Don't make CSR mandatory

Don't make CSR mandatory
Rajiv Kumar(The author is Secretary General of FICCI)

The issue of mandatory corporate social responsibility (CSR) has come up again, though not quite in as many words. Under this provision, firms may be required to allocate 2 per cent of their profit after tax to CSR. Ostensibly, the measure seems understandable. One may ask, how can sharing a mere 2 per cent of corporate profits for ‘good causes' be onerous or unreasonable?

There is no argument against firms having to give back to society in the form of CSR. Although personal charity and actual CSR are confused with each other, the two are certainly not substitutes.

The problem also is that if applied indiscriminately across all size and categories of firms, CSR's impact could be distortionary. By being applicable only to the organised sector, mandatory CSR would apply to about 300,000 enterprises or about 0.7 per cent of the approximately 42 million production entities, enumerated in the latest Census.

Of these, a small fraction comprises publicly listed companies, in which such a mandatory provision can be effectively monitored. This small universe includes all central and state government enterprises, large domestic private enterprises and multinationals that perhaps already implement CSR, some being socially recognised for their CSR activities.

So the mandatory provision, if and when applicable, would apply to a miniscule segment of the private sector. The question, therefore, is whether it is worth the policy attention and social dissonance that would be generated if a mandatory provision is enacted. The miniscule group of companies that will be involuntarily required to undertake mandatory CSR spend would include firms that may be catering to export markets where margins are wafer-thin. An additional impost of 2 per cent could well imply their exit.
ADDITIONAL BURDEN

It also includes start-ups or relatively small firms that are barely able to keep their head above water.

It will also apply to firms that are meeting 100 per cent of their energy requirements from captive plants at three times the unit cost of grid electricity and perhaps also having to bear the cost of infrastructure and security.

Is it fair that such a provision is applied indiscriminately across all category of firms, even in a situation when Indian companies have to bear on an average an additional burden of 15 per cent on account of infrastructure deficit and transactions costs when compared with their global competitors?

Would it not be fair to first provide a level playing field to Indian companies, before considering an imposition of an additional burden of 2 per cent by way of mandatory CSR?

Making it mandatory would also require enforcement and the creation of yet another inspectorate. This as we know has its inherent problems of rent generation and compliance evasion.

An entire class of fraudulent CSR recipients could emerge and complicate monitoring and regulation. It is better, therefore, to create a CSR culture and require firms to report it in their annual report for them to judged by their shareholders and the constituencies concerned.

Moreover, there has never been much clarity on the expenses that can be legitimately included under CSR activities. An increasing number of companies are today spending vast amounts on training their new employees, which they did not have to do in the past.

DEFINING CSR

Infosys and TCS as is well known, each train more than 30,000 new recruits every year in specially created facilities. With an average attrition rate of 20 per cent or more, such in-house training contributes better trained skills to society at no public cost.

Other companies spend significant amounts on encouraging innovation and helping young entrepreneurs during their incubation period. Others provide free or subsidised education to the children of their employees or medical facilities to families when that is not legally required. Does the deputation of staff from private enterprises to the public sector and government also constitute a form of CSR?

These are questions that need to be settled carefully before the provision is made mandatory and handed over to another set of inspectors for ensuring its implementation. If done in haste, it may well end up increasing the regulatory burden and generating a large number of disputes without yielding the desired results.

CONSULTATIVE APPROACH

It may well be more useful for the government to consult with the corporate sector on some major issues, such as promoting industrial activity in backward districts, making industrial growth more employment-intensive and expanding training.

The creation of a public-private partnership for more efficient delivery of public services in the rural sector could be another useful initiative.

This will minimise leakages and benefit a large number of poor rural households. On issues such as CSR, a consultative approach needs to be adopted, as in the past, so that a right balance is achieved.

Let us also recognise that in the present Indian conditions, the greatest social service that corporates could perhaps render is to maximise employment growth. Without our youth being productively employed and living with the self-esteem that such employment provides, all other palliatives in the form of hand-outs, public services and well-intended charity will not suffice to create a just and equitable society.

While a CSR culture must be nurtured and spread, it is equally important that Indian companies concentrate on becoming globally competitive, inherently innovative and generators of large scale employment. This to their highest social responsibility at this stage of India's development.

(The author is Secretary General of FICCI)