NEW DELHI (Thomson Reuters Foundation) - The Indian parliament has passed a new bill that aims for greater accountability and transparency in the private sector, and makes it mandatory for some companies to spend 2 percent of profits on uplifting the poor, a government statement said.
The Companies Bill - which will also strengthen shareholder rights in a country where many businesses are family controlled - replaces a law enacted in 1956, long before reforms in the 1990s opened up the economy and laid the foundation for a boom in privately-operated companies.
"The new Companies Bill... will allow the country to have a modern legislation for growth and regulation of (the) corporate sector in India," the government's Public Information Bureau said last week in a statement announcing the law’s approval in the upper house of parliament.
The law will require companies with market capitalisation of more than 5 billion rupees ($82.4 million) to spend 2 percent of their annual net profits on corporate social responsibility (CSR), such as social work or charity.
"Corporate social responsibility is a new concept in terms of Indian legislation. India is perhaps the first country in the world to have CSR in statute," Corporate Affairs Minister Sachin Pilot told the news channel CNBC-TV18.
"The reason we've done this is to make sure that companies that are large and profitable for a certain amount of years are able to qualify to do CSR."
An estimated 300 million people in India live below the poverty line – many of whom are from marginalised communities such as tribes and lower castes – and are dependent on free government services that are often shoddy and poorly delivered, often due to incompetence and corruption, experts say.
Although many big firms have their own foundations or CSR programmes, activists have long called for the booming business sector to do more for the country’s socioeconomic development.
State-owned companies are already mandated to pay between 0.5 to 5 percent of profits on social welfare projects.
Indian industry has welcomed the new bill, which will become law once President Pranab Mukherjee signs it.
"Now that the law is ready, it is time to focus and work on the practical aspects of complying with its provisions," said Chandrajit Banerjee, director general of the Confederation of Indian Industry. "One such vital provision is surely the clause dealing with CSR (spending)."
However, some civil society organisations warned the law could end up having a mere superficial impact if funds are not prioritised on projects such as those related to health and education, and if communities targeted to benefit are not given adequate say.
"This is a significant and welcome step," said Parvinder Singh, head of advocacy and communications for the Poorest Areas Civil Society.
"But for this opportunity to translate into gains against poverty for excluded communities, the step needs to be backed with institutional provisions to link experience of civil society and government entitlements with the CSR framework."