Reality Check India

Mandatory CSR is theft and distorts the philanthropic landscape

Posted in Uncategorized by realitycheck on September 10, 2014

I had a few interactions on Twitter today in response to this tweet. Some were quite angry with my position.

The Congress led UPA government introduced Sec 135 into the Companies Act. This mandated all eligible companies to set aside 2% of their pre-tax profit towards Corporate Social Responsibility  programs.  In between my campaigns against even more egregious laws like the Right to Education, I have tried to spread awareness of this ill conceived scheme. In this post, I collect all my thoughts on why CSR needs to be repealed forthwith.  I hope our new dispensation gets wind of the real dangers of this scheme. India-Map-002

What is CSR?

Essentially all companies meeting certain arbitrary threshold criteria must spend atleast 2% of their pre tax profit on social work. The current thresholds are

The new law mandates that all companies, including foreign firms, with a minimum of Rs.500 crore, turnover of Rs.1,000 crore and net profit of at least Rs.5 crore, spend at least two percent of their profit on CSR.

It is estimated that anywhere from 6000 to 8000 companies fall into this criteria for a net yield of USD $ 2.5B to USD $8B. The beauty is as the economy grows more companies make more profits and more funds are released for social work. This should suffice for the purposes of this post, there is plenty of info on Google and Corp Affairs Website if you want more.

Key confusion – whose money?

A lot of folks on Twitter were angry with my tweet. They wondered  “Why are you attacking a noble philanthropic gesture from Ms Murty?”  They forget that the money donated by CSR activities is 2% of the pre tax profits of the companies and not their personal money. This distinction can be hard to get.

Let me explain this further : Say a company makes 2500Cr/Q in pre tax profits. They have to set aside 2% = Rs 200Cr/Yr for CSR activities. If there were no CSR – this 200Cr would normally be paid out as extra dividend to shareholders.  The promoters and board of directors are also  shareholders but they are spending the Rs 200Cr/Yr that belongs to all shareholders.  In my view ; this is simple breach of trust and  theft of shareholder money.  

Good vs Bad CSR

What I am about to say is very counter intuitive.  There are two types of CSR, with examples.

CSR activities that have a hidden motive of profit. Working with villagers whose lands were acquired for cheap, providing safe transport for women employees,  training local unskilled labour for use in factory.

CSR that are done out of real heartfelt concern for social good. These activities have no hidden profit motive and are done to purely uplift the underprivileged, provide scholarships to needy students, provision hospital equipment in far off places.  They are not designed to increase profits.

The upside down thing is this  : The second type of  CSR done out of pure concern for the underprivileged is breach of shareholder trust and theft of their money. The former type of CSR with hidden profit motive is understandable !!

 

Therefore my main problem with all CSR including those from Infosys Foundation,  Reliance Foundation , Shiv Nadar,  Bharti Foundation and all the rest is that they are indulging in philanthropic activities.   

Why is CSR philanthropy bad ? Better than tax which is eaten by the corrupt

There are actually two issues here.   First Ipso Facto, mandatory CSR is undesirable as a philanthropic pursuit as I will explain. Second,  the counter argument assumes a scenario where a 2% additional corporate tax replaces the 2% CSR. The argument is that money spent by well intentioned and people of integrity like Mrs Murty Ms Mazumdar Shaw or Mr Tata  is far better then cycling the money through the corrupt govt delivery system.

As a purely social pursuit CSR is abhorrent because it substitutes the preferences of thousands of shareholders with that of a couple of promoters.  This is not to say that minority shareholders need to have a veto power on day to day business  judgments.  The assumption is that minority shareholders trust the board of directors and company executives to be able to best deliver profits being in possession of the right information and technology.  However, after having made profits – the minority shareholders have no such expectation on CSR money. They expect either dividends of reinvestments that would work to increase future profits. This is basic market mechanism. This is also why NO OTHER COUNTRY in the world has mandatory CSR

Primary effects – skewed recipients

Say you did not have the CSR and simply distributed the net yield of Rs 25,000 Cr/yr  to shareholders as extra dividend.  Now those shareholders have extra money they can allocate to their favourite philanthropic activity. Many will allocate it to Hindu temples , others to Churches.  Some will allocate to RSS – some may write a check in favour of, shudder; a non Idea of India think tank. The point is the masses decide the allocation and some of it will be for unpopular causes in the eyes of the “in crowd”.  If you look at the law as well as the mission statements of these “foundations”  – they explicitly rule out donating to religious trusts and those that dont sign up to ‘equitable society’ as defined by them.  Here is a F.A.Q.

We do not partner with religious institutions or political parties, or provide assistance to individuals. We support apolitical and non-religious non-government organizations (NGOs) that are committed to the cause of an equitable society. FAQ from Infosys Foundation (not picking on anyone – everyone has the same rules)

Words like Equitable Society are controversial because they never tell you what it means in concrete terms.  All we know is that  in their worldview an equitable society  isnt one where the profits are returned to investors

To sum up ,  the skew is that recipients such as temples, village rituals, Hindu schools who would otherwise be beneficiaries of  normal everyday people are now cut out of the loop.   Secular and posh NGOs who would never be the recipient of normal everyday donors are now rolling in crores. This is an abhorrent and unacceptable skew. I do not even want to get into the outright communal and vitriolic campaign by the likes of Ram Guha who doubt the Hindu Societies willingness to be philanthropic.

