Open Access Research Article
CORPORATE SOCIAL RESPONSIBILITY IN INDIA A CONTRAST AND DEVELOPMENT
Published Paper
Article Details
CORPORATE
SOCIAL RESPONSIBILITY IN INDIA A CONTRAST AND DEVELOPMENT
AUTHORED BY -
NABIL RAZA
Acknowledgement
This paper delves into the underlying
theories and real-world research regarding the rationale behind Corporate
Social Responsibility (CSR). It examines the potential consequences of enforced
CSR as per the recently enacted Companies Act of 2013 in India. This analysis
encompasses firm incentives, expected reactions from companies subject to this
law, implications for the availability of resources and the provision of social
benefits, and the prospects and hurdles associated with implementing mandated
CSR.
To shed light on these matters,
empirical insights are drawn from the study of voluntary CSR practices within a
sample of 500 prominent companies listed on the Bombay Stock Exchange, spanning
the period from 2003 to 2011, which predates the new regulation. The central
argument of this paper posits that despite the potential economic burdens that
mandated CSR may entail, the provisions of the new Act have been carefully
crafted to strike a balance between the interests of corporations and their
shareholders, as well as those of society and its stakeholders. Nevertheless,
the effective resolution of implementation challenges will ultimately determine
the extent to which the objectives of the new regulations are achieved.
INTRODUCTION:
Indian corporations, akin to their
counterparts in other nations, have a longstanding tradition of engaging in
social endeavors that transcend the immediate financial objectives of the
corporate world. However, since the late 1990s, Corporate Social Responsibility
(CSR) activities have increasingly come under scrutiny from both policymakers
and stakeholders in corporations. This heightened focus on governance issues
led to the formal initiation of CSR emphasis in India.
The journey towards formalized CSR in
India commenced with the issuance of the Corporate Social Responsibility
Voluntary Guidelines in 2009 by the Ministry of Corporate Affairs (MCA, 2009).
This eventually culminated in the enactment of Section 135 of the Companies Act
in 2013 (MCA, 2013), mandating CSR spending and disclosure for specific
categories of companies. Notably, while CSR issues gained prominence globally,
India became the pioneer in making CSR activities obligatory for large,
profitable companies through legislation. In other countries, CSR endeavors by
corporations mostly remained voluntary, with only a few nations mandating
corporate disclosure of such activities.
Consequently, Section 135 in India
has stirred a wide spectrum of opinions among policymakers, corporations,
industry associations, social sector organizations, and academics. On one side,
mandatory CSR has been hailed in policy circles as a “historic opportunity” and
a potential “game changer” for India. Advocates envision a collaborative effort
between corporations, government, and civil society to facilitate “national
regeneration” through sustainable development. Unconventional as it may appear,
some argue that, for a developing nation like India, mandatory CSR might serve
as a tool to navigate a “middle path” between a liberal and a regulatory state,
thereby balancing economic growth with social stability . On the flip side,
critics of mandatory CSR, primarily represented by corporations and business
associations, contend that mandating CSR activities essentially transfers government
social responsibilities onto the private sector and forces businesses to bear
the brunt of governmental shortcomings. Moreover, when these activities lack
clear definition, mandatory CSR could create perverse incentives for
corporations to mask their efforts to meet obligatory requirements or seek
loopholes to evade legal compliance.
Given the contrasting perspectives
surrounding mandatory CSR, the objective of this paper is to critically examine
the implications of Section 135 and the accompanying Rules, as notified by the
Ministry of Corporate Affairs in 2014 (MCA, 2014a). Fundamental and Central
Inquiry:
The overarching question at the heart
of this study revolves around the potential of mandated Corporate Social
Responsibility (CSR) to address the welfare disparity in a developing nation
like India. To be specific, this paper undertakes an in-depth analysis of the
implications of Section 135 of the Companies Act, 2013, on various facets.
These facets include firm incentives, the expected responses of corporations
falling under the purview of this section, its impact on the availability of
resources and the delivery of social benefits, and, lastly, the prospects and
challenges entailed in the implementation of mandatory CSR expenditure under the
prescribed Rules. To shed light on these complex issues, empirical insights are
derived from the examination of CSR practices among a sample of 500 major
companies listed on the Bombay Stock Exchange during the period from 2003 to
2011. This timeframe precedes the enactment of Section 135.
Structural Overview of the Paper:
The paper follows a structured
outline for comprehensive exploration. Section 2 lays the foundation by
elucidating the key provisions of mandatory CSR as stipulated under Section 135
of the Companies Act, 2013. Section 3 provides a panoramic view of the existing
theoretical and empirical literature pertaining to the rationale behind CSR.
