9.1 Introduction
India’s Companies Law underwent a set of significant reforms in 2013, but the provision that has attracted perhaps the greatest attention is Section 135. It appears to be one of the first, if not the first, attempt in the world to mandate corporate spending on Corporate Social Responsibility (CSR) initiatives in certain circumstances. The law required that Indian firms above certain profit, sales, or net worth thresholds either spend 2 percent of their average profits over the last three years on activities deemed to be CSR by the government or publicly explain why they did not do so (with penalties increasing for noncompliance over time). Studies have explored the effects of these reforms on the market value of Indian firms impacted by them and on CSR spending by Indian firms, among other issues, but few have explored the genesis of the reforms. This chapter begins to examine that question with a central puzzle: The CSR requirement could have been written as a CSR tax rather than a CSR spending requirement, so why would the Government choose the latter, more heterodox, option?
The analysis suggests that the CSR reforms did not primarily arise from philanthropic considerations. Rather, the motivation for the reforms reflects a blend of political optics and state capacity or efficiency considerations informed by historical experiences with market-oriented reforms. On the efficiency and state capacity front, the Indian state might not have been as well placed to enforce a CSR tax as Indian firms might have been able to manage a CSR spending requirement in 2013. This is largely due to the incentives and constraints faced by private sector employees compared to public sector employees in the Indian context. On the political optics side there was a perception in government (and apparently a sizable part of the citizenry) that the liberalization efforts had primarily benefited only a very small sliver of the country. The CSR reforms were a way for the government to prod firms to engage in activities that benefited the citizenry in a manner that made it look like the firms, rather than the state, were doing it. If the state had explicitly used the tax system, it suggests that economic liberalization (which largely reduced the role of the state in managing the economy) was not working for the citizenry at large and that the state had to come back in to steer the economy. It would also have led businesses to question the state’s commitment to liberalization. This might have undermined support for further liberalization reforms that were being put forward at that time. However, if corporations were engaged in CSR then it might look like the gains from economic liberalization were beginning to find their way from India Inc. (the colloquial label for corporate India) to the general citizenry. This latter account might enhance support for economic liberalization reforms that were contained in the 2013 Act and perhaps future reforms. This blended account provides interesting insights about this rather unique set of reforms and considerations that may be helpful in exploring developments following on from those reforms.
Section 9.2 begins the inquiry by detailing the current legal regime governing CSR activities in India. Section 9.3 examines the scholarly work that discusses the impact of the CSR reforms. This covers a remarkably broad terrain that is still evolving. Section 9.4 then examines the political economy and history behind these reforms and describes the blended account just mentioned. Section 9.5 delves into post-2013 CSR developments and Section 9.6 concludes.
9.2 Overview of Legal Developments Related to CSR in India
India’s Corporate Social Responsibility (CSR) provision was enacted as part of many other reforms in its Companies Act 2013. At the time of its enactment, it was one of the first provisions, if not the first, in any country to require that some firms spend a percentage of their profits on “socially responsible” activities or explain why they did not. These heterodox CSR reforms, however, were not the end of efforts in this realm. There have been further amendments – one in 2019 and one in 2021 – that have moved the regime from the “comply-or-explain” regime of 2013 toward a “comply-or-else” regime. This section describes the original 2013 reforms and 2014 rules and what changes were brought by the 2019 and 2021 amendments. In addition, it briefly discusses the limited case law that has emerged thus far.
Section 135 of the Companies Act 2013 operates in two steps. First, it creates conditions under which firms are subject to Section 135. Second, once a firm is subject to Section 135, it lays out the obligations that apply.