Secondary effects – social status

With CSR money, an entire galaxy of corporate angels are born.  They are able to project their philanthropy far and wide, in slums and forests, from billboards where Ambanis and Tatas and Mittals  beam down on you  hugging poor kids. They are almost the new government. They are accumulating enormous social and dare I say, political capital.  To the extent it comes out of the 2% mandatory CSR  it is social heroes created out of stolen money.  Sooner or later,  these larger than life angels will back political parties or think tanks  and their aura rubs off on them. Worse they can condemn certain other types of thoughts and guide the dissent that way.

A tax is better

Contrary to what you think a 2% extra corporate tax is better than Mandatory CSR.  An extra tax can help rationalize bring down, overall corporate tax rates for big and small corporates.  Once the money is in the govt kitty we atleast have democratic institutions that determine how they get spent in accordance with wishes of the people.

The corruption argument is not worth responding to, because it would mean all income tax is bad and we should be allowed to buy gravel and tar with our money if we want public roads.

 There is no principle behind the 2% number either.  Why not 1% or 5%? Clearly companies with large social and environmental impact such as Mining,   Meat Packing,  large consumers of water, need to spend way more than 2% to get the folks in their impact area on their side.

Anyway you look at it.  This mandatory CSR disrupts market mechanisms, creates uncertainty, skews philanthropic allocations, introduces more regulation and compliance, endless nuisance of NGOs bickering and fighting with each other, extortion.

 

But there is one bright spot.  It applies to all religions. C’est la vie.

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8 Responses

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  1. rc said, on September 10, 2014 at 7:18 pm

    Correction

    They have to set aside 2% = Rs 250Cr/Yr

    Read as 200Cr/Yr instead of 250Cr/yr

    Wrote it in one pass.Will fix post tomorrow

  2. Prem said, on September 11, 2014 at 7:09 am

    Dear RC
    After reading your article, I get a sense that you have idea about social work or CSR.
    You sound more like a political worker and writing blogs in from AC rooms.

  3. Vanitha said, on September 11, 2014 at 10:46 am

    Very pained to read this blogger write like this. Please see the great social work done by the foundations then comment. Everyone has responsibility to the underprivileged and poor people.

    • zeneraalstuff said, on September 1, 2016 at 8:33 am

      Yes, but on their own time, and with their own money. As a shareholder, I might want to take those 2 rupees saved on CSR and spend it on something the promoters may not see as a worthy cause.

      I should have that freedom.

  4. anonfornow said, on September 12, 2014 at 11:35 am

    Wrong article only shows your bias ..

    I t is not 2% of tax but of avg tax calculated over past 3 years. Foolish argument about 2% why are you paying 20% IT why not 40%? First educate yourself about the great work done by others and learn about human rights. Big philanthropic projects like hospitals etc need lot of money instead of small donation . Thank you.

  5. Ram said, on September 13, 2014 at 3:07 am

    Please also write about the how the unwilling employee is dragged into this farce called CSR… how s/he is forced to contribute from his salary to such foundations… how a part of his variable pay is affected by such contributions to foundations… how 1 person who heads the foundations is seen as a philanthropist while the actual contributors dont get a mention… how the employees have CSR activities built into their appraisal systems so they end up being unpaid laborers… how the employee contribution is siphoned out to foundations and peanuts are spent back on them and written to CSR expenses…
    Those who are appreciating the good work… yes, some good work gets done… but whose money is it??? Why do I as employee or shareholder have no say in its spending??? who is the actual beneficiary??? Is the demi-god status bestowed on so-called philanthropist really deserving???

  6. CSR is Golden said, on September 16, 2014 at 5:35 am

    Without mandatory CSR how do you think Award giving organizations like Golden Peacock http://www.goldenpeacockawards.com/
    and also, Institute of Directors
    http://iodonline.com/
    and let us not forget the International Academy of Law (do not doubt because of the title, it is a totally Indian organization)
    http://www.internationalacademyoflaw.org/
    can function?

    Golden Peacock provides a “strategic tool to lead the competition”. How many corporates can produce a quick impression of high quality without such tools?

    Now think of the expense: award ceremonies are in London and Dubai, also many ex Judges are involved in handing out the awards. There is a clear aura of high legitimacy which has to be maintained. These don’t come cheap. The amount charged to companies receiving awards may not cover the full cost of running the show. Already so many different kinds of awards have been lined up so that everybody can have something. Yet there will be a cost burden as quality is never cheap.

    Mandatory CSR will be a big boost to this whole industry of building quality reputation for corporates that do not want to get their hands dirty with the work.

    Imagine the day when every Indian company, big or small, can have a Golden Peacock award to proudly show off to customers that they are also winners. With mandatory CSR that day will not be far off. Without mandatory CSR only a few will be able to afford it.

  7. alpha1 said, on May 4, 2016 at 10:18 am

    The brutal honest truth is that humans are two faced liars.
    In front of everyone they will display a “socialistic cause” altruistic face, whereas in privacy they revel in their true colors (selfish, greedy, …. any other “negative” trait that you have been “taught”)

    How is this related to CSR?
    Haha!

    If humans are truly benevolent, then they should’ve anyway diverted a considerable part of their earnings (made via dividends or capital gains) to altruistic causes like CSR.
    But they are not.

    Hence, perhaps a forced regulation made like this.
    So all (the same people) now wear their fake face, show CSR activities, while at the same time justifying to their inner selfish self that CSR will ultimately “pay off”.

    We are back to square one only. No one is doing any altruistic work, it is all “investment” made to reap benefits later.

    I think most of the people countering your post (quite emotionally) have either not understood this bitter truth about crafty species called humans, or they are showing their fake faces here.


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