Section 4 delves into various regulatory approaches and identifies the
potential costs and benefits associated with mandated CSR.
To provide context for the issue of
mandatory CSR, Section 5 conducts an empirical analysis of the voluntary CSR
initiatives undertaken by the top 500 listed companies in India during the
period spanning from 2003 to 2011, which precedes the enactment of Section 135.
Finally, Section 6 serves as the concluding segment of the paper, assessing the
prospects and challenges entailed in the implementation of mandatory CSR in
India.
2. CSR(The Legal Framework) :
The initial formal attempt by the
Government of India to address the CSR issue was the issuance of the Corporate
Social Responsibility Voluntary Guidelines in 2009 by the Ministry of Corporate
Affairs (MCA, 2009). Before this, the significance of CSR had been discussed in
the context of corporate governance reforms, as seen in the Report of the Task
Force on Corporate Excellence by the Ministry of Corporate Affairs in 2000
(MCA, 2000). While this report made a compelling business case for CSR and
underscored the societal benefits it could yield, the discussion remained
advisory in nature, lacking actionable points.
It was in the 2009 Voluntary
Guidelines that the fundamental elements of a CSR policy were delineated. These
elements included care for all stakeholders, ethical conduct, adherence to
workers’ rights and well-being, respect for human rights, environmental
responsibility, and activities aimed at promoting social inclusivity and
development. The Guidelines explicitly differentiated between philanthropic
activities and CSR endeavors, emphasizing the voluntary nature of CSR
initiatives that extend beyond any statutory or legal obligations.
Transition to Mandatory CSR
Regulation:
The progression from voluntary CSR
initiatives to regulated requirements began with the issuance of the National
Voluntary Guidelines of Social, Environmental & Economic Responsibilities
of Business in 2011, also issued by the Ministry of Corporate Affairs (MCA,
2011). These guidelines, crafted based on input from significant stakeholders
nationwide, delineated nine principles for responsible corporate conduct aimed
at fostering inclusive economic growth at the national level. Similar to the
2009 Guidelines, the 2011 Guidelines operated on a voluntary basis, encouraging
corporations to adopt all nine principles and report their adherence under an
“apply-or-explain” principle. Interestingly, unlike the 2009 Guidelines, the
2011 version did not propose earmarking a specific portion of profits after tax
or any other parameter for CSR activities.
The transition from voluntary CSR
practices to a regulated framework took a pivotal turn when the Securities
Exchange Board of India (SEBI) mandated, as part of Clause 55 of the Listing
Agreement, that the top 100 listed companies must disclose their CSR activities
in the Business Responsibility Reports (BR Reports) accompanying their Annual
Reports. SEBI viewed this move as serving the broader goal of public disclosure
and as a step towards integrating social responsibility with corporate
governance.
The most ambitious endeavor in the
realm of mandated CSR for corporations unfolded with the introduction of
Section 135 of the Companies Act in 2013 (MCA, 2013). As mentioned earlier,
Section 135 marked a significant departure as it made both CSR spending and
reporting obligatory for the first time in India, placing CSR activities firmly
within the purview of corporate law. Precisely, Section 135 requires companies
with a net worth of rupees five hundred crore or more, a turnover of rupees one
thousand crore or more, or a net profit of rupees five crore or more to (i)
establish a CSR Committee comprising at least three directors (including one
independent director), and (ii) allocate, under the guidance of the CSR
Committee, at least two percent of the average net profits made during the
preceding three financial years toward the fulfillment of their Corporate
Social Responsibility Policy.
While Section 135 firmly stipulates
the quantum of CSR spending and reporting, it maintains flexibility in terms of
the choice of CSR activities for companies. Instead of rigidly defining CSR
boundaries, the law broadly outlines a scope of social responsibility in
Annexure VII of the Act, comprising a list of activities that corporations may
potentially undertake, granting them the discretion to decide. As for
compliance with Section 135, the law adopts a “comply-or-explain” approach,
without explicit penalties for non-compliance.
Following the passage of the Act, the
Ministry of Corporate Affairs notified the Rules related to CSR on February 27,
2014. These Rules specify activities on which companies may expend the
earmarked CSR funds. To prevent self-serving expenditure, the Rules clarify
that CSR activities benefiting only the company’s employees and their families
will not qualify as CSR spending. However, companies are permitted to enhance
the CSR capacities of their employees through reputable institutions, with the
caveat that such spending does not exceed five percent of the total CSR
expenditure for that financial year. The Rules under Section 135 came into
effect on April 1, 2014.
