Too many regulations are ruining CSR
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The Companies Act, 2013, introduced a well-intentioned section requiring companies to spend on corporate social responsibility (CSR) initiatives. The section is applicable to large companies measured by net worth, turnover, or profits. We argue that while the intent was to keep the provision principle-based and flexible, the leakage between intent of the law, its drafting, its delegated interpretation, and its final execution by the company on the ground gives rise to concerns that it does not realize what it set out to accomplish.
Clearly, the object of introducing the section was to promote corporate philanthropy to ensure that growth remains inclusive. With increasing divergence between the richest and the poorest, the political need for companies to address public welfare is evident and admirable.
The simplicity of a principle-based approach is clear in the Act itself, which requires 2% of profits to be spent based on a policy set out by the CSR committee of the boards of large companies. Any spending below the minimum needs to be explained in the annual directors’ report in a “comply or explain” regime.
This seems to suggest that a company, through its CSR committee, is free to decide what is appropriate by way of the amount to be spent and how and where to spend.
In the event the amount is below the required threshold, the directors need to explain why.
For the “where to spend” question, the view of the committee is final and no one can question the discretion of the board or the committee.
Though the statutory provision appears simple, flexible and left to the judgement of the corporate board, it’s not.
Indeed, the way the ministry of corporate affairs has injected complexity and second-guessing contradicts the very foundation of what the section sought to achieve. A schedule, a notification, a circular, two general circulars and frequently asked questions (FAQs) distort the simple flexibility of the section. These notifications and circulars are exceedingly prescriptive in places. Here are a few examples.
One-off events like marathons, awards or charitable contributions are not considered CSR-compliant.
An average marathon generates over a million kilometres of health-inducing running just on marathon day and probably tens of millions of kilometres in the previous few days of training, contributing significantly to preventive health. But this is not CSR.
A compliance award function may introduce significantly higher levels of compliance with the law across not just the awardees but across thousands of listed companies that seek such awards in the future. But it is not certified CSR.
There is more. Charitable contributions for helping the disabled will change the lives of millions of affected people, but are not considered CSR-compliant.
Many large companies have substantially contributed to training law enforcement agents, for example in cyber security, where the public sector’s knowledge is limited. That is not CSR either, even though it significantly enhances the financial and economic security of the country.
Neither is any form of capacity building in government, which is inexplicable in a country hobbled by lack of state capacity.
India is urbanizing fast, and will witness the largest migration worldwide into urban centres over the next 20-30 years, an eventuality it is not fully prepared for. Yet “sustainable urban development” and contributions to enhance urban public transport systems are not CSR-compliant, even though our chaotic and polluted cities could use all the help they can get. The specific inclusion of “sustainable” urbanization begs the question whether “unsustainable” urban development is somehow compliant?
In spite of the exhortation to interpret the laws liberally, the fact is it’s hard for a compliance department to certify such a liberal interpretation, especially if it’s at odds with Schedule VII.
It’s also worth noting that interventions that are likely to have the greatest positive externalities (state capacity, urban development, etc.) are specifically prevented.
The overly prescriptive set of what is and what is not CSR is grounded in mistrust (based on a variety of delegated explanatory circulars) rather than in trust (as prescribed in the section). This mistrust is best seen in the non-inclusion of research, perhaps because of a fear that commercial research and development activities will be passed off under CSR.
However, this puts the world of ideas, fundamental research, design, training, etc., which will likely provide the greatest bang per rupee spent, out of reach of the world of CSR.
The best way forward is to delete all circulars, general circulars, notifications, FAQs and truncate the schedule to two or three principles. The rest should be left to corporate disclosures, which can be more detailed, as to where the company has chosen to utilize its money and let the company deserve the public accolades or shame based on its choices.
A US supreme court justice, Louis Brandeis, said appropriately, that sunlight is the best disinfectant and a lamp-post the best policeman. It’s time to trust the firms and even more importantly the people who will judge those firms.
Reuben Abraham and Sandeep Parekh are, respectively, the CEO of IDFC Institute and managing partner of Finsec Law Advisors.