The first step is met when a firm meets at least one of three thresholds in any financial year – either sales (called “turnover”) exceeding INR 10 billion (~USD 125 million), net profits exceeding INR 50 million (~USD 625,000), or net worth exceeding INR 5 billion (~USD 62.5 Million).Footnote 1 All firms with operations in India (including publicly traded firms, private firms, and foreign firms) are subject to Section 135 when they cross any of these thresholds.Footnote 2
Assuming that a firm crosses any of these thresholds, then a number of obligations arise under the original Section 135 in the 2013 Act. In particular, the firm must:
i) constitute a “Corporate Social Responsibility” (CSR) committee with three directors where at least one must be independent,Footnote 3
ii) disclose the composition of the CSR committee,Footnote 4
iii) formulate a CSR policy (via the CSR committee) recommending the kinds and amounts of CSR spending the firm is to pursue and the CSR committee must monitor that policy,Footnote 5
iv) publicize the firm’s CSR policy, once it has been approved by the Board after taking into account the CSR committee’s recommendations, and the Board must ensure that the policy is followed,Footnote 6 and
v) ensure, via Board action and monitoring, that it spends at least 2 percent of the firm’s average net profits (over the last three years) on activities listed in the firm’s CSR policy or provide reasons for why it did not (i.e., a “comply-or-explain” rule).Footnote 7
Although this was called a “comply-or-explain” rule, it is only the amount of CSR spending (i.e., item (v) above) that is subject to a “comply-or-explain” requirement, while all the others (items (i) to (iv) above) are mandatory and failing to meet them triggers liability.Footnote 8 An explanation for failing to meet the 2 percent spending requirement (item (v)) might avoid liability if that explanation was thought to be acceptable, but the statute did not provide guidance on what might be acceptable or to whom such an explanation should be provided.Footnote 9 The penalty for violations of Section 135 was INR 100,000 (~USD 1,250) on the firm and every officer of the firm for the first day of the violation and an incremental INR 1,000 (~USD 12.50) per day for as long as the violation continues.Footnote 10
As drafted, Section 135 did not provide guidance on what activities amounted to CSR and what did not. The Ministry of Corporate Affairs (MCA) provided this initial guidance later through a set of rules approved in February 2014.Footnote 11 The rules designated a broad array of activities as amounting to acceptable CSR, including education, arts, health, poverty eradication, environment, some designated government programs, funds for technology incubators in government academic institutions, reducing gender inequality and other inequalities, and more.Footnote 12 This left firms with considerable scope and discretion in deciding where to engage in CSR spending. Nonetheless, the MCA’s rules did exclude certain items such as spending undertaken in the normal course of business, to benefit employees or political parties, or relating to foreign activities (i.e., activities occurring outside of India).Footnote 13 Over time there has been an increase in the number of government programs that are designated as counting for CSR purposes.
Section 135 was then amended in 2019 and 2021. The 2019 amendments made several technical changes but, for our purposes, perhaps the most important were changes that:
i) required firms to keep funds earmarked for CSR spending, but not spent, in a separate account for up to three years until the funds are spent and if they still are not spent after three years, then the funds must go to an activity in Schedule VII of the Act (e.g., the Prime Minister’s Relief Fund);Footnote 14 and
ii) stated that failure to comply with the provisions (including the spending requirement) would not have a defense of an acceptable explanation and could result in criminal liability for the firm and relevant officers.Footnote 15
Unsurprisingly, the criminalization of noncompliance generated considerable consternation in Corporate India, leading to more amendments in 2021.Footnote 16 These involved:
i) decriminalizing noncompliance with CSR requirements (which are now only civil) while increasing the civil monetary penalties compared to the 2013 legislation. These penalties were capped at INR 10 million for firms (~USD 125,000) and INR 200,000 (~USD 2,500) for officers;Footnote 17
ii) weakening some requirements for smaller firms;Footnote 18
iii) excluding additional items from the list of acceptable CSR activities so that advertising or marketing and spending to fulfill other statutory obligations did not count toward the CSR requirement;Footnote 19
iv) a requirement for firms who should spend more than INR 10,000,000 (~USD 125,000) on CSR, under the CSR rules, to conduct independent impact assessments and present them to the board;Footnote 20 and
v) a series of changes relating to the implementation process for the rule.Footnote 21
In addition to these statutory and regulatory changes, the Government of India and private parties have created CSR tracking websites, which are quite detailed, and other resources that might facilitate greater and more effective spending on CSR.Footnote 22
