India's pioneering CSR law could have promise, but progress is slow

Earlier this year India became the first country to mandate corporate social responsibility by law in an effort to share the cost of development with the many companies growing fat on its economic rise.

The government first estimated CSR spending could top $3.3 billion, exciting development actors who saw a significant source of new funding.

But more than seven months after the ambitious rules came into force, implementation is slow and officials are slashing spending estimates because companies don’t expect to meet their targets in the first year.

Potential beneficiaries, including nongovernmental organizations, can still smell the money but are unsure when they’ll see it.

India’s biggest companies have practiced philanthropy for decades but giving has been “sporadic,” and has not aided development, according to the government.

The new rules in Section 135 of India’s Companies Act aim to change this, making it mandatory for companies of a certain size to spend 2 percent of their average net profit for the past three years on CSR, and forcing them to take a systematic approach.

India’s Prime Minister Narendra Modi, who came to power in May promising rapid development, has thrown his weight behind the CSR law. His development priorities, like sanitation and vocational training, are influencing where many companies spend their money. After Modi used his important Independence Day speech to talk about the dire need for toilets, numerous companies promised to build them, including: Adani Group, Tata Consultancy Services, Coal India and Larsen Tourbro.

To get a piece of the CSR pot, NGOs like CARE India have been building internal capacity, hiring staff, and drafting corporate engagement strategies to suit the new legal landscape.

“We recognized there’s huge funding potential, so we’ve done an inward-looking analysis on how well-placed we are to approach corporates, we’ve tweaked our strategy and we’re employing more people for corporate outreach,” said Niresh Kumar, CARE India’s head of fundraising.

NGOs are approaching the companies that are required to spend on CSR — as per the law, this is all those registered in India with a net worth of 5 billion rupees ($82.5 million) turnover of 10 billion rupees, or a net profit of more than 50 million rupees.

The Indian Institute of Corporate Affairs, which is facilitating the law’s rollout for the Ministry of Corporate Affairs, initially estimated 16,000 companies out of the 950,000 registered in India would meet the criteria.

The total spend and work done by each company will only become clear after the financial year ends on March 31, 2015, when companies report their activities. Those that fail to spend the required 2 percent won’t be fined but must report why they didn’t comply.

The law requires companies to formulate and publish a CSR policy, and set up a CSR committee with three board members and an independent director.

CSR projects can be done by a company’s own nonprofit foundation, which many large Indian companies have set up for philanthropy, or through NGOs registered in India that have been running for at least three years. Smaller companies can pool their funds or contribute to a government development fund.

A 2008 survey of 28 companies doing CSR, including Tata Chemicals, Coca-Cola India and Reliance Industries, found 37 percent implemented initiatives through a separate foundation, while 58 percent had a separate CSR department. The survey, the most recent one conducted by industry body the Associated Chambers of Commerce and Industry in India, found NGOs were the partners of choice for 67 percent, while 58 percent worked with government departments and 21 percent with multilateral or bilateral organizations.

The act lists CSR areas as: hunger and poverty, education, health, gender equality and women empowerment, skills training, environment, social business projects and promotion of rural and national sports.

Work must be conducted in “project mode,” and can’t be one-off events like donations or marathons. Companies must also give preference to projects in their local area.

How are NGO’s setting up?

NGOs are boosting staff, doing research and creating strategies for CSR and private sector engagement.

CARE India has set up a CSR team of three people for private sector engagement and is hiring more.

“We’re doing an analysis on where the companies that are eligible for CSR are having operations and then we are approaching them with our programs and our need of funding in that area,” Kumar said.

CARE is targeting companies outside its operational area with programs that aren’t geographically bound, like corporate gender empowerment. It’s also expanding its CSR strategies for multinationals.

“It helps for them to have one single partner for both domestic and international CSR,” Kumar explained. “Airtel is very big in Africa and so is CARE, so now we’re looking at how our domestic partnership with Airtel can become an international one.”

Finally CARE is positioning itself as an influencer in CSR spending.

“We’re doing that by talking about issues, like gender rights within corporates and the social issues that prevail in this country,” he said.

Connecting the actors

Many NGOs are getting listed on databases set up by government and private players to connect companies with implementing partners. Ensuring these NGOs are credible is a key concern, as there are an estimated 2 million NGOs in India and the sector is widely unregulated.

The IICA has been tasked with building a “National CSR NGO Hub” to act as a “gateway” to CSR. To get listed, NGOs need to supply their Indian registration certificate, tax returns for the last three years and documents showing development activities.

However, the government issued the same orders for a CSR hub to be set up by the Tata Institute of Social Sciences (TISS) in 2010, when CSR was made compulsory for India’s public sector companies. TISS struggled due to a lack of resources, and NGOs like CARE faced lengthy delays getting approved. It currently has a database of 300-odd NGOs registered in India, evaluated on technical and financial measures.

A number of private consultants and NGO listing websites have also emerged to serve the growing CSR market. Some more well-regarded ones are: Credibility Alliance, Give India, CSO Partners, NextGen and the Indian Centre for Corporate Social Responsibility.

Proactive NGOs like Deepalaya, which runs schools for underprivileged children, are using both government and private platforms to find donors. Deepalaya CEO TK Mathew registered with TISS and Credibility Alliance. He spends his days trawling the Internet for companies required to do CSR, checking their online policy and devising potential programs with cost predictions before making an approach.

Mathew said he has had discussions with a dozen companies, including Sony and Gas Authority of India, but has so far not secured any new partners.