India’s Leadership in Mandated CSR:
With the implementation of Section
135 of the Companies Act, 2013, India achieved a notable milestone, as observed
in the Report on the Standing Committee on Finance (LSS, 2010) by the Ministry
of Corporate Affairs. India became the first country to incorporate CSR
provisions into Company Law and make CSR expenditure mandatory for corporations
based on predefined criteria. In contrast, in most other parts of the world,
CSR remains a voluntary endeavor at the discretion of corporations. The extent
of mandatory requirements typically revolves around the compulsory reporting of
CSR activities undertaken by corporations, although this is not uniformly
practiced across all countries. In certain nations like Sweden, Norway, the
Netherlands, Denmark, France, Australia, and China, either government
regulations, stock exchange regulations, or a combination of both necessitate
corporate disclosure of CSR activities through sustainability reporting. The
distinguishing aspect of Section 135 is that it not only mandates the reporting
of CSR activities but also requires corporations to engage in CSR activities in
the first place.
3. The Rationale Behind Corporate
Social Responsibility:
In any discussion about CSR, it is
crucial to grasp why corporations should assume social responsibility in the
first instance. Why not exclusively pursue the maximization of shareholder
value and leave the pursuit of social development to other entities?Understanding
the Essence of CSR.
The inquiry into the essence of
Corporate Social Responsibility (CSR) extends to comprehending the basis for
CSR, particularly within the framework of Section 135, and the economic
underpinnings of mandated CSR. The question of “why CSR” can be dissected into
three subsidiary inquiries: What is CSR? What rationalizes CSR? What justifies
mandated CSR?
Defining CSR:
The quandary regarding the relevance
of CSR within corporate activities is intricately tied to defining the scope of
CSR for a corporation. A review of existing CSR literature reveals a divergence
of opinions and ambiguity concerning the elements constituting socially
responsible behavior by corporations. It is imperative to establish a consensus
on the definition of CSR, first from the standpoint of the entity responsible
for CSR (i.e., the corporation), second from the viewpoint of the entity
affected by CSR (i.e., society at large), and finally from the perspective of
the entity seeking to bridge the gap between the firm and society (i.e., the
regulator). In any national context, discussions about the extent of CSR
regulation should, at the very least, commence with an agreement among these
three entities regarding the essence of CSR.
The definition of CSR has evolved
over time, with sample definitions from academic literature and international
agencies, CSR has been conceptualized along a spectrum of corporate behaviors.
On one end, it encompasses shareholder profit maximization within the framework
of established rules, as proposed by Friedman in 1970. On the opposite end, it
represents an all-encompassing objective that harmonizes economic, social, and
environmental goals to serve the interests of shareholders and stakeholders, as
defined by UNIDO, the World Bank, and the World Business Council for
Sustainable Development (WBCSD).
Central to most of these definitions
is the notion that CSR is fundamentally a voluntary endeavor, serving as a
conduit between the corporation and society. The corporation’s objective shifts
from merely maximizing shareholder interests (the shareholder primacy
perspective) to considering the interests of all its stakeholders. This concept
closely aligns with the emphasis on reconciling economic objectives with social
and environmental goals, potentially compelling corporations to embrace a
broader sense of responsibility.
CSR and Its Scope:
The concept of Corporate Social
Responsibility (CSR) encompasses a wide spectrum of activities, from ethical
and moral conduct to actions that go beyond regulatory and legal obligations,
all of which contribute to social welfare. It entails recognizing that a
corporation’s economic activities should align with societal concerns. This
perspective considers the relationship between business and society,
emphasizing the moral and ethical responsibility of businesses to make positive
contributions beyond mere legal compliance.
Early proponents of CSR, like Bowen
(1953), argued that private corporations should be evaluated based on their
tangible contributions to the general welfare. This includes fostering higher
living standards, promoting economic progress and security, and contributing to
the overall betterment of society. Such contributions were viewed as essential
for the survival of the free enterprise system. Steiner (1971) extended this
argument, asserting that businesses, while primarily economic entities, should
also strive to achieve social goals, with responsibilities increasing in tandem
with the size of the business. This perspective ultimately evolved into the
stakeholder view, positing that a corporation’s objectives should extend beyond
profit maximization for shareholders and encompass all stakeholders, including
the broader society (Freeman, 1984).
