Compelling Voluntariness: Analysing Pitfalls of Mandatory Provision of CSR in Companies Bill

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Compelling Voluntariness: Analysing Pitfalls of Mandatory Provision of CSR in Companies Bill

S. Ramaswamy | May 2013

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.

This Act of charity being based entirely on voluntariness is now being turned upside down by the pending Companies Bill through a proposed clause in the Companies Bill, which has the trappings of making it mandatory for a certain class of companies to compulsorily spend under CSR; thus the voluntary Act of charity is sought to be replaced with “compulsory spending” under the guise of CSR once the Companies Bill comes into force after its due passage from the Rajya Sabha, receipt of the Presidential assent and publication in the official gazette.

THE PROBLEM WITH CLAUSE 135

A plain reading of the Clause 135 in the Companies Bill, as it exists, has following chinks in its structure and conception:

It seeks to make an essentially voluntary act compulsory.
It quantifies the percentage of at least 2 percent of the average net profits of the previous 3 years of a company instead of leaving the discretion to the companies on the spend .
Introduction of independent director on committee which may be strongly resisted in promoter driven companies, especially if the Independent director is desirous of running the CSR professionally as opposed to the views of the promoters.
No moratorium period suggested for evaluating whether the concept, as prescribed in the clause, is capable of achieving its intended object.
Why not provide for this important activity to be entirely independent by having all directors independent including some or majority of them with relevant expertise in CSR.
No agency or institution or method available or prescribed to verify the quantum of spend and assess and track its impact.

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?
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. What worries me is that 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.

About Author

S. Ramaswamy

S. Ramaswamy is Vice President, General Counsel & Company Secretary for JCB India Ltd. Views are personal and do not intend to reflect any political bias.