Corporate Social Responsibility: Choice or Coercion

[By Anchal Bhatheja and Chaaru Gupta]

Anchal is a student at the National Law School of India University, Bangalore and Chaaru is a student at the National Law University Jodhpur.

Section 135 of the Companies Act 2013 (the “Act”) in India provides for mandatory Corporate Social Responsibility (CSR) by corporations. Prior to 31.07.2019, the provision required corporations to merely ‘comply or explain’, that is, if a company did not spend the earmarked CSR expenditure, it had to disclose the reasons in its board report. However, the 2019 Amendment to the Act turned Section 135 into a ‘comply or suffer’ provision. It went a step ahead and provided for a fine, ranging from 5,000 to 25 lakh or imprisonment for 3 years or both. The provisions pertaining to imprisonment had to be removed due to the backlash from companies. Nevertheless, mandatory CSR continues to remain intact.

Interestingly, on 22nd March 2021, the Union Minister of State for Finance and Corporate Affairs in India, while responding during the question hour in the Lok Sabha, said that the policies of the central government were not being implemented using the (CSR) funds that come from the companies.. Article 12 of the Constitution of India provides that governance is the State’s responsibility which makes the validity of the question doubtful. In this article the authors aim to discuss the viability of making CSR mandatory in the Indian context, from the perspective of promoting innovation and growth of businesses as well as social justice.

There are overwhelming rationales, rooted in law and economics, to shift from CSR to other ideas namely Corporate legal Responsibility (1), Corporate Social Incentives (2), Individual Social Responsibility (3), and Governmental Social Responsibility (4). This is because the burden of social justice cannot be put on the corporates and should be on the government. And if at all it is to be done by a non-governmental entity, it should be individuals who undertake it voluntarily and not out of compulsion.

  1. CLR- Corporate Legal Responsibility

Milton Friedman argues that the only social responsibility of corporates is to maximize their profits while playing by the rules of the game. They should be made to comply with regulatory laws like the Environmental Protection Act, 1986, The Air (Prevention and Control of Pollution) Act, 1981, Tax laws, etc. while carrying out their businesses, rather than having to mandatorily comply with CSR requirements.

Presently, the law is reflective of a paradox. For instance, on one hand, India loses10.3 Billion Dollars or 75,000 Crore Rupees due to tax evasion by corporates on an annual basis. On the other hand, the CSR regulations mandate these corporates to contribute towards Prime Minister’s Relief Fund, Rural Development Projects, skill development projects, and other such government initiatives under Schedule VII of the Act.

The paradox in the data suggests the State invests its limited administrative resources in making the businesses run legally before it makes them run ethically. Furthermore, better legal enforcement will lead to more voluntary compliance and would, consequently, increase investor confidence. This would also reduce disputes and litigation in the realm of company law, which presently puts a burden on state resources as well as hampers the growth of businesses.

  1. CSI- Corporate Social Incentive

Mandatory philanthropy is an oxymoron. Mandating donations defeats the very purpose of philanthropy or CSR. Furthermore, coercing the corporates to engage in CSR will hamper innovation and corporates will allocate funds just out of fear of penalty. This was in fact witnessed when a lot of corporates invested in the construction of the statue of the popular Indian Leader Sardar Vallabhbhai Patel, dubbed the Statue of Unity, to stay in the good books of the government.

It is better to positively incentivize corporates to take initiative on their own accord in the sector they are working, instead of coercing them to work in areas that they do not deal in. This will lead to more efficient outcomes as they would have expertise in those specific areas. Further, from a business perspective – it will also help them in improving their image and market base. For example, incentivizing a software company to build accessible software for the differently-abled is more logical and economical than forcing them to build toilets in a nearby village.

Therefore, towards this end, the state can offer benefits like preferential clearances and tax abates to the corporates that act upon corporate social incentives in charity, instead of penalizing them for not being “charitable”.

  1. ISL -Individual Social Responsibility

If CSR is not mandatory, the individual shareholders’ earnings will increase as the expenditure of the company decreases. This encourages the shareholders to engage in charity on an individual level, for a cause that aligns with their idea of social responsibility. Even if elimination of the expenditure of the company which goes into CSR investments does not lead to an increase in the income of an individual, they will be naturally more inclined to engage in charitable activities as compared to a situation where they know that their company is already investing enough of its resources in CSR and there is no need for them to engage in charity on a personal basis.

Further, the decisions regarding the areas in which a company will invest, to fulfill its CSR requirements are taken by the Board of Directors (BoD) on the recommendations of the CSR committee which comprises two directors and one independent director. However, it does not mean that the opinion of the BoD necessarily aligns with the opinion of the shareholders. If the law omits the requirement of this coerced social responsibility on the corporates, the shareholders on their personal level will be able to have a free dialogue with their ideas of what social justice means to them and will be able to decide the areas they would want to engage with as philanthropists. Thus, the resultant satisfaction of the transaction will be much higher for the individuals. In fact, EdelGive Hurun India Philanthropy List 2020 suggests that individual philanthropy has just been increasing over the past few years.

  1. GSL- Governmental Social Responsibility

It is the responsibility of the government to ensure the welfare of society. The Constitution provides for Directive Principles of State Policy (DPSPs), which are the policy guidelines that the government is ought to keep in mind while making laws. They include social justice goals like equal pay for equal work, safe working conditions, among others. However, as held in the landmark case of Minerva Mills v. Union of India, they are non-justiciable. It is ironic that DPSPs, a form of GSR are non-justiciable whereas CSR is mandatory. The corporates are responsible to their shareholders and their goal is to increase profits. In this process, their social responsibility can at most extend to generating jobs and contributing to the nation’s wealth. It cannot be extended to undertaking and funding welfare-oriented policies. Outsourcing governance to corporates, while the government runs businesses is functionally absurd and is nothing less than killing the Golden Goose.

Conclusion

As of 2021, the Indian ministry of corporate affairs has decriminalised CSR non-compliance and defaults would only attract a monetary penalty. State’s coercion on corporates, which are business vehicles meant to further the interests of the shareholders, to engage in charitable activities is a form of market bypass. Therefore, there is a need to shift from mandatory CSR to other forms of social responsibility.

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