These changes are quite numerous and were enacted with considerable speed. However, judicial developments do not appear to have reflected that kind of urgency. There are few cases adjudicating significant issues associated with the CSR rules and even fewer that impose penalties for noncompliance. One case resulted in a fine of INR 100,000 (~USD 1,250) where the firm failed to meet the CSR committee and spending requirements in the first year they were bound (without any explanation).Footnote 23 The firm’s justification was that it was not prepared in that first year, but has met the requirements since then.Footnote 24 Other cases have revolved around whether decisions made by Income Tax Assessors were accurate (for determining whether the amounts spent count toward the CSR rule)Footnote 25 and whether some expenditures should not be counted toward the CSR requirements (e.g., spending on tobacco-related matters).Footnote 26
The CSR rules generated a great deal of discussion, with many praising the reforms but many also criticizing them. A common response was that this rule had turned essentially a voluntary activity into a mandatory one, going against the very nature of CSR.Footnote 27 Others thought the reforms were in essence revolutionary, suggesting a new way forward in the inclusive development debate.Footnote 28 However, these arguments were often made before the reforms came into effect and hence were not often based on the effects of the reforms. It is to those effects that I now turn.
9.3 Studies on the Effects of CSR Reform
The structure of the CSR reforms provided scholars with a rather nice empirical design to test some of the effects of the reforms. In particular, the substantive obligations only applied if the firm crossed certain thresholds (e.g., net profit, sales, net worth). This meant that firms just above and below the relevant thresholds might be very similar in most respects except that one set of firms (those just below the threshold) would not be subject to the substantive regulations and another set (those just above the threshold) would be subject to them. This provided for plausible control (just below the threshold) and treatment (just above the threshold) groups assuming these firms were otherwise similar, which they appeared to be. Several papers used this feature of the reforms to test their empirical effects.
9.3.1 Firm Value Effects?
Some conducted event studies and found that the stock market prices of the treatment firms (just above the threshold) declined on the earliest announcement of the reforms relative to control firms (just below the threshold).Footnote 29 This is perhaps not that surprising because the reforms in essence imposed a cost on firms subject to the rules reflecting the increased CSR spending and the costs associated with creating a CSR committee and meeting the other requirements. This might be balanced by some benefits (e.g., goodwill, higher sales) that might accrue to the firm from these activities. However, the results of the early studies suggest that, at that time, the market did not appear to think those benefits were sufficiently large to overcome the costs.
More recent work suggests that there might have been benefits at the time of the earliest announcement of the reforms for foreign firms and for firms in controversial sectors in India because the government was providing greater clarity on what might amount to CSR and in turn what might generate goodwill for these firms.Footnote 30 This more recent work uses different event dates for its tests so its analyses are not directly comparable to earlier work but nonetheless the results are interesting.Footnote 31
9.3.2 CSR Spending Effects?
Reformers might also be interested in whether firms actually complied with the additional spending and other requirements. This was not a given in light of the “comply-or-explain” rule and a somewhat less aggressive attitude toward enforcement by Indian regulators and courts in the corporate governance space at that time.Footnote 32
The earliest empirical paper examining this issue found that soon after the reforms came into effect CSR spending for firms below the threshold began to increase and many more firms were reporting CSR spending when they had not done so before.Footnote 33 This was, however, accompanied by a reduction in advertising expenses at these firms (suggesting some substitutability between CSR and advertising spending).Footnote 34 Additionally, the paper found – somewhat counterintuitively – that firms that were engaged in active CSR spending prior to the reforms (e.g., spending more than 2 percent of profits on CSR before it was required) reduced their post-reform spending to 2 percent.Footnote 35 This presumably unintended consequence suggested that the pre-reform high-CSR spenders found the reputational advantage from that level of spending to be less valuable when CSR spending appeared mandated.Footnote 36
However, this study was early in the postreform period and it appears that, since then, the level of CSR spending by firms in India has grown substantially. The most recent data from the Government of India’s CSR tracker website suggests that CSR spending is now quite significant, with most firms complying with the 2 percent spending requirement.Footnote 37 This not only suggests growth in actual CSR spend, but also heightened compliance, which is impressive given the fairly thin levels of official enforcement intensity thus far.
