Mandatory Investment of 2% of Net Profits in CSR Activities

CSR ASSIGNMENT

1/9/2011

Submitted by

ASHUTOSH KUMAR JHA [91011]

FMG XVIII ‘A’

Mandatory Investment of 2% of Net Profits in CSR Activities

FORE School of Management | CSR Assignment

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The Ministry of Corporate Affairs has proposed that every company having net worth of

Rs.500 crore or more, or turnover of Rs.1000 crore or more, or a net profit of Rs.5 crore or

more during a year shall be required to formulate a CSR Policy 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.

This has divided critics in two camps regarding the ability of bill to make corporate more

socially concerned. Need for a bill has highlighted the lack of concern and self regulation on

the part of corporate necessitating intervention of government. It gives a very sad outlook

of Indian business community.

The bill has tried to bring in the accountability towards society part forcibly. This would

empower the regulatory authorities and socially motivated groups and individuals to

question the corporate. This would also wake up corporate bodies to look at the way they

are giving their returns to the society. Lots of employees in companies want to pay their

dues to society but are not aware of avenues. Companies, to confirm with regulation

atleast, would have channels where their employees can participate. On the other hand, this

bill is being questioned for trying to force companies into doing what can only be done if

managing board is self-motivated and concerned. Asking an unmotivated company to invest

in CSR activity would either result in inventive and unscrupulous way of routing back money

or else money thrown out without concern to check how its spent. Passing a bill and making

a regulation would result only in conformance and not rise of genuine concern within

corporate body.

This may also make companies spending larger than 2% start looking at 2% as benchmark.

Lots of family owned businesses/ families with large stakes in business houses like Tatas and

Birlas have huge spending into social welfare in their personal capacity. To ensure

conformance, these may be routed through their holding companies.

To ensure the success of a regulation with good intention and lofty ambition, the regulation

needs to demarcate the activities that would come under the aegis of CSR activities.

Moreover, as this would eat into profits, shareholders would do their best to minimise the

financial impact. These concerns would be better addressed if there was some tax benefits

or incentives provided to the companies for conformance.

The success or failure of such a regulation will lie in its finer details and functioning. There

would be questions on the manner in which companies decide the precise CSR activities

they would spend their monies on, how they would resolve conflicting demands among

stakeholders, what checks are employed to ensure that the funds are not misused, and how

incentives may be created such that the funds are deployed for the most appropriate

circumstances. And further their needs to be a tough non-conformance punishment to

ensure the compliance by all companies.