Making businesses give

The new companies law, which has been cleared by both Houses of Parliament, mandates all companies with a net worth of at least Rs 500 crore, revenue of at least Rs 1,000 crore, or net profit of at least Rs 5 crore to spend two per cent of their average net profit of the last three years on corporate social responsibility, or CSR. Though Sachin Pilot, the corporate affairs minister, has said it is not a tax, cess or levy, industry sees it otherwise - its net profit margin will shrink at least 20 percentage points. The fundamental point missed by the legislation is that charity is done by businessmen, not companies. A company's job is to reward its shareholders in the best possible way. Philanthropy is the work of individuals, not companies. Bill Gates, not Microsoft, puts billions into charity.
 

The reason for the CSR cut (since it's not a tax, cess or levy) is that Indian business doesn't do its bit for social change. And redistribution of wealth is high on the agenda of the United Progressive Alliance, or UPA, its consequences be damned. This time companies have been asked to dip into their reserves and hand over money to the poor. I can see the UPA leaders telling people in their rallies for the 2014 general elections how they have channelled thousands of crores into CSR. It's a little like the politics of sugarcane in Uttar Pradesh: to please the farmers, the state government every year raises the price at which mills can buy sugarcane; the burden is fully borne by the mills, while the party in power walks away with all the credit. It's one of those things that no political party - leftist, rightist or centrist - can afford to oppose.

A few other things are equally worrisome. One, when the leakages from all government-run welfare schemes are huge, how do we know there will be none here? The probability of the money reaching the intended beneficiaries is low. Two, how will we ensure that the money spent by companies doesn't fall into the hands of politically connected non-governmental organisations and contractors, or friends and family of promoters and senior executives? Spare a thought for the limitless possibilities for round-tripping and kickbacks here. Three, the law says that while spending the money, "the company shall give preference to the local area and areas around where it operates". Won't it worsen the regional imbalance? Most of the money will be spent in a handful of states. Who will do CSR in Bihar or in West Bengal? Of course, CSR advisors stand to make some serious money in the new scheme of things. 

Indian businessmen are often compared to the robber barons of 19th-century America who bribed, cajoled and threatened their way to untold riches. But those Americans built public institutions that still stand tall - something only a handful of Indians can claim to have done. For example, the Tata family built the Indian Institute of Science, Tata Institute of Fundamental Research and Tata Institute of Social Sciences; Lala Shri Ram set up Shri Ram College of Commerce, Lady Shri Ram College and Shriram Bharatiya Kala Kendra. But the list is short.

One reason for this is that Indian businessmen in the pre-liberalisation days were taxed very severely. Some of them even sold their shares just to pay their taxes. They were happy to run their companies with low stakes - Tata Sons, at one time, owned less of Tata Steel than the Birla family. This weakness got fully exposed in the mid-1980s when Swraj Paul raided Escorts and DCM. No Indian businessman has forgotten that. The first thing he does, if he has the money to spare, is to raise his stake in the company. Two, most businessmen see themselves as a custodian of family wealth - they hold it, and indeed add to it, only for the future generations. Three, Indian businessmen are in growth mode and need all the money they can raise. Many of them have pledged their shares to raise money for expansion.

Still, some have started to make serious commitments to charity. The list of Indians who are setting aside a part of their wealth for charity is rising slowly but steadily. Azim Premji has, in two tranches, transferred 20.7 per cent of Wipro's shares to the Azim Premji Foundation. P N C Menon, the Dubai-based promoter of Sobha Developers, has said that he will donate half of his wealth, currently estimated at almost $600 million (Rs 3,600 crore), to charity. The corpus of the Mittal family-funded Bharti Foundation has exceeded the targeted corpus of Rs 200 crore by Rs 25 crore with generous contribution from others like the Singh family of DLF and Kalpana Morparia of JP Morgan. Rohini Nilekani, wife of Infosys co-founder Nandan Nilekani, recently sold 577,000 shares of the company for over Rs 160 crore to channel her wealth into philanthropy.

Philanthropy is something that will take its natural course; it cannot be forced. Unfortunately, that's what the government has done with the CSR clause in the new companies law. Let's face it, businessmen are an angry lot these days. The economy has lapsed into low-growth mode. Consumer spending is down. Their profits have eroded and nobody knows when the business scenario will improve. The investment climate in the country is adverse and business sentiment is at rock bottom - so much so that Indian businessmen find it more prudent to invest abroad than in the country. The CSR levy couldn't have come at a worse time. It has only added to India's unattractiveness as an investment destination.