the Women Against Sexual Harassment at the Workplace Act, 2012, (hereafter “Women’s Act 2012”) passed on February 27, 2013.
Some predict Parliament will pass the bill in its winter session this year. Although critics of the law doubt its effectiveness, interest in CSR spending requirements evidences an awareness and interest in improving corporate practices in India. By joining CSR requirements with environmental management and gender equity requirements, India is enhancing its legal framework to promote better practices in these areas. The interest shared by India and Indonesia in corporate social responsibility evidences a general trend in Asia overall, as countries seek to enhance domestic laws to promote better corporate practices in the global market.