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India’s significantly revamped Companies Act 2013 has mandated a Corporate Social Responsibility (CSR) legislation, making her the first country to attempt at enforcing social spending and reporting. These rules came into effect on 1 April 2014.

A company operating in India is to spend 2% of its bottom line (average profit-after-tax for the company’s operations in India for its preceding three financial years)  annually with freedom to choose a sector of spending or design its CSR strategy. To qualify, the company should have a net worth of over Rs. 500 crore (c. £50 million)  or a turnover of over Rs. 1,000 crore (c. £100 million) or a net profit of more than Rs. 5 crore (c. £0.5 million). We have used the following foreign exchange rates where required in our report: £1 (Pound Sterling) = Rs. 100 (Indian Rupees); $1 (US Dollar) = Rs. 60; and £1 = $1.6.

The law goes further by clearly indicating that the company’s Board of Directors will be obliged to provide the reasons for not spending its quota. The top 100 companies listed in India’s NSE generated a net bottom-line of Rs. 3,51,000 crores in Financial Year 2013-14, thereby pegging the potential CSR outlay at an excess of Rs. 7,000 crores (c. £700 million). And that’s only by the largest corporate houses of India Inc.

Current scenario: social spending in India

According to the Asian Centre for Human Rights, the Indian government released an average of Rs. 950 crore (c. £95 million) annually to India’s 2 million NGOs between 2002 and 2009. This is a small contribution compared with $2 billion (c. £1.2 billion) in annual funding from abroad, as reported in the media. NASSCOM estimates a total spending by corporates on purely social ventures of around Rs. 12,000 crore (c. £1.2 billion) by 8,000 Indian companies this year in addition to what the State will provide for social ventures.

Nevertheless, enforcement of the law is still under scrutiny. The language relating to investigation or penalties in case of non-compliance is inconclusive and we are still unsure of any permissible legal action on failure to adhere to spending or reporting rules. But is it just enforcement that can improve adherence to the CSR Law or is there room for market-driven or, better yet, voluntary spending?

Social spending: enforced or wilful?

With the weak potential for legal action to be taken, India’s judiciary – along with India’s civil organisations of course – has taken the ‘name and shame’ approach to spur CSR spending. For instance, Coal India’s CSR activities were grossly unimpressive in 2011-12 with only 15% of the then budget allocation having been spent. The corporation went on to increase the spending to 60% of the mandate last year, presumably stimulated by these media reports. The coal mining PSU is now reported to be planning a $1.2 billion (c. £700 million) investment in solar power across India, adding to an $80 million (c. £50 million) planned investment by peer Neyveli Lignite Corporation in its wind and solar energy capacity. This capital expenditure is not a result of only enforcement of the CSR Law or social activism, but also of economic benefits such as the falling costs of harnessing renewable energy and growing market demand. Moreover, generating carbon-neutral energy and supplying to a growing demand can be considered within the scope of social spending.

Brand-linked spending

On the other hand, enterprises such as the Tata Group and their industrial subsidiary Tata Steel or the Aditya Birla Group focus on welfare of the society and rural development in their CSR programs. Tata Steel are an example of linking societal development with their brand by focussing on improving the livelihood of the families of their employees, education and adopting orphanages in and around their steel-manufacturing operations – programs that have been awarded and widely accredited in the media. ITC’s e-Choupal optimises its agricultural supply chain, benefitting associated social actors in its agricultural business. Further, financial institutions have established their foothold in the financial inclusion space via microfinance initiatives such as those of Citi and Grameen Capital that notably improve their access to an untapped market.

Initiatives within healthcare have also been received well, with Aditya Birla Group’s Pulse Polio and Mobile Clinic initiatives and also GSK’s rural and tribal health development program. In the education space, Infosys has contributed to refining primary education by partnering with schools to set up accessible libraries. Passive support towards active NGOs is also considered within the CSR framework, with education and health-centric NGOs such as Pratham and SNEHA being supported by a host of corporate houses that have an interest in these sectors.

For the environment, large electronic manufacturers in India are catalysing their e-waste recycling efforts, backed by green ratings such as the ones from US’ EPEAT and push from NGOs such as Toxics Link. We see a significant number of electronic take-back and trade-in schemes, warranty returns and sustainable reuse of old electronics by Apple, Nokia and Dell among many others. Recycling is also taking shape in other industries for instance, with ITC’s paper recycling and Coca Cola’s water conservation in India. A myriad of other examples of doing right by doing well for the environment can be seen in the uptake of cleaner energy, optimisation of the operations’ carbon footprint and improvement in energy, water and resource efficiency.

Willingness to Pay

One key point to note among the examples of CSR techniques is the strategic branding mobilised by these initiatives. With corporates vying to differentiate themselves, the CSR mandate can only be looked at as an extraordinary opportunity to innovate and develop tactical brand positioning by doing well for the consumer, society or the environment immediately impacted by the markets they operate in. A strategic link-up of CSR initiatives and the core line of business along with this brand promotion would make corporates more willing to spend and leverage the network of their expert non-profit NGO partners.

This essentially is the improvement in corporate willingness to pay for their socially- and environmentally- responsible initiatives.

Brand visibility and goodwill are linked to the social footprint of a corporate. The ethos behind India’s CSR Rule takes in to consideration the fact that this reputation directly nourishes the top-line, thereby adding monetary gains to the intangible brand image of these corporate citizens. CSR activities may also save costs and create additional revenue streams, as argued by IBM. In addition, a latent advantage to operational CSR is making the company’s operations more efficient, people-friendly and resource-optimal, thereby improving the bottom-line as well.

Conclusion: what to identify as CSR

CSR spending goes beyond the compassionate jargon spanning philanthropy, charity and humanitarian support. The ‘rebranded’ definition of CSR – at least in India – is the support of inclusive growth in the pluralistic society and the uptake of socially and environmentally friendly operations in the fast-developing economy.

Success of the CSR law will be hard-fought when enforced due to low awareness in the corporate community of tangible returns from CSR as well as weak enforcement of the mandate and impracticality of self-regulation. With Indian businesses becoming increasingly people and resource intensive, the corporate’s willingness to execute its sustainability agenda will be inevitable for not just social return, but also for driving financial sustainability while adhering to the CSR Law.

What is essential now is to identify the ‘where’ and ‘how’ to execute the CSR spending.