Viability of Mandatory CSR

CNBC reports on a proposal by the Government to require companies to introduce mandatory CSR spending:

Corporate social responsibility (CSR) spends will now be made mandatory for corporate India, sources in the Ministry of Company Affairs told CNBC-TV18. If approved, companies will have to spend 2% of the average net profit on CSR.

Mandatory CSR will be made part of the amendment to the Companies Bill. Currently, CSR 2009 guidelines are voluntary. CSR will be mandatory for companies with Rs 500 crore networth, Rs 1,000 crore sales, or net profit of Rs 5 crore or more. Such companies will have to formulate a CSR policy. Directors will have to disclose CSR in their annual report.

In the same report, CNBC interviews various industry leaders who do not find favour with the Government’s proposal to make CSR mandatory. They expect that a mandatory approach to CSR will reduce it to a “check-the-box” requirement receiving mere lip service.

The alternative solution would be to continue with the voluntary approach with stringent disclosure requirements that induce a culture of “comply-or-explain”. This would help vigilant investors, particularly socially responsible and ethical investors, to either engage with the companies to ensure they operate in a socially responsible manner or alternatively to exit such investments. Measures such as the Stewardship Code published in the U.K. enable closer monitoring by institutional investors. CorpGov.net argues that simply requiring explanation may make the difference in CSR, while peer pressure generated by key companies or their leaders may compel many others to follow in adopting socially relevant business investments and practices (which has been evidenced recently, although in a philanthropic context).

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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