First compulsory licensing, and now compulsory CSR? The Companies Bill 2012, passed by the Lok Sabha last December, mandates that certain companies will have to spend at least two per cent of the average net profits of the three immediate preceding years on activities related to corporate social responsibilities (CSR), every year.
The companies to be impacted by this norm are those with a net worth of Rs 500 crore or turnover of Rs 1,000 crore or an average net profit of Rs 5 crore in last three financial years. Various reports estimate that at least 30-odd Indian pharma companies would fall into this category and around Rs 300-350 crore would have to be set aside for CSR annually.
Surya Bansal, Program Manager, Sustainability, Manufacturing & Process Consulting, Frost & Sullivan agrees that there is a huge investment that will have to be earmarked in the name of CSR. What remains to be seen, she opines, is whether CSR and sustainability initiatives need to be brought under the same umbrella so that in the end, an organisation invests in bettering society and is simultaneously able to work towards more sustainability.
 “Companies which have CSR programmes are doing so irrespective of such provisions but the provision might get companies to look at CSR more seriously.”Hitesh Sharma Tax Partner & National Leader – Life Sciences Services Ernst & Young |
The Bill is expected to be tabled in the Rajya Sabha in the upcoming monsoon session and will also need the Presidential nod before it is passed. Granted that the more-than-half-a-century-old Companies Act, 1956 needed an extensive overhaul and was way past its ‘use by’ date. But given the other regulatory salvoes being fired on the pricing and other fronts, how are these Indian pharmaceutical companies viewing this added expenditure?
It is still too early to look for reactions from pharma companies to this provision, opines Hitesh Sharma, Tax Partner & National Leader – Life Sciences Services, Ernst & Young. Companies which have CSR programmes are doing so irrespective of such provisions but he concedes that the provision might get them to look at CSR more seriously.
The move is in line with most countries in the world, points out Chaitanya Kalia, Partner, Climate Change and Sustainability Services, Ernst & Young; where corporates and industry are being asked to contribute to the development of the country/society by providing employment, to achieve Millennium Development Goals, etc.
 “What is unique about the Indian situation is that a specific target amount has been mentioned. While governments urge companies to invest in CSR, no where in the world has any figure been specified.”Chaitanya Kalia Partner, Climate Change and Sustainability Services Ernst & Young |
But the Indian authorities seem to have gone one step further. What is unique about the Indian situation is that a specific target amount has been mentioned. While governments urge companies to invest in CSR, no where in the world has any figure been specified, says Kalia.
The intentions of the Government of India (GoI) are indeed laudable in the light of the ‘jobless recoveries’ being seen in major economies like the US and the sluggish growth rates in India as well. But will such a stipulation do the trick?
Analysts are not holding their breath on this one because it could remain a toothless provision. Kalia points out that since there is no penalty provision, which means that companies cannot be penalised for not implementing this provision, it could result in a delay/ time lag before companies actually start implementing this. However, he feels that most companies will do so to meet corporate governance (norms) and concedes that it is a starting point.
Laggards so far
When it comes to CSR and environment, social and governance disclosures, pharma companies lag behind the rest of India Inc. A joint report by Deutsche Gesellschaft fur Inter-nationale Zusammenarbit (GIZ), Global Reporting Initiative (GRI) Focal Point India and Thought Arbitrage Research Institute (TARI) released last August, showed that only around 10 per cent of the firms in the BSE 200 bring out sustainability reports.
This fact is borne out by the latest TARI report, ‘Sustainability Reporting in the Pharmaceutical Sector: Prescription for Pharma’ (see pages 34-38 in this issue) where the authors make the point that while reporting on sustainability metrics is predominantly voluntary, with the steadily increasing importance that it is gaining globally, companies (in India) will have to start reporting on the impact they have on the economy, the environment, society and the organisation itself.
There is no doubt that current spends on CSR by Indian pharma companies will have to be increased because they are much lower than the target of two per cent of profits mandated by the Companies Bill 2012. Secondly, says Kalia, companies which already had CSR programmes will maybe have to re-look/ re-structure them to be in line with the provision because Schedule 7 of the Companies Bill 2012 specifies six-seven areas where the CSR needs to be done.
 “There is a huge investment that will have to be earmarked in the name of CSR.”Surya Bansal Program Manager Sustainability, Manufacturing & Process Consulting, Frost & Sullivan |
Commenting on GoI’s intention, Bansal comments that Indian pharma companies are beginning their journey towards sustainability while global pharma companies are already far ahead. Analysing the difference in approach, she reasons that the latter have taken sustainability through their strategy and have defined the road-map. Given the GoI’s recent initiatives, pharma companies, along with other industries, will soon have to do the same.
Good intentions
In the past few years, the GoI has taken some stern steps to make CSR and sustainable development initiatives mandatory for Indian companies. For instance, the Department of Public Enterprises has mandated that public sector units should invest 0.5 per cent to five per cent of their net profit on CSR activities.
Way back in July 2011, the Ministry of Corporate Affairs released a booklet, titled ‘National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business’, aimed at strengthening the Indian tradition of involvement of businesses in social welfare and development.
