The 2% Rule

Corporate citizenship isn’t entirely new to India, but the introduction of a new law has paved the way for more action in this area. On April 1st, Section 135 of the new Companies Act 2013 came into effect, making it mandatory for large businesses to contribute 2% of their average net profit towards social responsibility programs.

india
via: indiacsr.in

Which Businesses are Eligible?

Businesses that meet the following criteria will have to adhere to the 2% mandatory CSR spend:

  • Net worth of more than Rs 500 crore ($80 million)
  • Turnover of Rs 1,000 crore or more ($160 million)
  • Net profit of Rs 5 crore or more ($800,000)

All companies registered in India will have to comply with these rules by creating CSR committees and spending at least 2% of their average net profits over the last three years on CSR. Non-compliance would not be penalized, but would be ‘scrutinized’- companies would need a strong justification for their lack of CSR actions.

Potential for dramatic increase in CSR spends

There is a lack of data around how many Indian businesses currently contribute to CSR spends and how much they spend.  But third party analyses and government estimates indicate a huge potential increase as a result of the new law. An analysis of the top 100 listed companies in India (by revenue), by CSRidentitiy.com and Forbes India, shows that only 14 are currently spending more than 1% of profits after tax on CSR. Of these, only 6 are currently spending 2% or more on CSR, signaling a huge potential increase even by the top companies. In total, the Indian Institute of Corporate Affairs (IICA), part of the ministry of corporate affairs, estimates that 16,000 companies come under the new law. Many of these companies will be undertaking CSR projects for the first time. According to the IICA, the combined CSR commitment is expected to touch Rs 20,000 crore or $3 billion.

analysis of top indian coompanies' CSR spend value
Top 10 listed Indian companies by revenue and their current CSR spends (via CSRidentitiy.com and Forbes India)

 Areas of focus

To assist companies in developing their CSR strategies, the IICA is planning a series of initiatives including a national NGO hub, trainings and seminars, and conferences to connect potential partners across sectors. The law also guides companies to focus their CSR spends on issues within the areas of education, health, hunger, environment, gender equality and poverty.

list of recommended spend areas
via: pwc.in

Corporate citizenship as a differentiator

In recent years, several brands have launched high profile and highly popular social good campaigns in the space of change movements (Aircel Save Our Tigers, Tata Tea Jaago Re)  and social innovation (Mahindra Spark the Rise). With more and more youth and employees showing an interest in getting involved in purpose-driven campaigns, the intent of the new law is very much in line with the expectations of the people. In fact, the IICA expects the people and the media to play a significant role in ensuring businesses meet the 2% expectation and take meaningful action. Look out for more insights on Business Citizenship in our upcoming People’s Insights magazine, in which we share findings of a global survey of millennials covering 16 countries (including India). This post is part of the People’s Insights monthly brief for April + May. 04 April & May – People’s Insights Monthly Briefs by MSLGROUP

Annie Sunny

One Response to “The 2% Rule”

  1. MSLGROUP Peoples Lab (@PeoplesLab)

    An overview of India’s new 2% mandatory CSR spend rule and how it will impact big businesses by @Underthesun19 http://t.co/mEausRflmz

    Reply

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