India CSR law could open door to fraud, says Ratan Tata

One of India’s highest-profile philanthropists has warned a new law that mandates Corporate Social Responsibility (CSR) by large corporations is vulnerable to fraud and exploitation

Speaking exclusively to Philanthropy Age, Ratan Tata, the former chairman of the Tata Group and current chairman of the Tata trusts, criticised a clause in his country’s new Companies Act, which forces large corporations to spend at least 2 per cent of their profits on CSR.

“We have a phenomenon which is meant to be good but is going to be somewhat chaotic,” he said, arguing that India does not yet have the infrastructure or oversight capability to successfully introduce such a scheme.

The country, which has a population of more than 1.2 billion, is currently home to an estimated 3.3 million Non-Governmental Organisations (NGOs).

“You’ll see an enormous growth in NGOs, everybody tripping over themselves in order to register to attract some of this money,” he said. “However we don’t as yet know what kind of monitoring there’ll be in terms of how well this money is used.

“You will have a registered NGO, you will have the money, the money goes to the NGO and it may be three or four years before the whole thing explodes in a series of fraudulent operations, money being given to people that don’t exist, or causes that are subterfuge for something else.”

Under the new legislation large companies are required to set up a CSR board committee, with at least three directors and a minimum of one independent director. The clause applies to any firm that has a net worth of Rs5bn ($83m) or more, turnover of Rs10bn ($160m) or more, or net profit of Rs50m ($839,000) or more during any of the previous three financial years.

Each firm’s CSR committee is responsible for ensuring that funds are diverted towards activities that promote poverty reduction, education, health, environmental sustainability, gender equality, and vocational skills development.

Companies may choose which area to invest in, or contribute the amount to central or state government funds earmarked for socioeconomic development.

Tata warned that some “venal” companies would see the mandated donations as a form of taxation, and would attempt to “short-circuit” funds back into NGOs with which they are connected “under the surface”.

“The whole scheme is very vulnerable to exploitation,” he added. “It needs much more clarification than there is currently.”

The Companies Act 2013 has been approved by parliament and is expected to pass into law at the end of the first quarter of 2014. If enacted, India will become the first country in the world to mandate CSR.

The government has estimated that around 8,000 companies will be required to comply with the CSR regulations, translating into an estimated annual CSR spend of as much as $2.5bn.