While moral and ethical considerations
underpin much of the societal argument for CSR, economic arguments have also
been put forth both in favor of and against CSR. The most prominent critique
comes from Friedman (1970), who contended that profit-maximizing firms should
refrain from engaging in CSR, as diverting funds to create social good at the
expense of shareholder returns would be akin to “theft.” According to Friedman,
CSR would lead to allocative inefficiencies and social losses. Conversely, a
body of theoretical research has provided an economic rationale for the social
role of private firms in providing public goods through CSR. For instance,
Besley and Ghatak (2007) argued that CSR resembles the private provision of
public goods, potentially leading to Pareto improvements. They suggest that CSR
by private-for-profit firms can be efficient, especially when government
provision of public goods is suboptimal.
Rationale for CSR in Developing
Countries:
The rationale for CSR takes a
distinct form in developing countries, considering their unique socio-economic
challenges. In these contexts, social, environmental, and sustainability issues
are often more acute, particularly in regions affected by globalization,
economic growth, investments, and expanding economic activity (Visser, 2007).
As noted by Amaeshi et al. (2006), CSR in low-income countries predominantly
focuses on socio-economic issues such as poverty alleviation, healthcare
provision, education promotion, and infrastructure development. This contrasts
with CSR priorities in Western countries, which often revolve around business
ethics, fair trade, green marketing, climate change, and socially responsible
investments.
In India, CSR aligns with
socio-economic activities aimed at fulfilling the nation’s development goals,
without necessarily sacrificing corporate economic objectives. The role of
corporations in development is seen as complementary to that of the government,
rather than antagonistic.
The Rationale of CSR:
Understanding the drivers of CSR in developing
countries and the basis for imposing mandatory CSR in India requires examining
the pros and cons of socially responsible activities from both societal and
corporate perspectives, as well as recognizing the need for regulatory
oversight.
CSR and Social Welfare:
At the societal level, there is a
growing recognition that a corporation’s economic activities should be
intertwined with societal well-being. CSR discussions often revolve around the
moral and ethical obligation of businesses to contribute positively to society,
extending beyond mere legal compliance.
Early advocates like Bowen (1953)
argued that private corporations should be evaluated based on their tangible
contributions to the general welfare, such as raising living standards and promoting
economic progress. Steiner (1971) echoed this sentiment, asserting that
businesses should aim to achieve social goals in addition to economic
objectives, particularly as they grow in size. This perspective eventually
evolved into the stakeholder view, which emphasizes that a corporation’s
purpose should encompass the interests of all stakeholders, including society
at large.
While moral and ethical
considerations form the bedrock of the societal argument for CSR, economic
arguments have also been made, both for and against CSR. Friedman (1970)
famously argued against CSR, claiming that it would be socially irresponsible
for profit-maximizing firms to engage in activities that detract from
shareholder returns. However, others, like Besley and Ghatak (2007), have
provided theoretical support for the economic rationale of CSR as a form of
private provision of public goods, particularly in cases where government
provision is lacking.
In the context of developing
countries like India, CSR takes on a broader role that goes beyond standard
arguments. Here, the focus extends to the role that CSR can play in achieving
developmental objectives, including poverty reduction and inclusive growth. The
perspective shifts from Friedman’s view, and instead, emphasizes the social
role of corporations in development in tandem with the government. CSR is seen
as a means to supplement or substitute for government resources and delivery
mechanisms, particularly in areas where governments may be weak, corrupt,
under-resourced, or lacking institutional capacity (Visser, 2008; Blowfield and
Frynas, 2005; Matten and Moon, 2008). These arguments align with the
conclusions drawn by Besley and Ghatak, suggesting that CSR can be efficient
when government provision of public goods is suboptimal.
CSR and the Corporation:
Examining the rationale for Corporate
Social Responsibility (CSR) from the perspective of a corporation reveals two
distinct motivations: “performance-driven” and “stakeholder-oriented” (Basu and
Palazzo, 2008, as cited in van der Wees, 2009).
1. Performance-Driven CSR:
Performance-driven CSR is a strategic approach where corporations engage
in CSR activities with a profit motive in mind. These firms believe that their
corporate social performance will ultimately translate into improved financial
performance over the long term. Essentially, this aligns with the “business
case” for CSR, where CSR expenditures are fully consistent with the objective
of maximizing shareholder wealth, with no inherent trade-off between shareholder
interests and social responsibility. This perspective operates under the
premise that “smart companies” proactively integrate CSR into mainstream
business practices, employee engagement, and view it as a competitive advantage
(Davies, 2002). In other words, CSR is an investment that yields returns.
