1. THE SPECTER OF MANDATORY CORPORATE SOCIAL RESPONSIBILITY
Since no business exists in vacuum, so it becomes the responsibility of every business to engage
in social and Corporate Social Responsibility (CSR) is a good enabling tool for the corporate
houses to contribute towards the social good. In essence, CSR is concerned with treating the
stakeholders of a company or institution ethically or in a responsible manner. Where ‘ethically
or responsible' means treating key stakeholders in a manner deemed acceptable by the society.
The Act of giving charity, or as called “CSR” in corporate lingo, has since time immemorial been
seen as act of benevolence or charity done voluntarily or out of one’s free will.
Corporate Social Responsibility: Implications of New Companies Bill
The New Companies Bill makes it mandatory for companies to earmark at least 2 percent of
their average net profits for the preceding three financial years, for implementing a corporate
social responsibility (CSR) strategy.
The bill is applicable to companies with a net worth of Rs. 500 crore or more, a turnover of Rs
1,000 crore or more and a net profit of Rs 5 crore or more during any financial year.
Thus the bill makes it compulsory to not just earmark the funds but also form a CSR committee
(of board members consisting 3 or more directors out of which at least one is an independent
director), formulate a CSR policy, allocate the amount to different activities and monitor the
implementation from time to time. Further, the CSR policy is to be disclosed on the company
website.
With regard to implementation, only project based investments, and not mere donations, will
be accepted as CSR which involve innovative social inventions/initiatives that factor in hazards,
risks and vulnerabilities. Baselines surveys, social impact assessment and meticulous evaluation
including documentation are mandatory along with training and re orientation of the staff.
The CSR amount unused/unlapsed in a particular year will be carried forward to the following
year. CSR budget itself hence is non lapsable.
With regard to failure to spend the requisite amount, the bill states that the company shall
have to provide sufficient reasons for not spending the allocated CSR budget. While no specific
penalties are contemplated in the Bill with respect to CSR, sections 450 and 451, provide for
general penalties for flouting the rules and repeat offences. An estimated 2,500 companies fall
into this “mandatory” CSR-reporting category.
CSR activities in the first year would be between Rs. 9,000 crore and Rs. 10,000 crore spent in
social welfare.
Implications for the Indian Companies
The new bill has two important provisions with regard to CSR. The first is that the board is
mandated to ensure that the company will spend on the CSR. Second being that they have to
give an explanation regarding the spending. So, effectively although there is no mandatory
obligation on the company, but a responsibility is cast upon the board members. An
explanation that is unsatisfactory can empower the regulator to question the roles and duties
of the directors making it not just a provision on paper but an obligation on the board, which
they may not be able to get away from easily.

2. The idea has also been to make the spending transparent and more than just ad hoc
philanthropy. By mandating a CSR team, with 3 directors including one Independent Director, a
CSR strategy, ensuring implementation and monitoring of results are all in the direction of
pushing companies to develop a management level approach by targeting operational risk
mitigation through CSR, as an effective tool. They may be further propelled to understand
ground realities, leading to an amalgamation of stakeholder interests with the company’s long
term goals. This will be an optimal concept, enhancing welfare of all the concerned entities.
Challenges Ahead
The first and most important challenge is that of political pressure by local politicians especially
for PSU’s to spend in their constituencies. The mandatory spending and the essential baseline
suveys along with social impact assessment will lose its meaning if the initiatives can’t be
directed in areas which need them the most with regard to mitigation of operating risks.
Another concern is that a mandatory spending is nothing but tax. Hence, mandatory CSR
increases the country’s already high corporate tax, implicitly. It stands at 32.5% which itself is
higher than the global average of 24.09 %. The figure for other countries, China, Vietnam and
Indonasia stand at 25%. Thailand and Turkey are at 20%, South Africa 28% and Nigeria at 30%.
Increase in the corporate tax may hamper the country’s ranking as an investment destination,
leaving India at a competitive disadvantage in the global marketplace.
An added issue is the monetization of the Returns on Investment (ROI) for the company’s
initiatives. This is because CSR based initiatives may have a huge gestation period and so
calculating returns on investments like scholarships for deprived sections or benefit to the
environment by adoption of cleaner fuels etc. may be lengthy propositions.
Companies may be forced to do some reshuffling within the organization which could lead to
diversion of its manpower away from the core activities. Because of lack of expertise, this will
further pave way for CSR consulting in huge proportions. Hence, the process of empanelment
of expert agencies into the CSR framework of an organization, must be eased.
Finally, though the Companies bill is a great step forward, efforts must be made to clear the
haze around the kind of activities that may be taken up by companies under CSR to prevent the
initiative from getting mired by emergence of corruption with companies trying to ‘greenwash’
their profitable activities under the garb of CSR.
Million Dollar Question: Will the compulsion really work?
While the intent of the government is appreciable however its legislation, as prescribed in the
clause, is totally flawed and could have been better worded to achieve the intended
consequence.
It would have been beneficial had a moratorium period been given of, say, 2 to 3 years for
testing the waters before giving finality to the amount or percent of spend to be linked to
turnover or profits.
Companies in red not having profits but still required to spend, the question in such a scenario
will linger be – “Will they do the same when the very ultimate idea of business is to make a
profit.” Also, at the time of loss, it would become difficult to shell out the mandated amount
although the net worth of the company taking into account the average of 3 years of profits
would be high. This could lead to a potential situation of window shopping or window dressing
the books?

3. Also, the shareholders are the real owners of the company, diversion of their profits may not be
appreciated by all of them. They should be given the discretion to use their own funds.
There should also be a provision of incentivisation for companies who comply with the law
relating to CSR. Also, the specialisation of the company in its area should be the logical area for
it to concentrate on CSR to maximise the gains.
This will also encourage competition and innovation. The products of life skill activities of CSR
can be used as a source of income generation and will encourage innovation in means of
production and outputs.
Lastly, one cannot rule out completely the threat of manipulation by the people in power of
diverting the funds to further their own political agenda by introducing various schemes under
state/central sectoral programs. This would in turn unnecessarily lead to a situation whereby
companies would be forced to park some percentage out of the 2 percent profits in these
schemes out of political compulsions.
Conclusion
Companies and their promoters, who are real philanthropists, will continue with their
charitable work without any compulsion. Notable examples in this regard include N.R.
Narayana Murthy, Azim Premji, Ratan Tata, to name a few from the Indian corporate sector.
Notable names from West include Bill Gates, Warren Buffet to name a few, who had CSR
ingrained in their DNAs and worked for social good without any legal obligation thrust upon
them. The act of compelling voluntariness by the govt. is akin to mere shifting of its burden of
providing of public goods on to the corporates. This may not work because those who are
committed to ‘giving’ will continue with their socially responsible activity– these are in the
‘ethos’ of an organisation and persons behind it and would not be much affected by the
introduction of this mandatory clause. It should not give rise to an unsavory situation where
the money is the ‘only’ being manipulated in the books of accounts of the companies, instead
of actually being used for the purpose of CSR.