Author(s) :

Neelam Jhawar.

Volume/Issue :

Abstract :

India is on the path of development and is witnessing growth when compared to its peers. However, the benefit of the increasing economic growth is being enjoyed only by a small portion of the country’s population. As per the latest Human Development Index rankings (2017), India ranks 130th out of 189 countries, and it is moving up on the rankings at a plodding pace, thus, emphasizing on the developmental challenges India faces. The CSR agenda was included in the Companies Act 2013 keeping on table the developmental challenges India faces. The concept of CSR has taken a new meaning ever since its introduction as a mandatory requirement in the Companies Act 2013. However, since Section 135 is a soft mandate, the extent and the pace with which the companies are complying by the mandatory requirement needs to be checked. Thus, the focus of the paper is to: firstly, examine the extent of companies’ compliance to the mandate; secondly, investigate the difference in the compliance by different groups of companies; thirdly explore the impact of corporate governance practices and corporate financial characteristics on CSR, and fourthly to analyze the impact of the CSR spending on the company’s financial performance as that would determine their future course of action concerning their CSR spending. Data analysis has been done using Descriptive Analysis, One-Sample t-Test, Independent Sample t-Test, and Multiple Regression. The results indicate that the actual CSR spending is significantly less than the mandatory requirement. Polluting companies and companies with foreign ownership have been found to spend more than their counterparts. A significant impact of select financial characteristics and select corporate governance practices on the actual CSR spending of the companies has been concluded. Actual CSR spending is found to impact the financial performance of the companies significantly.

No. of Downloads :

18

KEYWORDS:

CSR, Companies Act 2013, Corporate Governance, Financial Performance

INTRODUCTION & OBJECTIVES:

The term ‘Corporate Social Responsibility (CSR)’ explains the responsibility of a corporation towards the society. An organization's operations create a tridimensional (economic, social, and environmental) impact on the society; therefore, certainly it should function under the overall discipline of the society. The discourse on CSR is primarily based on the premise that businesses use society's resources, and, therefore, they must contribute towards social welfare (Richa and Gautam, 2010; Sarkar and Sarkar, 2015). In return of extracting resources from the society, the business has to return what it owes in the forms like promotion of education, health care programmes, protection of national heritage, etc. (NIFTY, 2003). If a business wants to survive and grow in today's competitive market, it has to ransom a part of its profits in favour of groups other than the shareholders. Managers, now have begun to recognize that they owe responsibility not just to the owners but the society as well. This outlook acknowledges the concept of social responsibility. There is no consensus on the definition of CSR (Richa and Gautam, 2010; Sarkar and Sarkar, 2015). Generally speaking, the idea of CSR in most of the definitions is a voluntary activity. CSR is a complex and dynamic concept with open rules of application (Matten and Moon, 2008). A review of the existing literature provides that CSR is about balancing the social, and environmental objectives along with the economic objective of maximizing shareholders’ wealth. There is growing acceptance among the researchers and academicians about the differences in CSR issues across developing and emerging nations, and the developed nations. Social issues like poverty alleviation, promoting education, health-care provision, development of education sector, are more prevalent in developing countries than in developed countries, where environmental and sustainability issues such as climate change, business ethics, green marketing, and socially responsible investment are predominant (Sarkar and Sarkar, 2015). It is hard to refute that the market capitalization of large multinational companies like Apple or General Motors is higher than the individual Gross Domestic Product (GDP) of several nations. This reinforces the need for the companies to realize their power and use it to serve the accompanying duties (NIFTY, 2003). Sarkar and Sarkar (2015) explained the rationale for CSR by presenting diverse line of thoughts of different authors. Howard R. Bowen (1953) opined that private corporations should be assessed based on their contribution to the general welfare; Steiner (1971) stated that though businesses are primarily economic institutions, however, they do have a responsibility towards the society, and this responsibility should increase with the size of the business. Besley and Ghatak (2007) stated that CSR is like providing public goods by private and for-profit organizations who would be possibly more efficient in providing public goods than government firms.Supporting this, Deodhar (2015) added that it is a well-accepted fact in the society that the free market fails to deliver merit goods in the right quality and right quantity. Though the very reason of entry of government is to manage such market failures and provide optimal level of merit goods, however, the government's efforts are not sufficient. In this backdrop, a CSR activity may be seen by a firm both as a righteous action of a responsible corporate citizen and a value-creating opportunity for strategic brand building exercise. Over the years, the support for CSR has evolved, and has culminated into the ‘Stakeholder Perspective’ to CSR which recognizes the role of an organization to not only maximize shareholder’s wealth, but also serve the interest of all other stakeholders. In the backdrop of the growing need for organizations to behave in socially responsible way, and the lack of a universal definition of CSR, India, one of the fastest growing economies in the world, made an attempt to organically develop a model of CSR that suits its culture and economy, departing it from the global norms, making CSR spending mandatory for certain set of companies by enacting Section 135 of the Companies Act 2013. What makes Section 135 distinguishing is that not only it makes the reporting of CSR activities mandatory, but goes one step ahead by making CSR activities mandatory. In other countries, CSR spending has been kept as a voluntary subject, and only some countries such as Sweden, Norway, the Netherlands, Denmark, France, Australia and China, require mandatory disclosure of their CSR activities (Sarkar and Sarkar, 2015). Though Indonesia had mandated CSR spending for a certain set of companies back in 2007, however, through Companies Act 2013, India has taken a strong step to have mandated CSR spending for a much larger set of companies. Effective from 1 April 2014, Sec 135(1) requires every company with 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 to spend in every financial year, at least 2 percent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy to be drafted by the CSR committee within the purview of Schedule VII of the Act. Schedule VII activities mainly focus on social sector which is in stark contrast to the developed countries where the focus is on environment (Rajeev and Kalagnanam, 2013). The compliance to Section 135 is based on Comply or Explain approach, with no open penalty for non-compliance. If the Board of Directors’ report does not include details as required by the law regarding the unspent on CSR and the reasons thereof, then penalty is levied. The regulatory approaches to CSR across the countries take three different forms: voluntary reporting and voluntary spending, mandatory reporting and voluntary spending, and mandatory reporting and mandatory spending. The corporate failures since the 1990s, the growing concern towards the impact of business operations on the environment’s sustainability, and the global financial and economic crisis of 2000s proliferated the need to have a stringent approach towards CSR Disclosure (Sarkar and Sarkar, 2015). However, much of the discourse on CSR across the globe is on reporting: whether CSR reporting should be voluntary or mandatory. Since, there is no universal definition of CSR, and differences exist in how developed countries and developing countries view CSR, with the enactment of Section 135 of the Companies Act 2013, the concept of Corporate Social Responsibility (CSR) has taken a new meaning. In India, in a short span of time, we have witnessed rapid changes in the CSR Reporting and CSR Spending Regime: From Voluntary Reporting and Voluntary Spending in 2008, to Mandatory Reporting and Voluntary Spending in 2012, to Mandatory Reporting and Mandatory Spending in 2013 (Sarkar and Sarkar, 2015). The mandate as has been enacted by the Indian Government is steady with the stakeholder theory and the legitimacy theory, and completely negates the idea of Friedman (1970) that “the business of business is to do business only” (Marques and Srinivasan, 2018). Thus, in this background, it necessitates the need to study the existing CSR environment in India, and whether the introduction of Section 135 of the Companies Act 2013 can act as a lesson for other developing countries to come up with a similar enactment in a hybrid form that suits their requirements. OBJECTIVES OF THE STUDY The compliance to Section 135 is based on Comply or Explain approach, with no open penalty for non-compliance i.e. if the company doesn’t ‘comply’ by the mandate, the Board shall, in its report ‘explain’ the reasons for not spending the amount. Thus, Section 135 can be explained as a “soft mandate” (Rossow, 2015). However, if the boards fails to do so, the company and the officers are punishable. Less empirical research has been done to find out the determinants of CSR in India, and most are small sample based studies (Kansal et al, 2014). Studies on the relationship between CSR and financial performance of the companies have been done, and have reported mixed results (Mishra and Suar, 2010). As the Section 135 mandate is exclusive to India, made effective from the financial year 2014-15, not a lot of literature exists on this subject (Kapoor and Dhamija, 2017). This has served as the research gap and the study has been carried out with the following objectives: 1. To investigate the actual CSR spending of BSE 500 companies. 2. To study the deviation in company’s CSR spending from the mandate of the Companies Act 2013. 3. To analyze the CSR spending for various groups of companies on the basis of the share holding pattern and the environmental sensitivity. 4. To explore the impact of the company’s financial characteristics, and select corporate governance practices on their CSR spending. 5. To investigate the impact of company’s CSR spending on their financial performance.

DOI:

https://doi.org/10.58426/cgi.v2.i1.2020.6-40