The “2%” Impact of India’s Companies Bill: “Creative Capitalism” for Development

By Syed Mafiz Kamal

The contextual brief of the Companies Bill

The Indian government has been working on a reform bill to enhance corporate accountability and foster investment for over 10 years. The Bill is called “Companies Bill”. In recent years, the Companies Bill has been unable to pass Indian Parliament in 2008 and in 2009. Finally in 2011 the Indian Corporate Affairs Minister Sachin Pilot submitted a well-trimmed and comprehensive Companies Bill to the Parliament. In November of 2012, it passed the lower House of the Parliament “Lok Sabha”. The Bill has passed the upper house “Rajya Sabha” in August 2013. And it is be signed into law by President Pranab Mukherjee, with a few months. The Companies Bill is designed to protect the investors and stakeholders of Indian Inc and boost social development work via mandated corporate social responsibility provision. According to Wall Street Journal: “the bill seeks to update India’s corporate laws to the realities of the 21st century, where social responsibility is a key area of a corporation’s activities; fraud and money laundering have become more sophisticated and harder to monitor; and the accountability of executives and auditors have become a bigger priority”. In general the Bill is being received enthusiastically by the business community, investors and the civil society in India because it has been long awaited. The last older “Companies Bill” in India which set ground rules for investment and corporate governance was set in 1956. Speaking on the new Companies Bill, the Indian Corporate Affairs Minister says “under the new law, the CSR spending would be the responsibility of companies like their tax liabilities.”

On the Company Bill and the CSR Provision i.e. Pro-Business + Pro-Developmentholi02

Once it goes into law, the new Companies Bill will replace the Companies Act of 1956. The biggest difference is the new Companies Bill gives more authority to investigating officers and makes corporate social responsibility a legal obligation. It will affect all Indian companies and investors, especially the big corporations. Business leader Lalit Kumar writing for the Indian news agency The Hindu states “this [Companies Bill] should not only restore, but revitalise foreign investors’ confidence in the India Inc story. Many corporations have started reviving their plans for making an entry into India”. The bill is pro-business and very liberal, and is expected to attract international investment. The bill has mechanisms such as impartial audits and increased number of independent directors of board. It will set up independent satellite corporate courts “National Company Law Tribunal (NCLT)” to expedite the process of complain by investors and share holders. This will improve companies’ accountability and reduce uncertainty of investors, especially international investors. It is speculated to increase efficiency through appropriate measures. As an example measure; “the new legislation limits the number of companies an auditor can serve to 20 besides bringing more clarity on criminal liability of auditors”. In alignment with the pro-business component, the other important feature that the Companies Bill is it’s pro-development. It incorporates a 2% CSR (Corporate Social Responsibility) policy. “Firms having Rs.5 crore ($1 million) or more profits in the last three years have to spend on CSR activities. One of the major proposals is that companies have to mandatorily spend 2 per cent of their average net profit for CSR activities”. India will become the first country to mandate CSR for successful companies across the board (although some countries like Malaysia have mandated CSR spending for selected industries such as mining). According to the new Companies Bill, all companies with revenue greater than $200 million or profits of $1 million or net worth of $100 million must spend 2% of the average of the last 3 years profits, towards CSR activity. They must set up independent CSR board in their companies to oversee the spending. They are encouraged to spend locally and on areas of poverty, education, environment, healthcare, women empowerment, developmental R&D and social business. If a company does not conduct its own CSR it can give the required amount to the government’s socio-economic welfare programs such as “Prime Minister’s National Relief Fund”. Failure to accomplish the 2% CSR will lead to penalization.

