In India, corporate social responsibility isn’t just a good idea. It’s now the law. In August 2013, the Indian Parliament passed a revised version of the nation’s Companies Act, and the act now requires companies of a certain size to invest 2 percent of net profits in social benefit activities. This provision, which makes India the first country in the world to mandate CSR spending, could unlock as much as $3 billion annually, creating a monsoon of opportunities to tackle issues like extreme poverty and childhood malnutrition. Yet even as companies gear up to meet the new requirement, they and their social-sector partners are bracing for challenges.

“The possibilities are enormous,” says Priya Naik, founder and joint managing director of Samhita Social Ventures, a CSR consulting firm in Mumbai that is funded by N. S. Raghavan, cofounder of Infosys. “Companies need to think carefully about how to make significant contributions,” Naik says. “If they just want to write a check and be done with it, then we risk a tremendous amount of chaos.”

The new law applies to all companies that meet certain thresholds of financial performance—businesses with annual net profits of 5 Crore INR (about $800,000), for example. According to the Confederation of Indian Industry, at least 6,000 companies now have an obligation to take up CSR initiatives. Although many Indian companies already have CSR programs in place, they face new reporting and transparency requirements. Disclosure of CSR spending on a public website is mandatory, for instance. There is no penalty for failing to meet the 2 percent goal, but companies must explain the reasons for any shortfall. (Bhaskar Chatterjee, CEO of the Indian Institute on Corporate Affairs, suggested in an interview with The Telegraph of Kolkata that companies will be “shamed” into complying with the law.)

Under the new CSR mandate, Indian business leaders will need to recalibrate their approach to social engagement. “Smaller companies have been giving back to the community primarily through philanthropy. The need of the hour is to be more strategic,” says Jay Thakkar, a CSR consultant at Accenture who is based in Mumbai. “They must ensure that their CSR and sustainability activities find the sweet spot where there is congruence of social benefits and business benefits.” Effective CSR, he adds, “comes down to prioritizing initiatives based on this sweet spot and then partnering with NGOs and civil society to achieve well-targeted aims.”

Piyush Verma, an investment manager at Lighthouse Advisors India, says that the companies in his portfolio are moving quickly to establish CSR teams that report to their boards. A growing number of Indian companies, he adds, are contributing not just funding but also in-house expertise to social causes, and he offers an example: “Suraksha Diagnostic in Kolkata does free checks for poor patients across its centers. They also hire economically [disadvantaged] students and train them on the latest medical equipment.”

The social sector will need to track impact closely, warns Payal Mulchandani, cofounder of the 4th Wheel, a CSR think tank and consultancy based in Ahmedabad. “There’s a risk that companies will invest in a lot of small projects, with little learning or cross-fertilization,” she says. Mulchandani also notes the risk that the CSR requirement will create “an open door for greenwashing and creative accounting.” But India’s new approach to CSR presents “an opportunity for innovation in sustainable social investment,” she adds.

Ratan Tata, former chairman of the Tata Group and a prominent philanthropist, has said that the national CSR scheme is well intentioned but “vulnerable to exploitation.” In an interview with Philanthropy Age, he predicted that nonprofit organizations will be “tripping over themselves” to attract funding from companies.

Indeed, for NGOs, the revised Companies Act creates unheard-of access to corporate philanthropy. In a survey of 20,000 nonprofit partners, according to Naik, Samhita found that 50 percent of NGOs “had never approached corporates for funding before.” Pratik Kumar, CEO of the Magic Bus, a sport-for-development organization, is well aware of the challenges that this boon will bring. He and other nonprofit leaders, he says, will “need to upgrade our professionalism to match the demands that such a large leap in funding would mean for all of us.”

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