A seemingly philanthr-opic press release iss-ued by the Government of India’s Press Information Bureau on corporate social responsibility (CSR) exposes how the government has lost the plot.
According to the press release, the Ministry of Corporate Affairs has “agreed” that the Companies Bill, 2009 should include mandatory provisions for every company having a networth of Rs. 500 crores or more, or a turnover of Rs. 1,000 crores or more, or a net profit of Rs 5 crores or more in a year, to “ensure that every year at least 2% of its average net profits during the three immediately preceding financial years shall be spent on CSR activities as may be approved and specified by the company”.
The press release states that every such company ought to formulate a CSR policy and the directors should make disclosures of such policy and such expenditure. Companies that do not have profits would be required to give “suitable disclosure / reasons”.
In other words, government has now decided that it would force private enterprises to be charitable – clearly erroneous intervention. Being socially responsible is a matter of culture and willingness, and not a matter of legislation. It cannot be mandated, it has to come from within. Either a business organisation has it in its ethos, or it does not. So long as a business pays taxes honestly, provides employment in a fair manner, and does not subvert the system, it would be a good corporate citizen. Paying a sum of 2% of its profits cannot make it a good social citizen.
Once such artificial mistaken concepts are legislated upon, one would have to write a dozen other provisions of law to protect such legislation. In other words, the Companies Bill would have to provide a definition of what constitutes “corporate social responsi-bility” since every corporate should clearly know the ends to which its funds are to be applied to be eligible to claim compliant status.
After defining what the term is, one would have to define what would not qualify as an acceptable end-use. Every company can set up a trust with an ostensible purpose of conducting “CSR activity”. Who runs that trust, how that trust conducts itself, and what means it adopts, cannot and ought not to form part of company law. If the government indeed desires to pen even more legislation on how the recipient of CSR funds should expend the amount, it would involve creating a further superstructure of regulations – all of which would call for more expenditure on administration, which could perhaps be better expended towards real CSR.
Money finds its way to where it is desired to be directed by its owner. Regulating its flow has to therefore involve a very cautious, minimalist and sophisticated approach. Mandating by law that every company falling with the parameters ought to fund CSR activities is replete with the prospect of fraud and illegality.
Take the case of the so-called IPO scam. Issuers of securities were forced to make proportionate allotment of shares to all applicants in public offerings – a measure, which by itself, could be regarded as unwise policy. Human conduct found solutions within the letter of law – applications were made by actual human beings, meeting all the requirements of an applicant for shares. They were funded by persons who desired a larger allotment but were being denied the allotment due to the mandatory requirement of making proportionate allotment. After allotment, such persons bought shares from the successful applicants, sold the shares in the market, and earned the profit their money had earned.
It would have been good to introspect and change the regulations governing IPOs. Instead, in April 2006, every capital market intermediary in the chain of IPO activity was accused of being caught napping, and worse, in the same breath, also accused of collusion.
Even more public money was wasted in prosecuting the accused. Many innocent market intermediaries are defending proceedings even today, while some fearful ones have paid up settlement amounts in fear of greater wasteful expenditure on defending proceedings.
Another example is the priority sector lending norms in the banking sector. Banks are forced to lend to sectors identified as “priority” – such as agricultural loans although the operation of the rest of government policy failed to ensure that such sectors became creditworthy. Scams developed – one was the “cobbler scam” involving large shoemakers creating fake cobbler co-operatives to take loans from banks.
All in all, the government is embarking upon an exercise that could provide greater scope for corruption and scams. Worse, this approach will undermine the very concept of CSR and reduce it to provision of lip service in the form of a check-the-box compliance.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own)
Email: somasekhar@jsalaw.com
