By Ayush Dwivedi
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 entire concept of CSR is controversial and experts do not know how to define it, but all of them agree with the fact that it is voluntary by nature and if made mandatory it will give an impression that companies work in-voluntarily. This Bill if made law will change the definition of the companies itself, shifting its objective from profit making to social, ethical and environmental responsibility. If CSR committees become too bounded to philanthropy it will limit Indian CSR to writing cheques for good causes with little effect on core business performance.
Schedule VII to the Bill tabulates 10 activities that would constitute CSR. These include the well-known ones such as eradication of hunger and poverty, promotion of education, promoting gender equality, mother/child healthcare and contribution to Prime Ministers Relief Fund (3). Contrary to the actual role of CSR that is, to conduct all aspects of business operations responsibly by upholding core human rights and labour standard and giving due regard to stakeholders’ interest including shareholders, workers, consumers, communities and the environment (1). It is important for the government to realise that the companies are not NGOs. It seems as if the government is trying to engage the corporate sector in funding its social projects and it is evident from the activities like contributing to Prime Ministers relief fund.
Sir Milton Friedman in his New York Times piece once wrote, “The Social Responsibility of Business is to Increase Its Profits”. According to this view CSR is bad for the economy as it increases inefficiency and the maximization of profits, in fact, provides the biggest gains for the society. This school holds that CSR will actually take money out of the economy which will be inefficiently used in social programs, and divesting the economy’s growth and multiplication of that CSR used amount of money, which is actually true. In fact, by loosing growth the overall social development of a nation is adversely affected. In other words, Rs.1 spent on CSR will deprive Rs.1 from efficient profit making investment (which is argued to have trickledown or ripple effect). The 2% CSR policy is an example of government mandated intervention which will lead to wastage in the economy. In real sense, it will not have any social benefits. Moreover, the 2% CSR policy creates reluctance within the business community to invest in India.
It won’t be incorrect if we say that mandatory CSR is a tax in disguise. Corporate which are already subjected to 32.45% of corporate tax (global average being 24.9%) will get discouraged if made to pay additional 2%; this will create pessimistic view about the economy in the world. Thus India’s all time low current account deficit that is 4.8%, will further plunge due to fall in the foreign investment and further aggravate the rupee depreciation problem. CSR will be accounted as “taxing” which deprives the investors of mobilizing the economy. Increasing the tax rate will certainly not lead to making India a more “attractive investment destination” and leaving it behind the other favourable investment destinations like Indonesia and China.
Due to the provision of setting up a separate department for CSR, 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. 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.
Most of the firms have realised the fact that they won’t be able to succeed if they don’t function in ethically and socially responsible manner, then why is there a need for making it mandatory! Moreover many conglomerates like TATA, RELIANCE spend more than 2% in CSR. Hence firms will have to follow it for goodwill even if it remains voluntary. Thus, creating tangential corporate enclaves of CSR activities will mislead the companies from its fundamental objective of “profit making”.
References
1. Ordering Corporate Responsibility -A Misplaced Faith? By Rashmi Venkateshan
2. KPMG Report on Corporate Tax
3. The Hindu, Companies Bill 2013