Economic Policy Analysis: Good vs Bad

The 2% CSR provision of the new Companies Act will have ripple effects in the economy of India. However, the effects, both positives and negatives, can only be speculated via thorough analysis of economic theories. The important prospect to remember in viewing any economic policies is whether they efficiently foster growth and human development. Before, indulging into analysis, it is important to understand some of the relevant features and known-realities of Indian economy. In spite of economic boom, India only spends .6% of its GDP, which accounts to about $5 billion on corporate oriented social welfare. In comparison, America spends about 2% of its GDP over $300 billion to charity. Income disparity in India has doubled in last 2 decades. In a country which has the highest concentration of people living below poverty-line (20% of population) An Indian national flag flutters on top of the Indian parliament building in New Delhi , according to Forbes, India has 55 billionaires (expected to rise to 220 in next decade) and 125 000 millionaires.Noteworthy: many companies in India such as Tata and IBM already spend more than 2% in CSR. Indian companies have benefitted from liberalized government policies enhancing global trade and investment from multinationals. The pressures for Indian companies, who refused to do CSR, are increasing. With the 2% CSR provision there will be an immediate doubling of social program money in India i.e. additional $5 billion poured into social welfare sector. It will soon match the 2% GDP spending on charity by American companies. The negatives of the 2% CSR policy comes from the roots of classical economic thought framed by Milton Fiedman in his New York Times piece “The Social Responsibility of Business Is To Increase Its Profits”. According to this view CSR is bad for economy and it increases inefficiency. He equates CSR as “taxing” which deprives the investors of mobilizing the economy. The holders of this view advocate that the maximization of profits, in fact, provides the biggest gains for the society. This school holds that CSR will actually take money out of the economy and will be inefficiently used in social programs, and deprive that CSR used amount of money to multiply and grow the economy. In fact, by loosing growth the overall social development of a nation is adversely affected. In other words, $1 spent on CSR will deprive $1 from efficient profit making investment (which is argued to have trickledown or ripple effect). The 2% CSR policy is an example of government mandated intervention which will lead to wastage in the economy. In real sense, it will not have any social benefits. Moreover, the 2% CSR policy creates reluctance within the business community to invest in India. After all, this policy might not be so “pro-business”. Lalit Kumar writes “this could hit companies hard, since 2 per cent of a company’s average profits is a significant chunk of money”. Confederation of Indian Industry has expressed similar concern, and has declared that the companies prefer that CSR be left to their own hands instead of being mandated. With such attitude, if businesses do not invest in the economy, there will be problems with the onset of money flow in the economy. The economy can be expected to stagnate. If companies find it market-efficient to invest in CSR they will do it according to their own will. Another way to look at it: CSR is actually a regulation. Since corporations have minimal profit incentives to engage in CSR, the government mandate only creates trouble for not only the companies but the government itself. The government might have to invest more resources in CSR oversight. It may actually create net loss over all. Since companies do not want to do CSR, CSR work might be ill-done by the companies. Under CSR mandate, they will supply bad products in the economy, which may be below market standards. Flipping the cards, the pro-2% CSR economic argument shall depict a different set of reasoning. This new CSR fosters creative solutions for development in a capitalist global order. It’s “creative capitalism”. This policy only brings India at par with other advanced liberalized economies such as the US in terms of India’s charitable giving which is expected to be an optimal 2% of GDP (after the implementation of this CSR provision). With increased deregulation, capitalization and privatization in India, human welfare and environmental standards are being drawn down. India is winning the “race to the bottom” and failing to improve standard of living for its population. In fact, in real terms it is worse than other nations in the world “the Western economies” whose living standards are of high level. What’s the point of growth without development?sohrab-hura-01 Over recent decades, through increased deregulation, corporate tax relieves, state-sponsored legal recognition and subsidized energy & land, the Indian companies actually benefit from the nation’s resources and “public good”. The society has not benefitted via corporate welfare (no real ripple or trickle effect!). Hence, hereby, the cost benefit analysis of companies’ functions lead to REAL inefficiencies in the economy. It is only smart to mandate CSR in order to reduce such inefficiencies in the economy. Via 2% CSR there will be more human capital developed (education, healthcare, training, etc) in the economy which will have long term ripple effect on Indian economy to accelerate production of goods and services. Moreover, through CSR spending in energy, environment and R&D other factors of production will be more efficiently utilized. This will in turn boost capital generation and thereby boost the economy in the long run. By not increasing taxes and allowing companies to invest in their own CSR programs, the government is actually increasing efficiencies in the economy. Businesses in terms of their technical, local and information capabilities are in a unique position to better provide social goods than the government. It is often argued by scholars that the government re-distributes resources, mostly taxed money, very inefficiently. Plus the government agencies are often restrained by regulations and requirements in their attempt to implement social programs. Businesses do not have to face such restrains. They can spend money and minimize externalities that come with undertaking social good. Moreover, handing-over of social programs to the companies, the government can relieve itself from some regulatory duties. In turn, the government saves money that would otherwise be used for maintenance or regulatory programs. Mandated “privatized” social welfare operated under market-mechanism will be more efficient than regulation measures via taxation. The social programs, from now onwards, will be at the companies’ “free will”. A real estate company might be able to build a better innovative/low cost housing project, when the resources are left to their hands, than the government operated housing agency.Lok-Sabha Corporations in India have failed to take responsibly for the real cost of their functioning. Many often pollute the environment and run away from human hazards that they invent. Environmental and human disasters caused by companies induce real loss to Indian economy. 2% CSR policy envisions a system in which each industry would contribute in a manner apt with their expertise. Chemical and oil companies might take environmental and safety initiatives and technology companies might take tech-education initiatives. The infamous case of Bhopal Chemical Plant blast caused by Union Carbide (now owned by DOW Chemical) has taken lives of 20 000, injured 100 000 and harshly damaged the environment. The government and the society-at-large have been bearing the burden of the undue cost of the disaster. Moreover the human capital lost from the economy in the death and crippled is further immeasurable. It is much cost effective to mandate corporation to take care of their self-created mess. And the 2% CSR policy provides such provisions. The 2% CSR policy entitles companies to “prove” their CSR spending to public authorities and the public in general. This in turn creates transparency and increases efficiency (assuming transparency leads to efficiency). It thereby also, creates good public reputation for the industry which can be viewed as publicity and promotion. This may improve a company’s market share, not only locally but at global level (for MNCs). In today’s liberalized global economy such marketing boost might raise a company’s sales and market reputation internationally.

Conclusion: My Take in a Nutshell

The mandated 2% CSR investment in the new Indian Companies Bill is indeed an innovative solution to India’s social problems. It is not ideal but it is a product out of necessity for economic justice in India. It is aimed to increase efficiency by avoiding acceleration of bureaucracies. It is strange hybrid of corporate volunteerism and of government regulation in India. The question is: if the 2% CSR provision is to become law, will it help or will it hamper the economy? I believe it is a “creative capitalist” solution to resolving economic problems of development, environmental care and societal inequality. It promises to reduce many negative externalities. It is still unique to India. This model might pave a new path to development of economic policies for other developing nations where they can incur growth not at the expense of slow human (capital) development and environmental degradation.

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