Corporate Social Responsibility in India – Transition from Moral Imperative to Mandatory Expenditure

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Mandatory spending on Corporate Social Responsibility is the new reality for Corporate India. The enforcement of this provision from April1, 2014, has shifted focus from the debate on whether CSR is a moral imperative or not to how companies can put the mandatory CSR expenditure to effective use.

The provision of the Companies Act 2013, mandates that any company with a net worth of at least Rs 500 crore or a turnover of Rs 1,000 crore or a net profit of at least Rs 5 crore would have to spend at least 2 per cent of its average net profit of the immediately preceding three years. According to the norms, the CSR activities will have to be within India wherein companies can choose from a range of activities such as promoting preventive health care and sanitation, setting up homes and hostels for women and orphans and livelihood enhancement projects. If a company is unable to spend the amount, an explanation will be required in the director’s report.

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As a result of this provision, many corporate enterprises are stepping up their CSR efforts. However, as a matter of fact, many companies still lack the processes to channelize the allocation of these funds. Read more

Building a ‘Responsible India’

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By Somali K Chakrabarti

India has, for long, been an emerging economy. While most of the developed economies including the US, consider India as a strong prospect, the large and widening performance-potential gap in India leaves a lot to be desired.

A question that frequently pops up in a number of forums is ‘What can bring about the transition of India from a emerging to a developed nation?

The importance of an environment that supports development, enforces law and order, promotes entrepreneurship and steers the country towards higher productivity cannot be stressed enough in this context. Most people would agree upon the need to do away with red tape, corruption and have policies in place to prop up the economic development and growth. Yet, in addition to the changes in the business environment, certain behavioral, cultural and value related changes are also needed in our society, to aid India’s transition to a developed nation. Unfortunately many of these softer aspects have been severely under rated by our society in the recent past.

As the saying goes No nation can rise above the quality of its thoughts.

Progressive thinking is needed, if we have to evolve as a developed nation. To build a nation that makes the world sit up and notice, we need imaginative, inventive, responsible and determined people. We need motivated and responsible citizens who can bring about the changes in an inclusive and sustainable manner. Read more

From Owning Profits to Owning Network: Shift in paradigm for Digital businesses

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Over the last few days, there has been a lot of buzz around social media businesses fetching insanely high valuations including  Facebook’s acquisition of WhatsApp for $19 billion. On one hand, the conservative traditional investors are perplexed with the high valuations of social media companies, on the other hand some traders with investments in social media are laughing their way to the bank.

The fact is that ‘Social Media’ businesses differ from ‘Traditional’ Businesses both in terms of ‘Value’ they create and in terms of the methods used for ‘Valuing’ these companies.

While products and services of traditional businesses serve tangible needs of the market, digital social businesses mostly create new needs either by enhancing user experience, or by  seducing users with an unique experience or an emotional appeal.

Traditional businesses generally have a fixed organization structure, start from a local market and later expand to global markets. In contrast, digital/social businesses are global from day one and thrive on collaborative structures based on interaction with online communities; if such companies manage to capture imagination, growth can be instantaneous. Candy Crush, the mobile phone game has been downloaded more than 500 million times since its launch in 2012 and is worth $5 billion now in 2014.

So whilst traditional businesses focus on break-even and profits, for digital businesses expanding and owing the Network becomes the first and foremost priority. The ‘value is in the network’: own the network first, and find a way to profit from those connections later.

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For traditional companies valuations are obtained by appropriating all the potential earnings of the company in future to the present date. The future earnings are found based on the growth estimates of the revenue & costs.

For digital companies the valuation is guided by the user base and is based more on the intangible assets. Hence the digital businesses continuously strive to improve user engagement and grow the user base. Though it is possible to attain a  spectacular growth in user base  within a very short period, say with a particular app, it might be difficult to maintain that level or replicate a similar level of engagement with another app.

Twitter saw the share price plummet more than 20% after quarterly results in Feb 2014, showed that the social network was not adding users as fast as it once did. Zynga, the maker of Farmville, has seen its share price halve since its late 2011 initial public offering (IPO), while Finland’s Rovio has struggled to replicate the success of its 2010 hit Angry Birds.

Secondly valuation of intangible assets in digital businesses requires understanding the full global potential of the assets and valuing them accordingly.

Facebook is currently being valued at $170 billion, at about $130/user, given their existing user base of 1.25 billion. The high price of $19 billion that Facebook paid for acquisition of WhatsApp a co with no (proprietary) intellectual property, almost unlimited competition can perhaps be explained in terms of the strategic value that FaceBook sees in owning a IM service with 450 million users and killing the potential competition.

Had WhatsApp listed on a stock exchange, it possibly might have fetched a lower price.

As it may be difficult for digital businesses to continuously dish out products one after the other, so it is very likely that after having accumulated a user base, the founders of some of the smaller digital businesses opt for selling their product to a bigger player who sees strategic value in the product and can leverage the digital platforms to provide value added services to their customers.

It could also happen that in a year or two from now that social media companies see a deceleration in the exponential growth in user engagement and valuations of these companies come down to more realistic levels commensurate with their earnings and return on investment. In such a scenario, the investors who are late entrants and buy at peek valuations may suffer if the market stops seeing the same potential or prices the companies differently than how the initial price is arrived at.

However a fact that seems almost certain is that with time most of the traditional businesses will work on their digital strategies and start using digital channels to tap the ecosystem & engage online communities. This in turn will benefit the digital businesses that can extend their platforms to individuals as well as to the corporate sector and enter into a symbiotic relationship with the traditional businesses.

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References :

http://aswathdamodaran.blogspot.in/2014/02/facebook-buys-whatsapp-for-19-billion.html

http://www.dailymail.co.uk/sciencetech/article-2562383/Thatll-buy-lot-sweets-Candy-Crush-maker-King-valued-5bn-plans-stock-market-debut.html

http://www.theepochtimes.com/n3/531996-living-in-a-world-without-financial-rules/

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