2. Stakeholder-Oriented CSR:
Stakeholder-oriented CSR arises from the corporation’s desire to serve
the interests of all stakeholders beyond just shareholders. While the
shareholder primacy view predominantly emphasizes profit motives, the
stakeholder perspective seeks to reconcile the social and economic goals of an
organization, driven by a moral imperative to benefit society at large (van der
Wees, 2009). Often, a corporation’s motivation to prioritize stakeholder
interests through CSR activities stems from external pressures exerted by
various stakeholders (Frynas, 2005). However, it’s important to note that
stakeholder-oriented CSR activities may involve a trade-off with profit
maximization, sometimes requiring corporations to “sacrifice corporate profits
in the public interest,” as referred to by Elhauge (2005).
Critics of the stakeholder
perspective argue that maximizing stakeholder value is inconsistent with the
efficient operation of a company. The multiplicity of objectives that the
stakeholder theory proposes can distort managerial incentives, as it becomes
unclear what managers should prioritize when there isn’t a single, well-defined
objective to maximize.
Determining Stakeholder Weights and
Regulatory Approaches:
A critical concern emerges when
considering stakeholder-oriented CSR: how to assign weights to the various
objectives of different types of stakeholders, and who should be responsible
for this determination? In the absence of a clear-cut economic rationale for
such an exercise, responsible behavior towards stakeholders can inadvertently
lead managers to act irresponsibly. Managers may strategically use stakeholder
value maximization and CSR engagement as a façade for personal gains.
The issue of assigning weights to
stakeholders and objectives remains complex and largely unresolved. It raises
questions about the transparency and fairness of such assignments and whether
they should be determined by the corporation, regulatory bodies, or other
entities. Without a standardized framework, this aspect of CSR remains open to
interpretation and manipulation.
Additional Dimensions of CSR
Motivation in Developing Countries:
In developing countries like India,
firm-level motivations to engage in CSR take on additional dimensions.
Globalization has increased the importance of accessing international markets,
potentially driving firms in these countries to align with globally accepted
CSR norms. This alignment is particularly relevant concerning environmental
standards, where firms may seek to signal their compliance through
sustainability performance reporting and adherence to CSR codes (Visser, 2005).
The presence of multinational companies with international exposure also exerts
pressure on local firms to comply with various sustainability reporting and CSR
code requirements, including ethical trading initiatives, fair trade practices,
and product labeling.
Regulatory Approaches to CSR:
The regulatory approaches to CSR
involve the extent to which governments influence CSR behavior in two key
aspects: reporting of CSR activities and the amount of spending on CSR
activities. This leads to three types of regulatory regimes:
1. Voluntary reporting and voluntary
spending.
2. Mandatory reporting but voluntary
spending.
3. Mandatory reporting and mandatory
spending.
Debates on CSR policy often revolve
around whether CSR reporting should be voluntary or mandatory, i.e., whether
firms should be legally required to report their CSR activities. In contrast,
the discussion of voluntary versus mandatory spending is less common, primarily
because CSR activities, regardless of their nature, tend to be voluntary in
most countries (Box 1).
Mandating CSR Disclosure:
The issue of mandating CSR disclosure
revolves around whether corporations should be legally obligated to report and
disclose their CSR activities or if this decision should be left to the
discretion of the corporation. The debate over mandatory CSR reporting gained
prominence in recent years following the global financial and economic crises.
The Shift Toward Mandatory CSR
Reporting:
The transition from a “hands-off”
approach to more stringent CSR regulation has been driven by various factors,
including the global financial and economic crises, corporate misconduct,
failures, and growing environmental sustainability concerns. These developments
created a “trust deficit” between corporations and their stakeholders
(KPMG-UNEP, 2010). Consequently, CSR governance has evolved to impose greater
mandatory disclosure requirements regarding how corporations’ CSR activities
impact different stakeholders and the broader community.
The economic rationale for mandatory
CSR disclosure, compared to voluntary reporting, is not immediately obvious. If
CSR activities are primarily driven by strategic considerations or the desire
to serve stakeholders, it should be in the firm’s self-interest to voluntarily
disclose its CSR activities. In essence, if engaging in CSR is financially
beneficial, it should also be advantageous to disclose these activities.