A recent paper argues that firms initially spending more than 2 percent of profits on CSR are likely to increase beyond that level if the law does not confine their choices too much.Footnote 38 In other words, initially larger CSR spenders are likely to increase their spending as the law gets clearer.
Another recent paper explores what the main CSR strategies of Indian firms appear to be.Footnote 39 These authors suggest that there are two main strategies. First, most firms follow a “narrow” strategy where their CSR spending tracks issues such as education and healthcare in high population density areas.Footnote 40 They do this directly rather than relying on nongovernmental organizations (NGOs). The authors suggest this reflects the concerns most likely relevant to the stakeholders of these more urban firms.Footnote 41 Second, the larger firms and state-owned enterprises tend to target “broader” issues by greenlighting many different projects and relying on NGOs to implement their plans.Footnote 42 Their findings suggest that firms’ CSR expenditures are attuned to their likely stakeholders concerns rather than the potential efficiencies firms might provide in CSR activity.Footnote 43
9.3.3 CSR Spending and Politics?
In recent years, concerns have been mounting about the interactions between the CSR rules, CSR spending, and politics. For instance, a recent paper argued that local politicians are heavily influencing the selection and spending on CSR projects in order to enhance their chances of winning the next set of elections.Footnote 44 It also finds that, in addition to local politicians, local stakeholders and community activists have become more active in approaching firms for CSR spending since the reforms were enacted.Footnote 45
In addition, some scholars have expressed concerns that CSR policy at the national level may reflect the ruling party’s electoral concerns in pivotal states.Footnote 46 This is because contributions to certain government schemes can count toward the CSR spending requirements and the set of approved government schemes seems to be rising. Moreover, there is some evidence that state-owned enterprises are also contributing to these government schemes in fairly large amounts.Footnote 47
This then raises the intriguing prospect that firms and politicians might trade off political contributions for lower levels of CSR spending. This is explored in another recent paper which finds that poorly governed firms in India use CSR spending and political donations as partial substitutes.Footnote 48 Its findings suggest that firms with more opaque governance (e.g., family group membership) or headquartered in high-corruption states are less likely to meet CSR targets around elections yet they tend to increase political donations at that time.Footnote 49
These sets of papers suggest that it is worthwhile to further explore the interactions between CSR and politics. More generally, an analysis of how private CSR efforts and public efforts interact in the provision of public goods and social services would be valuable.
Although the empirical work on the CSR reforms is growing rapidly, that still leaves open the question at the heart of this chapter – what led to these reforms and are the effects of the reforms consistent with those motivations? Understanding the history and political economy of these reforms is critical in better understanding the reforms.
9.4 Political Economy Surrounding CSR Reform in India
The CSR reforms in India are puzzling in some respects because it appears that a simpler way to get firms to contribute to social causes would be for the government to impose a CSR tax on them. Indeed, one might argue that the CSR rules are, in effect, a 2 percent tax on firms above certain thresholds, with the decision on how to spend those funds being delegated to firms within boundaries established by the government. That then raises the question of why the government adopted this more heterodox approach to CSR – was this thought to be more efficient in some sense, more politically attractive, or something else?Footnote 50 Although one can imagine many possible responses, a deeper appreciation of the political and historical background against which the choice was made is likely to be illuminating. I approach this in two steps – first, what led to the heightened desire for corporations to give back to society?; and second, what led the reforms to take the specific shape that they did? (i.e., a CSR spending requirement as opposed to a CSR tax).
