A flaw in the CSR design

Tulsi Jayakumar

Corporates can undertake social spending only where they are invested. The benefits go to already industrialised regions

Section 135 of the Companies Act 2013 and the resultant Corporate Social Responsibility (CSR) rules 2014, issued by the ministry of corporate affairs came into effect in April 2014. The activities listed which may be included by companies in their CSR policies appear ‘confusing’.

They include eradicating hunger and poverty, promoting education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, and combating HIV virus, AIDS, malaria and other diseases.

For one, these activities are traditionally supposed to be undertaken by a welfare state. Is this then an admission of the Government’s abrogation of responsibility?

It has been argued by some economists that such CSR spends are a drop in the ocean of overall government spending on the social sector. The question is: Can this make a difference to the provision of essentially public goods that the Government has so far not delivered?

A more disturbing aspect of Section 135 relates to the linking of a company’s profit-making with the development of local areas.

Companies are required to spend 2 per cent of their average net profits in the preceding three years and focus on local areas, around which they operate. This is an absurd proposition.

Local development 
This would increase inter-state disparities in social indicators. For instance, states like Gujarat, Maharashtra and Andhra Pradesh (as also Odisha in 2013), with their large number of industrial proposals, are likely to see greater social development on account of higher CSR spend by the private sector.

Odisha was the most attractive state for investment in 2013. It accounted for over one-fifth of project proposals in the first 10 months, valued cumulatively at ₹4.7 lakh crore, according to data from the department of industrial policy and promotion (DIPP).

Of the 30 districts in Odisha, the three relatively more developed districts of Ganjam, Jajpur and Jagatsinghpur, which attracted the largest investors, already have an industrial presence. With literacy rates of 81, 80 and 87 per cent respectively, their development indicators were better.

On the other hand, a ministry of home affairs (MHA) report identifies six districts as Naxal-affected. The most backward — Malkangiri — with a literacy rate of 49 per cent and almost 80 per cent of the population belonging to the SC/ST communities, is not likely to attract investments. What hope is there for communities in such districts?

Dealing with losses
What happens to development projects when companies make losses? According to an estimate, of the 5,138 firms listed on the BSE, the total number of companies qualifying under Section 135 has come down from 1,500 in FY2010 to 1,372 in FY2012. So has the number of total qualifying companies with Profit After Tax greater than zero — from 1,457 to 1,265.

While the total estimated CSR spend of such companies increased over the period (from ₹7,609 crore to ₹8,343 crore), such figures may be misleading. This macro-picture masks the reduced CSR spending on account of the companies concerned running losses.

Also, it is during recessionary times, when the need for such expenditure may be highest among vulnerable groups, that CSR spend may actually be unavailable.

Presently, most companies spend on projects relating to education, health and livelihood. These areas have synergies with business interests and sustainability. The rules in the Companies Act 2013 would make it difficult for companies to pursue strategic CSR — aligned to business strategy — since any expense which can be traced back to financial profits may have to be set aside for CSR as indicated by the law.

We may then see companies preferring to spend on activities specified in the Act which, however, may have a lower long-run social impact --- such as protection of national art, heritage and culture, promotion of sports, and contributing to the Prime Minister’s National Relief Fund. But what about addressing the problems of inter-regional inequality?

(The writer is a professor of economics at the SP Jain Institute of Management and Research, Mumbai.)