Corporate responsibility reporting is considered to have become an essential
business practice because corporations increasingly recognize that CSR
reporting positively affects financial value. Failure to report can negatively
impact competitiveness, costs, and potential business opportunities. Therefore,
when all firms voluntarily report their CSR activities, mandating CSR reporting
may only add regulatory burden without generating additional information (Lin,
2010). Moreover, mandatory CSR reporting could lead to uninformative and biased
information, potentially undermining corporate accountability (Hess and Dunfee,
2007). From a public policy perspective, the need for mandatory reporting
arises when corporations do not view CSR as immediately financially rewarding,
yet it is perceived as beneficial at the societal level. In such cases,
mandatory reporting can stimulate a positive CSR response, whereas voluntary reporting
could theoretically result in minimal CSR efforts. Mandatory reporting can also
reduce information asymmetries, especially in emerging markets with imperfect
capital markets, and enhance corporate accountability (Hung et al., 2013).
Additionally, in countries with weak institutions and enforcement mechanisms,
mandatory CSR reporting can address societal issues that are not adequately
addressed by existing laws and regulations. The growing support for mandatory
CSR disclosure, despite criticisms, is evident in the increasing number of
governments and stock exchanges mandating CSR disclosures through laws and
regulations while still maintaining the voluntary nature of CSR activities.
The Shift Toward Mandatory CSR
Reporting in India:
The transition from voluntary to
mandatory CSR reporting is particularly notable in India. Prior to 2012, the
disclosure of CSR activities in the country was purely voluntary, supported by
reporting frameworks provided by the government through the issuance of the
Voluntary Guidelines in 2009 and 2011. However, since 2012, it has become
increasingly mandatory, starting with the Securities and Exchange Board
requiring the top 100 companies to file Business Responsibility Reports and
culminating in the Companies Act of 2013, which mandates CSR reporting for a
larger set of listed and non-listed companies under Section 135.
Mandating CSR Spending:
The prevailing definitions of CSR in
the literature and underlying CSR theories largely portray CSR as a voluntary
endeavor. In this perspective, corporations determine their optimal CSR actions
as part of their business strategy, influenced by market pressures from
consumers, investors, stakeholders, and civil society organizations. In such a
scenario, the government’s role is generally limited to endorsing,
facilitating, and partnering with socially responsible corporate behaviour
through policy instruments like tax exemptions for CSR activities, award
schemes, information dissemination, training, and the promotion of CSR best
practices through voluntary guidelines and certification systems.
Economists and policy analysts have
typically been cautious about mandating companies to allocate resources to CSR
activities. Economic efficiency suggests that CSR should remain voluntary, with
companies engaging in it when the perceived benefits outweigh the opportunity
costs
Mandatory CSR: Prospects and
Challenges
The empirical analysis in the
previous section demonstrates that even prior to the enactment of mandatory CSR
under Section 135 of the Companies Act 2013, Indian corporations had
progressively embraced the notion of social responsibility. This is evident
through the substantial increase in the proportion of companies reporting their
CSR activities over the years. Importantly, this upward trajectory occurred in
a regime where both CSR spending and reporting were voluntary. It signifies a
compelling business case for companies to engage in social responsibility. This
is further corroborated by preliminary evidence suggesting a positive
relationship between CSR and firm performance, as gauged by Return on Assets
(ROA) and market value. Much like the overwhelming body of evidence from
developed countries, the analysis of India’s top 500 companies suggests that
the market values a firm’s social engagement positively. Given these findings,
it is crucial to assess the prospects and challenges associated with Section
135 in the foreseeable future.
The Prospects
Mandated CSR garners both support and
opposition. Proponents argue that a corporation’s objectives should extend
beyond mere profits and shareholders, encompassing social welfare and all
stakeholders. Opponents, on the other hand, contend that corporations have a
well-defined role of maximizing shareholder value and, therefore, CSR should be
market-driven and left to their discretion. This debate revolves around
normative issues that are challenging to resolve. Any economic policy typically
results in winners and losers, and a “good” policy strives to balance gains
against losses.
While the new provisions outlined in
Section 135 are expected to significantly boost CSR spending by Indian
companies compared to their previous levels, it is essential to recognize that
mandated CSR might impose certain economic costs on these companies and their
shareholders. Consequently, Section 135 incorporates various flexibilities to
mitigate these costs, ensuring that CSR spending does not disproportionately
harm companies and their shareholders while substantially enhancing net social
welfare.
A comprehensive assessment of the
arguments for and against mandated CSR suggests that the new CSR regulations
introduced under Section 135 are conceptually robust and well-structured.
Firstly, under the current rules, CSR expenditure is derived from profits,
which circumvents the challenge of managing multiple objectives inherent in
stakeholder theory. Companies still maintain shareholder value maximization as
a primary objective, with the option to allocate two percent of their profits
toward CSR activities post hoc. Therefore, these CSR stipulations do not
distort economic objectives, as is often the case with stakeholder
optimization.
