My past year at HEC Paris while pursuing the Masters program in Sustainability and Social Innovation exposed me to the concept of “social business”. At the outset, please note, for the purpose of the initial analysis, I am not referring to a social enterprise, the concept of social entrepreneurship or Mohammad Yunus’s definition of “Social business”. I am referring to the definition of “social business” as adhered to by many big multinational companies which revolves around business strategies consisting of product development, logistics among others, for the bottom of the economic pyramid population. The concept that enables both corporates and NGOs to benefit from the competencies, infrastructure and knowledge of the other to operate in low-income markets, the business case being the identification of business opportunities in catering to poor people so that it is a win-win situation for all.
To say that I was fascinated with this innovative business model that provides an opportunity for interests and capabilities to converge would be an understatement. What made me uncomfortable on a personal level, however, was the underlying corporate agenda to grow new markets at the bottom of the pyramid and the consequent risk of profit-making from the poor overriding all other considerations. But so far the convergence allowed for sustainable development and the accelerated eradication of poverty, it seemed like a very plausible solution to address the biggest developmental challenge plaguing India – Poverty. Provided, of course, that adequate safeguards were put in place.
When I came back to India, motivated by these models and the knowledge of them already being implemented in the country by foreign companies, the most obvious question that I asked was:
Why aren’t the top Indian companies following the same path in pursuance of their CSR policies?
In fact, they should have more than enough reason and opportunity to, considering India is the only country in the world to legally mandate a CSR expenditure of an amount of 2% of the net profit of certain companies for the preceding 3 years. With such enormous funds at disposal, social business projects would seem like the perfect avenue for CSR fund utilization. And since companies would benefit from the new markets for their products and services, they would have sufficient incentives too.
What I had conveniently forgotten was how inconsistent such a concept would be with the inherent philanthropic philosophy of the Indian CSR law as contemplated under Section 135 of the Companies Act, 2013. The law explicitly prohibits a company from engaging in a CSR activity related to its core business or generating profit from it. I also had a misinformed understanding that “social business projects” were still included as potential CSR activities under Schedule VII. The Clause prescribing for the same had, in fact, been deleted by the Government vide a notification dated 27th February, 2014 without giving any specific reason. Furthermore, the clause on the residual powers of the Government to prescribe other permissible CSR activities was also deleted vide the same notification.
If “social business projects” were still to find a place in the Schedule, there are no sources to ascertain the legislative intent behind the insertion of the term in the first drafto determine the scope. Although an interpretation can be derived from the consistent prohibition on profit-generating CSR activities since the initiation of the law in the year 2013.
So should companies in India be allowed to implement social business projects under the CSR mandate?
It appears to be a double-edged sword. One side is the genuine contribution to the developmental agenda through the integration of the poor in the main markets, and the use of corporate competencies to facilitate an on-ground transformation by ensuring affordable access to basic goods and services. The other side is the potential for manipulation of the rural population, of whom one-third are illiterate, by established multi-level marketing networks, convincing them of a need of something which is inconsequential in the face of their basic sustenance challenges. In a country, where people have fallen victim to several schemes run by companies [pyramid schemes, ponzi schemes, marketing shams, etc. ] time and again resulting in the misappropriation of funds, one can’t be careful enough. If wide powers of pursuing business interest with social value through CSR funds are vested in Indian companies legally, there will be substantial scope for exploitation. Furthermore, in view of the lack of elaborate monitoring and accountability mechanisms by the public authorities, maybe it is a good idea to not presently include social business projects as a separate permissible CSR activity for Indian Companies. There is potential for more harm than good. Companies can continue to develop radically affordable products for the poor in pursuance of a business strategy integrating social concerns without a CSR validation.
It is also important that since these limitations may not apply to foreign companies, instead of blindly perceiving the involvement of foreign companies in the apparent solving of the domestic social problems as a boon due to the inflow of funds, timely impact assessments are undertaken at a public level to ascertain the legitimacy of these interventions.
How else can the CSR funds be utilized in an innovative manner to address the developmental challenges in India?
An alternative to allowing companies to pursue their core business interests for the disbursal of the CSR funds through a direct involvement in the social business projects, would be the insertion of a clause in Schedule VII allowing for the utilization of the funds to set up incubators for social businesses and social enterprises. The definition of a “social business” should preferably be restricted to those businesses that are driven by a social cause, and are motivated to make money so they can continue to deliver on their social mission. This could include:
- A non-loss, non-dividend company devoted to solving a social problem and owned by the investors who re-invest all profits in expanding and improving the business.
- A profit making company dedicated to a predefined social cause which uses the profits to solve the social problem.
Schedule VII already contemplates the utilization of funds for incubators, only the scope is restricted to: technology incubators located within academic institutions which are approved by the Central Government. This does not allow the utilization of the funds to foster social entrepreneurship or social innovation at the grass-root level. Where companies are unable to actively design and implement programs dedicated to addressing developmental challenges, CSR funds should be used as an enabling and empowering financing mechanism for individuals/enterprises dedicated to solve a particular social or environmental problem. The corporate’s role should be limited to providing assistance to these entities.
Corporate social responsibility in India has largely taken the color of donations or philanthropy. The exceptions to this are companies that are committed to designing and implementing social projects consistent to their core values through their Trusts and Foundations. The CSR law in India, still at its nascent stage, leaves ample scope for funds to be diverted for CSR activities enlisted in Schedule VII with the sole objective of regulatory compliance and without any intention of a sustainable impact. This is despite the inclusion of prohibitions on one-off-events and the requirements of identification of beneficiaries, activities and projected outcomes to ensure that a activity is carried on in a project mode. Due to the absence of appropriate enabling provisions, a failure to effectively and efficiently utilize the CSR funds at disposal will definitely be a missed opportunity for India’s developmental agenda.
[All views are personal and do not reflect the views of any organization]