The then Union Minister for Corporate Affairs in the Ministry of Corporate Affairs, Murli Deora had commented on how Indian businessmen followed the traditional practice of spending surplus profits on philanthropy and how many were inspired by Mahatma Gandhi to do so. But have Indian businesses moved beyond charity towards responsibility?
As Bansal puts it, the challenge now is for companies, across sectors, to take CSR through the strategic route. The need of the hour is to be able to identify the business risks and opportunities (both short term and long term) and plan these CSR investments in such a way that the whole process itself is sustainable, she avers.
Pharma CSR in India
 “Professional organisations do not just focus on the inputs and investments in CSR. A large part of the effort is in measurement of the outputs – generally referred to as Impact Assessment.”Paresh Parasnis Head, Piramal Foundation & Piramal Enterprises |
Some of the biggies of Indian Pharma Inc already have well documented CSR activities. As head of Piramal Foundation, Paresh Parasnis makes the point that the Foundation has been operational over the last five years in the specific areas of education, and empowerment, with projects in each of these areas across a large geographic area in India. For example, Piramal Swasthya, has around 100 mobile health vans across six states (Rajasthan, Andhra Pradesh, Maharashtra, Assam, Orissa, Karnataka).
Parasnis indicates that the scale has been growing over time and the funding plans have been drawn up considering the current plans and focus of these projects – as such, the increase in funding will not be attributable to the CSR requirements of the Companies Bill, but more on the requirements and expansion of each of the projects.
Another long term contributor is Lupin Human Welfare & Research Foundation (LHWRF), which was set up almost 25 years ago in October 1988 with the objective of providing an alternative model for rural development in the country.
Dr Reddy’s Laboratories set up Dr Reddy’s Foundation in 1996, while Ranbaxy set up Ranbaxy Sanjeevan Swasthya Sewa in 2010. Among the other noteworthy CSR initiatives are those from Biocon and Cadila Healthcare.
Sustainability and CSR go hand-in-hand as both are measures of a company’s management policy to be a responsible corporate citizen. Bansal adds that Jubilant Lifesciences has been one of the first few Indian pharma companies to publish a sustainability report but on the whole, the approach to sustainability has been in bits and pieces by other companies, e.g. certain companies are focusing only on their social activities while some have started the process by preparing an internal sustainability report and few are talking of its environmental impacts. Parasnis reveals that Piramal Enterprises is currently working on their first Sustainability Report which they expect to release this year.
Protecting future markets
The history of CSR in India has many examples of philanthropy evolving from individuals’ charity or philanthropy to CSR, corporate citizenship and responsible business. But in most companies, CSR still equals philanthropy and is therefore done in an arbitrary manner. Hopefully the new norms in the Companies Bill 2012 will push companies to take it more seriously.
What are the driving goals or rationale for CSR in today’s world? The title of a 2008 white paper released by KPMG says it all: ‘Corporate Social Responsibility: Towards a Sustainable Future’.
 “CSR will be left to the discretionary goodness of those managing a corporation if a direct linkage of profits with environmental and social objectives are not established.”Kaushik Datta Director and Founding Member Thought Arbitrage Research Institute (TARI) |
But will a regulatory push do the trick and open the eyes of the corporate world to the rationale behind CSR? In a white paper titled, ‘Governance Beyond the Corporate Veil’, Kaushik Datta, director and founding member of TARI points out that unless the direct link between profits, and environmental and social objectives is established, CSR will be left to the discretionary goodness of those managing a corporation.
Citing the millions spent by Bill Gates and Microsoft on AIDS and education, he makes the point that investment in development is a business protection and sustainability cost and this belief will channel resources from private enterprises towards holistic development of people and nations. It also protects and sustains their markets of the future – the youth- he says, also citing the Tata Group and initiatives like the ITC’s eChoupal, which could drive prosperity among farmers in the future.
Hopefully, the new norms will force companies to track their CSR programmes more closely because it is being funded by their own profits.
Parasnis hopes that companies take a strategic view of this opportunity to ensure that the projects they support are in a position to expand their scale of operation (over time and across geographies) and become sustainable – both, from a financial standpoint as also the robustness of the solution implemented.
Impact assessment on various parameters will also have to be a key part of a corporate’s strategy to gauge the effectiveness of a programme. “Professional organisations do not just focus on the inputs and investments in CSR/socially relevant projects,” says Parasnis.
“A large part of the effort is in measurement of the outputs – generally referred to as impact assessment. The idea behind an impact assessment is to measure if the programme is leading to measurable change in the indicators – for example, reduction in infant and maternal mortality, improvements in disposable incomes, increase in rate of savings, improvement in student learning outcomes, reduction in school dropout rate etc. Any positive change in indicators of human development (that are targeted by any programme) would be compared with the base line data/ targeted level of improvement to measure the success (or otherwise) of a programme,”he explains.
Obviously, we will need to wait a couple of years to judge the impact of the new provisions proposed in the Companies Bill 2012 but by all indications, Indian Pharma Inc seems to be gearing up to earn its stripes as a more responsible corporate citizen.
