The lack of effective punishment for companies that fail to meet the 2% CSR requirement is the most notable lacuna in the Indian Companies Act of 2013. At the same time, mandatory CSR is not a replacement for state social spending, which is a key ingredient for the success of developing nations.
In India, the Companies Act of 2013 introduced new requirements for corporate social responsibility (CSR), but didn’t attach any penalty for non-compliance. What are companies doing in response? Has legally mandated CSR increased corporate giving in India?
In reality, the absence of adequate sanctions undermines the effectiveness of the 2% CSR requirement of the Act. Companies that have undertaken CSR programmes long before the Act was passed will continue to do so regardless of legislation, and companies that choose to not engage in CSR will, facing no sanctions, simply not comply.
The lack of effective punishment for companies that fail to meet the 2% slab is the most notable barrier to the success of the Companies Act in increasing CSR spending in India.
However, the Act does include other strictures—for example, all companies are required to have a CSR board, policy, and reporting procedure, and can face government-imposed sanctions such as fines for failing to comply, or even imprisonment for non-disclosure. But if the companies do not spend the required 2% on CSR, they are merely asked to explain it to their shareholders and on their website.
In such a context, many companies that choose to bypass CSR requirements have no reason to comply. Various solutions have been proposed to address this gap: for example, the government can introduce a “show-or-shame policy” whereby companies must show their CSR activities or face opprobrium. Eventually, this “shame” might compel companies to comply with all aspects of the law.
India though is among few countries in the world where it is mandatory for businesses to engage in CSR. In the United States, tax deductions are available to encourage corporate giving, but companies are free to choose the amount and the organisation through which to funnel their donations.
Despite the absence of a legal obligation to donate, the majority of American companies do give. According to the National Philanthropic Trust in the U.S., corporate giving in 2014 totalled $17.77 billion—a 13.7% increase from 2013. [1] And this giving is not limited to the larger companies—a survey done by the U.S. Small Business Administration shows that 75% of small firms donate to charities each year, averaging about 6% of their profits.
Companies voluntarily participate in CSR for various reasons: for example, it creates good human resources—people want to work with companies that are CSR complaint, it gives them a sense of pride. Mandating corporate philanthropy is therefore perhaps no more effective than allowing it to be voluntary.
Some lawyers, such as Anshul Jain, partner at Luthra and Luthra Law Offices, see the Indian Companies Act as an “alternative tax, which is being levied on corporations.” The Indian government has cut back its own spending on social welfare programmes and compelled businesses and NGOs to fill this vacuum.
A 2014 study conducted by the OECD found that India’s public social expenditure falls short of what is spent by other developing nations such as Brazil and China, both of which have seen great improvements in human capital as a result of state-led spending.
Brazil’s major success story in the social welfare sector is the well-known Bolsa Familia programme, launched by President Lula in 1993. According to the World Bank, since its inception, the programme has halved Brazil’s poverty rate, from 9.7% to 4.3%, reaching nearly 50 million people—or one-fourth of the country’s population.
A programme of this scale would be practically impossible for a single company, or even a group of companies, to implement—reminding everyone of the government’s key role in social welfare. Mandatory CSR is not a replacement for state social spending, which is a key ingredient for the success of developing nations. While companies have a responsibility to sustain and improve the quality of life in the areas in which they work, CSR cannot be a substitute for the state’s investment in the welfare of its people.
This article was tken from here.