India: An Argument Against Legal Sartorial To CSR: Where Are We?

Last Updated: 21 July 2017
Article by Rajesh Begur and Priyesh Sharma

Our souls still tremor with the horrors of disaster which took place in 1984, commonly remembered as the infamous 'Bhopal Gas Leakage Disaster', however the more shocking side is the behavior of Corporation towards this which always sought to underplay the health and environmental effects of its activities and continuously refused to release its research or take any responsibility of the incident. With the passage of time, advent of "Privatization" & "Globalization", and the legal backing accorded by the Companies Act, 2013- CSR has emerged as a significant theme in the Indian business community and has gradually became a mainstream activity. However, the questions on the effectiveness of this machinery, though least discussed, are as old as the notion of CSR itself. Without undermining or disputing its significance for the society, this Article is an attempt to bring out a negative facet of this picturesque concept and analyzing the efficacy of CSR under the legal clothing of corporate governance structure.

In recent years the concept of CSR has gained prominence in the corporate and legal fraternity. CSR is often seen as a facet of Corporate Governance, collectively shaping the identity of organizations and are thus increasingly integrated into the business stratagem of successful corporations. By concept it crystallizes the framework whereby corporations integrate social & environmental concerns in their business operation and in their interaction with their stakeholders on a "voluntary basis". CSR mandates that the corporation has not only economic and legal obligations, but also certain responsibilities to society that extend beyond these obligations. It's a general perception accepted by most of the academicians that not only these corporations are in a better position to deliver such extended social responsibilities, but to some extent they need to be themselves responsible for their fallouts and mishaps. CSR was supposed to be a "win-win" belief with the pressing idea that the corporations make profits and society benefits.

With the advent of Companies Act, 20131, going by the precedents set out by countries like Mauritius and Germany, India also made the CSR in to a mandatory obligation whereby a corporate which satisfy certain threshold is required to mandatorily use a part (at least 2% of its average net profit for the immediately preceding 3 financial years) of their revenue for the CSR activities. Additionally, there are compliances in relation to constitution of CSR committees Further, the provisions of CSR are not only applicable to Indian companies, but also applicable to branch and project offices of a foreign company in India. The scope of CSR activities has also been specifically notified under the said Act, however the same is vast enough to essentially meet the concept of CSR as mentioned hereinabove.

PRIMA FACIE, the motive and vision behind Section1 135 and rules thereunder certainly can't be questioned and are undisputedly considered as a welcome move by the corporate and legal fraternity. HOWEVER, these extended responsibilities have now been extended to a considerable wider sphere of corporations irrespective of the nature of activities carried out by them and in no manner, justify the underlying notion of "taking responsibilities of its own fallouts and mishaps". Also, with the clothing of legal provisions, the essence of "voluntary" act has gone somewhere in to vain and the "additional obligations" have now been changed in to "mandatory" requirements- mandatory requirement to utilize the stakeholders' resources in a manner not been essentially warranted by the underlying objectives of the business. Essentially, it invents a rebuttable argument of social obligation versus business objective. The provisions of the Companies Act, 2013 mandating CSR were some of the most celebrated changes in India's overhaul of its corporate code. However policy makers and analysts must confront the shortcomings of the concept of CSR itself as well as the problematic manner in which it is being implemented. 

In the words of Noble prize winning economist Milton Freidman, "CSR is in contradiction with the basic principles of corporate existence: a company's primary duty is to maximize shareholder return and devoting funds and efforts towards alternative objectives would inevitable conflict with this primary goal". The foremost objective of any corporate activity is to maximize its profit. On the other hand CSR emphasizes on the use of business funds in non business activities, thereby restricting the free market goal of profit maximization and is therefore fundamentally incongruent with the objective of profit maximization. Social concerns beyond the parameters of the market are best left to regulatory agencies or non-profit organizations driven by specific goals and expectations, corporations, in majority of the cases, are not well equipped to handle social issues.

Interestingly there is another angle to the above-mentioned argument too, the way CSR has been regulated under the Companies Act, 2013 would restrict a lot of corporations, including those which were previously prominently undertaking CSR activities on voluntary basis, from continuing with such obligations or limit the same to the minimum stipulation of 2%. Firstly, the threshold criteria for the corporations to be regulated by Section 135 of the Companies Act is quite high and a huge chunk of players have been kept outside of the same thereby creating two separate class of corporations- one, which are mandatorily required to carry out CSR and the other, which can do the same on voluntary basis. Going by the trend and experience with similar regulatory framework in other disciplines, the efficacy and compliance of the same by corporations kept outside the first sphere is a moot point. Secondly, Indian companies have a rich tradition of undertaking CSR and often spent more than the prescribed 2% amount. With the advent of the new legislations corporations that earlier spent more than the required amount have now restricted their CSR activities to the minimum amount! Lastly, while requirements are stated, there is no coercive enforcement mechanism under the Act. This means that despite the compulsory nature of the requirement the absence of specific penalties means that the law will (for good or bad!) once again remain largely voluntary.

FURTHERMORE, a robust body of academic literature provides evidence that companies often use CSR activities to draw attention away from their less socially desirable activities or derive a benefit to their reputation. CSR is often used by the corporations to cover up the negative impacts by saturating media with positive images of the company's CSR credentials and thereby "green washing the real picture". The verity that CSR is criticized as being a PR stunt is unsurprising, considering the fact that most CSR activities and strategies are routed directly through the PR officials of the corporations. These risks are especially relevant in the Indian context as the role of media and its influence of general public is unquestionable. There have been reports in the past wherein corporations were seen to use CSR activities to influence local elections!

LASTLY, making CSR mandatory often increases the pitfalls of this already fraught concept. Mandatory CSR interferes with people's personal preferences, distorts natural allocation of resources and increases the likelihood of irresponsible decisions making. It is often argued that setting minimum standards and attaching minimum monetary requirements to the CSR actions might stop innovation and restrict the "social" factor in the "corporate social responsibility". The debate of "ethics" versus "law" is time immemorial and with CSR it would not be wrong to say that the "law" has been imposed on the "ethics" and the possibility of corporations evading the same like taxes, instead of otherwise undertaking it as a voluntary act cannot be overruled. It could possibly be argued that compulsory CSR is a form of tax and given that India's corporate tax rate is already amongst the highest in the world, this would certainly have an adverse effect on the foreign investments in the economy.

Concluding marks..

The social motive behind CSR is undoubted but the pitfalls in the concept and manner of implementation cannot be ignored too. To summarize in a sentence "the term CSR is in vogue at the moment but as a concept it is vague and if not implemented carefully would reduce to another form of indirect and corporate taxation only".

One manner of maintaining the sanctity of CSR is to restrict the obligations to cover up the negative impacts and mishaps occurring due to such corporations only and not to make it another form of mandatory deduction from the corporate pockets. Alternatively, the "voluntary" structure adopted by countries like Denmark or United States which does not have mandatory legal compulsion, but if a company has no policy on this it must state its positioning on CSR in financial reports, should be by far a fair position on this. Interestingly, as a matter of fact the compliance ratio in United States is higher than Mauritius (which has compulsory CSR rules)! 

Footnote

1. Please refer to Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April 2014.

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