THE non-governmental bodies in India are likely to get a boost from April 1, with the government making it mandatory for specified companies to spend a minimum of two per cent of their net profit on corporate social responsibility activities.

The new rules, under section 135 of the Companies Act, make it mandatory for a company with a net profit of Rs50 million or net worth of Rs5 billion or an annual turnover of Rs10 billion to keep apart at least two per cent of the average net profit of the previous three years, for CSR activities.

While segments of the corporate sector had resisted the government’s move to make it compulsory for them to invest in CSR, with parliament having passed the necessary changes to the act, it is now part of the compliance law.

The Indian Institute of Corporate Affairs (IICA), part of the ministry of corporate affairs, estimates that more than 16,000 companies (less than two per cent of the total number of firms in the country) will come under the ambit of the new rules. They are expected to spend a whopping Rs280 billion on CSR activities in the first year.

The government has identified nearly a dozen areas where the funds can be spent by these companies. They include measures to alleviate hunger, malnutrition and poverty, promoting preventive healthcare and sanitation, providing safe drinking water, promoting education and gender equality and ensuring environmental sustainability. Companies that cannot take up such activities on their own can also donate to the Prime Minister’s Relief Fund.

Bhaskar Chatterjee, director-general and CEO, IICA, points out that money spent on activities relating to employees or compliance with any rules and regulations would not be taken as part of the CSR spend.

Kapil Sibal, the telecommunications minister, notes that companies can also invest in providing low-cost solutions to meet the needs of the poor. He cited the example of battery-operated rickshaws, which were developed by the ministry of science and technology (when he was the minister) to provide relief to thousands of poor people, who manually drag rickshaws in many parts of India. Many of them suffer from diseases such as tuberculosis.

The new rules also envisage a penalty of Rs2.5 million and even imprisonment for key officials if corporates do not invest in CSR. The IICA plans to maintain a database of all the activities undertaken by the firms.

Companies will also have to set up a CSR committee — comprising at least three board members, including an independent director — to oversee the activities. The committee members will be held responsible if the company fails to spend the money on the specified activities.

Kamleshwar Sharan, president, Greentech Foundation, believes the new rules would result in a huge expansion of the CSR economy in the country. “Companies will now be required to spend in a structured manner and not just writing a cheque for some cause,” he points out.

OF COURSE, CSR activities are not new to corporate India and many leading business groups, including those owned by multinationals, have for years been closely involved with several such activities. Groups such as the Tatas and the Birlas have set up trusts that have been working for decades in rural areas.

Many companies also donate substantial amounts to the Prime Minister’s Relief Fund or to the various Chief Minister’s Relief Funds, especially in times of natural disasters.

While the new law will result in a huge expansion of the CSR sector in India, the country already ranks among the top in the world in terms of NGOs and non-profit setups that are actively promoting different causes.

A recent government survey revealed that there are nearly two million NGOs operating in India, among the highest in the world. Many of them receive funding from abroad. In 2010-11, NGOs received about $2 billion from foreign sources.

Some of the NGOs are floated by vested interests — including some corporates — to prevent a rival firm from setting up a new factory or taking up a new project. Many large projects, including in the infrastructure sector, have been delayed for years because of the opposition by some of these agencies.

Politicians, government officials and even business groups have accused many of the NGOs receiving funds from international agencies of opposing projects in the nuclear, power, mining and infrastructure sectors and even in areas such as genetically-modified food.

Moreover, with the election season setting in, political parties have also begun indulging in mudslinging, accusing rivals of getting funds from shady foreign NGOs.

Many of the non-governmental agencies today are multi-billion-rupee operations, and have professionals heading them. Top executives from the corporate world have switched jobs, taking up C-suite positions with NGOs, who compensate them handsomely.

About 20 years ago, there was mutual suspicion between corporates and NGOs in India, but today there is a paradigm change in their attitudes towards each other. Top NGOs, including many run by international biggies, today hire executives who have graduated from the prestigious Indian Institutes of Technology or the Indian Institutes of Management, or even have foreign degrees.

The entry of international bodies as the Bill and Melinda Gates Foundation, has for instance, also brought in professionalism in the sector. Activists in the sector talk in terms of metrics and measurements and are well-versed in corporate lingo and make fancy presentations at seminars and corporate gatherings.

The expected surge in spending on the social sector will also result in shortage of trained and qualified personnel. There is already an acute paucity of skilled staff, especially those who are willing to relocate to rural and backward areas. Many of the NGOs have to offer attractive compensation packages to get trained people to relocate from metros and large cities to villages.

The mandatory spending by the corporate sector on CSR activities is expected to bring about more professionalism in the social enterprise field over the coming years.