Corporates don’t understand the complexity of development issues and sometimes have unrealistic expectations about what NGOs can achieve, including one electricity company that wanted to stop people from stealing power, he said.

“They expect social organizations can wave a magic wand,” Mathew said.

How is the rollout going?

With no mechanism to monitor implementation, there is no clear view of how the CSR rollout is progressing. But officials say many companies are struggling to set up and find partners for the large-scale CSR projects they need to do to comply with the law.

“Not a single project has gone online yet because companies have to completely reorient themselves,” said Bhaskar Chatterjee, the director of the IICA, who helped create the rules.

Corporations are undergoing a drastic transformation from “sporadically pumping in money here or there, leaving no significant impact behind” to formulating projects with predecided outcomes and systems for measuring progress and results, he said.

The government is not imposing a deadline for companies to start projects but hopes they will begin rolling out by December, Chatterjee said.

“Right now the government attitude is more enabling … we’re trying to give them a little more elbow room to get adjusted to the new act,” he said.

Large companies already involved in philanthropy are making sure their activities comply with the law and scouting for new projects if they need to scale up.

Give India, which vets NGOs and connects them with donors, is advising many large companies on how to plan, monitor, measure progress and mitigate risk for CSR projects.

“The corporates are still in discussions … people are still trying to figure out how to create a working model,” said Vikas Puthran, vice president of corporate alliances at Give India.

For companies with no history of giving or understanding of development, the task is harder. Small companies with limited budgets in particular can have unrealistic expectations and challenges.

The Confederation of Indian Industries, one of India’s main business associations, is advising a company with only 500,000 rupees to spend that wants to build a school, but has nearly exhausted its CSR budget on salaries for two new CSR staff.

“There are people who want to do really good stuff but their budgets are really small — it’s not viable,” said Sachin Joshi, the director of the CII-ITC Centre for Excellence for Sustainable Development.

Typically those with less to spend are encouraged to pool their resources with others or contribute to a government fund.

Compliance has been patchy among public sector companies who had already been required to participate in CSR and contribute some of their profits to development projects. Coal India announced in March that it was hiring 120 people to work on CSR after it was called out for spending barely 15 percent of its required budget last year. It was among 41 central public sector enterprises that failed to spend the required amount from 2012-2013, according to India’s comptroller and auditor general.

“There are some who are doing exceptionally good work, there are some who are catching up, there are some who have also not understood the concept of CSR and probably are not doing it the way it should be done,” said Venkatesh Kumar, director of TISS, which was tasked to help public enterprises implement CSR but is increasingly helping private companies. The institute is also starting to map CSR projects across India to avoid duplication and enable collaboration.

TISS has worked with about 70 companies doing CSR in 800 villages over the past three years or so.  Most of the money is being spent on health, education and livelihoods, but in less developed rural areas, basic infrastructure made up a large part of development projects, Kumar said.

Most companies were interested in “routine” infrastructure-driven development, building “schools, hospitals and toilets,” said CII’s Joshi.

Factories and manufacturing units were particularly keen on skills training, which “feeds into their workforce,” Give India’s Puthran said.

But there are also fears some companies will leave project implementation until the last minute in the financial year, or mask data to avoid compliance, Mathew said.

And the CSR rules may not stay the same. Companies have successfully pushed for amendments, including getting staff volunteering and training of NGOs counted as CSR expenditure.

“A lot of this lobbying and influencing is going to happen after one year” when results are reported and the nature of the game becomes clear, said CII’s Joshi.

CII and India’s other major industry bodies — ASSOCHAM and the Federation of Indian Chambers of Commerce and Industry — hold regular stakeholder engagement and capacity-building seminars, and are helping their members form policies and find partners. FICCI and CII also plan on building NGO databases.

How are companies setting up for CSR?

Many large corporations are handling CSR through their foundations while midsize companies are setting up internal teams to supervise projects carried out by implementing partners.

Aditya Birla Group, a $40 billion multinational, set up the Aditya Birla Center for Community Initiatives and Rural Development 18 years to provide strategic direction on rural development initiatives. The center is headed by Rajashree Birla.

Each company within the group has a CSR head, implementing staff and board level CSR committee. Birla sits on each CSR committee with Pragnya Ram, the Aditya Birla Group’s executive president of corporate communications and CSR as a permanent invitee.

The company’s CSR policy has five focus areas devised by the center: education, health and family welfare, social causes, infrastructure development and sustainable livelihood. The group spends more than 130 crore rupees annually working in 3,000 villages near its factories, partnering with government and NGOs, and engaging with CII, FICCI and ASSOCHAM.

The Aditya Birla Group works with CII on vocational training programs and with the Bill & Melinda Gates Foundation and NACO, the Ministry of Health and Family Welfare’s AIDS control body, for health care and AIDS programs, Ram said.

“It is not possible for a corporate not to reach out to partners because we simply don’t have the expertise in all these areas,” she said.

It will take time for CSR to be fully implemented across India’s corporate world and there are many uncertainties: Will companies comply without facing penalties? Will CSR be coordinated effectively despite scarce government resources? Will funds reach the least developed areas where few companies are set up?

Despite the challenges, the new rules do have many thinking about CSR for the first time. While it appears there may be foot dragging among corporates, it also seems the law will force companies to evolve and model projects may emerge down the road. Local actors will continue to engage and monitor progress, but they won’t be alone — those outside the borders will be watching as well to see if the model works.

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