Secondly, the requirement of two
percent of Profit After Tax (PAT) does not impose a significant demand on
corporate resources. For instance, considering the median PAT and turnover of
the top 500 companies (Table 1), the 2 percent rule would necessitate a modest
CSR spending of Rs. 4.65 crore relative to a turnover of Rs. 9687 crore. Even
when extended to all listed companies under the CSR rule, a company with median
PAT would only need to allocate Rs. 55 lakh annually as of 2012 (Table 7).
These figures cast doubt on the likelihood of CSR spending leading to a
substantial loss of competitive advantage, whether domestically or
internationally. In fact, if there is a business case for CSR, supported by
empirical evidence, international companies may be engaging in CSR to gain,
rather than lose, competitive advantages.
Thirdly, the CSR regulations follow a
“comply or explain” approach rather than a strict “comply or else” approach,
allowing companies to assess the opportunity cost of CSR. Smaller companies,
falling below specified thresholds, are exempt from CSR, recognizing their
potentially high opportunity cost of internal capital. Furthermore, companies
that deem the 2 percent CSR spending not in their best interest may spend less
or provide an acceptable explanation to the regulator. This approach, as
articulated by the Ministry, emphasizes disclosure of CSR activities in the
public domain, creating social expectations and, consequently, generating more
CSR spending compared to voluntary spending with mandated reporting.
Fourthly, companies lacking expertise
or core competency in CSR-related projects may appoint reputable trusts or
donate the specified amount to the Prime Minister’s Relief Fund. It is
noteworthy that many companies had voluntarily undertaken CSR, some exceeding 6
percent of their PAT, even before the regulations were enforced. These
companies likely assessed that the benefits of CSR outweighed the costs,
indicating that CSR aligned with their core competencies.
Lastly, concerns that mandated CSR
might reduce spending by companies voluntarily exceeding the two percent
threshold can be addressed. While there is merit in this argument, it is
equally plausible that CSR spending by these firms could increase to maintain
the signaling value of CSR. The ultimate impact becomes an empirical question.
Moreover, incumbent firms can enhance the signaling value of CSR through better
project selection and more efficient delivery compared to newcomers.
Despite these arguments, economists
may still view mandated CSR provisions under Section 135 as an implicit
corporate tax. However, a key distinction is that the current CSR provisions
function as a centralized tax with decentralized utilization through project
implementation by private parties. Explicit taxation lacks the assurance that
funds collected by the government will be allocated to CSR; the implicit tax, in
contrast, grants companies control over the targeted disbursement of their
funds, offering stronger incentives for informed choices.
Challenges Arising from Mandated CSR
Implementation
While recognizing the potential
benefits of Section 135 in strengthening the relationship between businesses
and society in India, several challenges and issues are likely to emerge during
the implementation of the new CSR rules. Addressing these challenges requires
the establishment of appropriate mechanisms.
1. Resource Allocation: One concern is
the potential generation of excessive funds under the new CSR Rules, posing
challenges for companies in identifying and sustaining suitable projects.
Companies are required to allocate 2 percent of their net profits annually,
creating management challenges in searching for, selecting, and implementing
projects, as well as monitoring ongoing CSR activities. These challenges could
accumulate in terms of scale and scope over time. An analysis of BSE listed
companies suggests that applying the present CSR criteria to these companies in
2012 would have resulted in an estimated CSR spending of Rs. 8343.9 crore based
on their net profit figures for that year. Extrapolating to FY 2015, including
unlisted companies, this amount could exceed Rs. 10,000 crore annually. While
these figures may seem relatively small in comparison to government spending on
social programs, they are substantial at the company level. For instance, the
median firm with a turnover of Rs. 33 crore would have to identify and manage
CSR projects worth Rs. 55 lakhs annually. Larger companies like Reliance and
ONGC would need to spend over Rs. 400 crore each year. Companies may require
dedicated centers for identifying, implementing, and monitoring projects or handling
numerous smaller projects, incurring additional costs. The government must be
vigilant to prevent promoters from channeling funds through CSR into
organizations they have an interest in. Effective monitoring and legislative
provisions are essential.
2. Reclassification of Expenditure :
Another issue pertains to the treatment of expenditures that companies may
already be incurring. Can expenses for educational institutions or hospitals
beyond legal requirements be classified as CSR under Section 135? Will this be
permitted if such facilities are accessible to non-employees as well? Questions
have arisen about whether certain types of expenditure qualify as CSR expenses.
