India's rich companies to pay 2pc of profits to help poor
New law welcomed although concerns raised over control of funds and corruption
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 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," said the head of the Indian Institute of Corporate Affairs (IICA), Bhaskar Chatterjee.
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. However, the spending requirement is not legally binding.
Nevertheless, it's one of the first such laws of its kind in the world, promising a cash bonanza for charities and non-government organisations while raising serious concerns the funds could worsen India's endemic corruption problem.
CSR has been imposed across much of corporate India. Any business with sales of more than 10 billion rupees (HK1.2 billion), 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 per cent of the net profits of the previous three years is spent on the scheme annually.
Failure to file a report on this spending, as with other financial disclosure requirements, will result in fines and possibly imprisonment for a company's directors.
But the spending itself is not compulsory. The final law says companies should set aside 2 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.
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 between 120-150 billion rupees .
The success of the CSR revolution will depend on how companies approach the new rules, says Samir Saran from the New Delhi-based think-tank Observer Research Foundation.
The money could become a "slush fund" channelled into charities and NGOs run by politicians "a legal way of bribing," says Saran, or into foundations run as pet projects by the family members of business owners.
"We have to be sure that this is not another policy with good intentions and horrible consequences," he said. "It is how it is implemented that will decide its success."