NEW DELHI, Sept 19, 2013 - India's government still struggles to provide reliable basic services to a majority of its citizens, trapping hundreds of millions of them in poverty. Now the country's richest firms have been told they must help.
Under the new amended Companies Act passed last month by parliament, large businesses have been asked to spend 2.0 per cent of their profits each year on "Corporate Social Responsibility" (CSR).
"The idea is that if we could divert some corporate energy and the corporate way of doing business into our development sector, for a country like India it could help enormously," the head of the Indian Institute of Corporate Affairs (IICA), Bhaskar Chatterjee, explained to AFP.
CSR is broadly - some say vaguely - defined in the law to mean funding programmes for education, poverty alleviation, protecting the environment or tackling disease, among others.
It's one of the first such laws of its kind in the world, promising a cash bonanza for charities and non-government organisations (NGOs) while raising serious concerns the funds could worsen India's endemic corruption.
CSR has been imposed across much of corporate India. Any business with sales of more than 10 billion rupees ($156 million), a net worth of 5.0 billion rupees, or bottom-line profits of 50 million rupees is liable.
They must set up a board to implement and report on the company's CSR policy, in theory ensuring that an average of 2.0 per cent of the net profits of the previous three years is spent annually.
Failure to report on this spending, as with other financial disclosure requirements, will result in fines and possibly imprisonment for a company's directors.
IICA, a business group established by the ministry of corporate affairs, calculates that 7,000 companies qualify, creating a possible annual pool of funds estimated at 120-150 billion rupees ($1.9-2.4 billion).
Sidharth Birla, president-elect of business group FICCI, says that corporate India lobbied hard against previous drafts of the law that would have forced companies to spend their profits.
"If they had made it mandatory then what would have stopped any other authority from imposing a burden on the company?" he told AFP, reprising one of the arguments against mandatory spending.
The final law says companies should set aside 2.0 per cent of profits for CSR and must report on their activities, but it also gives them an easy get-out by claiming there is nothing suitable to spend the money on. "We have been given to understand that you could well report that 'I have seen everything and I can't spend it'," Birla said.