April 1, 2014 — CECP’s time in India presenting at Dasra’s Philanthropy Week was all too short. Before the trip, I posted about what I hoped to learn about the two percent CSR regulation. Here’s an update on what U.S. companies with business in India need to know:
- The regulation does apply to foreign companies.
- The CSR Regulation is in effect for any fiscal years that begin after April 1, 2014. (Yes, that’s this week).
What still isn’t clear:
- Will there be a tax benefit for charitable contributions?
- How will companies count non-cash assets allocated to CSR?
In its simplest form, the regulation requires:
- A Board-approved CSR policy
- A Board-level CSR committee
- Reporting: online (public) and to the government Registrar
- Two percent of profit must be spent on CSR
- CSR categories are defined in Schedule VII
- If two percent isn’t spent, reporting must explain why
In my last blog post before the trip to India, I posted four questions I would address during my visit. Here are responses:
- Role of the Board. Most CEOs or senior leaders of companies I met were already involved in the company’s vision for its CSR programs. The regulatory requirements will formalize and take their involvement to a new level.
- Collaboration. Most companies could cite an example of collaboration in which they are involved, but the state of collaboration seemed similar to the U.S. – a sought-after goal but not the industry norm, neither on the corporate nor on the NGO side.
- Interestingly, the Official Rules have a clause on collaboration. Collaborations are encouraged, but each entity must be able to report separately.
- Staff. Many companies I met were already at an adequate (two percent of profits) resource level (noting the potential bias of companies who choose to attend CSR conferences). For companies where the regulation forces an increase, one concern is the immediacy. Compliance is not phased-in. Current staff will face sudden, increased pressures. There is also an immediate spike in demand for skilled CSR staff.
- India Institute for Corporate Affairs (IICA) is developing training for CSR staff.
- The Official Rules state up to five percent of the CSR spend can be allocated to building staff capacity.
- Foreign Companies. Foreign companies definitely must comply if they meet the financial thresholds. The Official Rules show a few differences for foreign companies:
- Size of CSR committee – at least 2 instead of at least 3 members.
- Government Reporting – an Annex to the Balance Sheet submitted to the Registrar.
There are still many unanswered questions. Does pro bono service count? How about product donations? Over and over again, the Ministry of Corporate Affairs seems to point these questions back to the Board-level CSR Committees. There are many parameters in Section 135, Schedule VII, and the Official Rules. Outside of that, the government continually turns final rulings back to the company, asking the corporate sector to take the lead on implementation. Given CECP’s extensive Valuation Guidance, we can be a resource to companies as they work out what counts.
Beyond compliance, there is an opportunity here. Because CECP believes in creating a better world through business, this regulation will be a spark for new corporate efforts to address the sustainable development challenges facing India. As Peter Drucker said, “Every social and global issue of our day is a business opportunity in disguise.” CSR professionals can take the lead on bringing this philosophy to the fore for the company. Regulatory changes of this scale do create new burdens in reporting and policies, but can also be a catalyst for value creation and change.
(The information provided in this blog is not to be construed as legal advice.)