In response, the Ministry of Corporate Affairs issued a circular specifying
that CSR activities must relate to Schedule VII of the Act and be interpreted
liberally. The circular lists specific expenditures that count as CSR and those
that do not. Further explanations and clarifications may be necessary.
3. Coordination of CSR Projects: Coordinating
CSR projects across companies in the same region to avoid duplication and
overinvestment in similar projects is a challenge. The Rules recommend that
companies prioritize local areas for CSR spending. An analysis of CSR
activities by large listed companies in 2011 indicates that companies typically
engage in a limited number of activities, such as education, health,
sanitation, women empowerment, and material and financial aid. Pooling
resources for large-scale projects like hospitals and schools may be more
efficient for smaller companies. Formal partnerships or consortiums can enhance
coordination among companies in a particular region.
4. Geographical Imbalance: Mandated
annual CSR expenditure could unintentionally lead to the concentration of
social welfare programs in regions with larger and better-performing
corporations. High CSR spending by such companies might disproportionately
benefit certain regions or states while leaving others with limited corporate
sector activity lagging behind. To prevent such unintended consequences at the
macro level, a coordinating agency at the central or state level could
harmonize CSR spending to ensure equitable development.
Conclusion
In conclusion, India’s new CSR
provisions should not be viewed as the government shifting its responsibility
to the private sector. The estimated annual CSR spending by corporates, in the
context of total government social sector spending, amounts to just around two
percent of what listed companies would have spent under Section 135. These
provisions should be seen as an effort by the government to engage the
corporate sector in complementing broader societal development goals. The
flexibility provided to companies in choosing and monitoring projects is likely
to promote efficiency and effectiveness in project implementation without
conflicting significantly with the primary objective of shareholder value
maximization. These rules strike a balance between social and economic
incentives, and it is hoped that the corporate sector will willingly contribute
to the nation’s inclusive growth under these provisions.[i]
Reinhardt et al.
(2008) observe that given a “bewildering” array of CSR definitions and
conceptualizations in the Literature, the challenge is to identify a
“consistent and sensible definition
Amaeshi, K.
M., B.C. Adi, C. Ogbechie and O. Olufemi, 2006. “Corporate Social
Responsibility
In Nigeria:
Western Mimicry or Indigenous Influences?” Journal of Corporate Citizenship, 24
Winter, pp.
83-99.
Basu, K. And
G. Palazzo, 2008. “Corporate Social Responsibility: A Process Model of
Sensemaking,”
Academy of Management Review 33(1), pp. 122-136.
Besley,
Timothy and Maitresh Ghatak, 2007. “Retailing Public Goods: The Economics of
Corporate
Social Responsibility,” Journal of Public Economics, Vol. 91, No. 9, p.
1645–1663.
Blowfield,
Michael, and Jedrzej George Frynas: 2005. ‘Editorial: Setting New Agendas –
Critical
Perspectives on Corporate Social Responsibility in the Developing World,”
International
Affairs 81(3), 499-513.
Bowen, HR
1953, Social Responsibilities of the Businessman, New York: Harper & Row.
Carroll, AB
1979. “A three-dimensional conceptual model of corporate social performance,
Academy of
Management Review, vol. 4, pp. 497-505.
Connelly, J.
T and P. Limpaphayom, 2004. “Environmental Reporting and Firm Performance:
Evidence from
Thailand,” Journal of Corporate Citizenship, 13, Spring: 137-49.
Davies, R.,
2002. “Corporate Citizenship and Socially Responsible Investment in Asia,”
Unpublished
paper delivered at the Conference of the Association for Sustainable and
Responsible
Investment in Asia, Hong King, 10 June 2002.
Elhauge,
Einer, 2005. “Sacrificing Corporate Profits in the Public Interest,” New York
University
Law Review, Volume 80, Number 3, June, pp. 735-868.
Friedman,
Milton (1970), “The Social Responsibility of Business is to Increase its
Profits,” The
New York
Times Magazine, September 13, The New York Times Company.
Frynas, J.
G., 2005. “The false developmental promise of Corporate Social Responsibility:
Evidence from
multinational oil companies,” International Affairs, Volume 81, Issue 3, , May,
Pages
581–598.
Gangopadhyay,
Shubhashis, 2012, Profiting from CSR: Mandatory spending on corporate social
Responsibility
does not fit in a market-driven society, Business Standard, January 28.
Article Information
CORPORATE SOCIAL RESPONSIBILITY IN INDIA A CONTRAST AND DEVELOPMENT
Authors: NABIL RAZA
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/09/05
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.
Disclaimer: The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of International Journal for Legal Research and Analysis.