9.4.1 Heightened Need to Give Back to Society?
Business in the Indian subcontinent has a long history of contributing to social activities,Footnote 51 but the factors that were most important in leading to the CSR rules appear to be of more recent vintage. The Companies Act 2013, of which Section 135 is but a part, was envisioned as a major overhaul of India’s 1956 Companies Act. These reforms were primarily based on the J. J. Irani Committee Report of 2005 commissioned by the Government of India.Footnote 52 The report came after India’s securities market regulator (the Securities and Exchange Board of India (SEBI)) had promulgated a watershed corporate governance reform (known as Clause 49 of the listing agreement) that adopted many global best practices in corporate governance.Footnote 53 The Irani committee report appeared designed to move India away from the more “mandatory” model of the 1956 Act and toward a more “enabling” corporate law and to be generally more consistent with global trends.Footnote 54 The overall sense was that India was modernizing its corporate laws.Footnote 55 However, the Irani committee report contained no mention of CSR reforms.
The CSR reforms were first mentioned in the Companies Bill in the middle of 2011,Footnote 56 but that was not the first time that the debate over CSR had reached the national stage in India. The Ministry of Corporate Affairs (MCA) had put forward a set of voluntary guidelines on CSR in late 2009 that were designed to persuade Indian firms to engage in more CSR activities.Footnote 57 It was these voluntary guidelines that set the stage for the CSR reforms that would eventually get enacted into the Companies Act 2013. Thus, the genesis of these guidelines forms a key area of inquiry for this chapter.
There were many forces at play that appear to have set the stage for the 2009 Guidelines. Perhaps one of the most consistent was a growing sense that India’s liberalization efforts had only really benefited a small segment of society and not the common person. Indeed, in 2007 the then-Prime Minister Manmohan Singh expressed concern that rising levels of executive compensation in India against a background of rising wealth and income inequality could cause social unrest.Footnote 58 He suggested that firms should curb this level of compensation and undertake more socially responsible activities that were consistent with more inclusive development.Footnote 59 Soon thereafter the global financial crisis led to even more concerns about income and wealth inequality, among other things.
By 2009, the Indian political landscape had mounting concerns over the distributional aspects of the liberalization efforts. However, these concerns became more prominent when India suffered its largest corporate scandal in the form of the Satyam fraud at the start of 2009. It appeared that India’s fourth largest Information Technology Services Firm – Satyam – had its prime assets siphoned off and sent to entities owned by its controller, Ramalinga Raju, and his family and kin.Footnote 60 The Government of India had to step in and essentially pick up the pieces. This, unsurprisingly, left a sour feeling about the private sector in early 2009. This rising skepticism was also a key theme in the national elections of 2009 where the ruling coalition – the United Progressive Alliance (UPA), led by the Indian National Congress Party – was looking rather shaky. The UPA eventually won the election by joining forces with a set of resurgent left-leaning parties who seemed to also find the liberalization efforts too limited in their benefits.
Thus, by the middle of 2009, there were concerns about the economic and distributional effects of liberalization, the ethics of the corporate sector,Footnote 61 and rising income and wealth inequality. Against this context the MCA drafted and released its voluntary guidelines on corporate social responsibility in late December 2009.
These guidelines exhorted firms in India to engage in more CSR activities. The then-Minister of Corporate Affairs Salman Khurshid said in the introduction to the guidelines:
[T]he corporate sector is also standing in the midst of a sustainability crisis that poses a threat to the very existence of business. What we have before us is a cross-road where one path leads us to inclusive growth and the other may lead to unsustainable future. However, the first path will require careful nurturing for which all stakeholders need to assume and discharge their respective responsibilities … The corporate growth is sometimes seen as widening the gap between the India and Bharat through its income-skewing capability. This gap needs to be bridged. While the Government undertakes extensive developmental initiatives through a series of sectoral programmes, the business sector also needs to take the responsibility of exhibiting socially responsible business practices that ensures the distribution of wealth and well-being of the communities in which the business operates.Footnote 62
This suggests that a key motive behind the guidelines was to encourage business to undertake more CSR activities or else there may be threats to the “very existence of business.” Presumably, this was a reference to rising calls to restrain business and curtail further liberalization efforts.Footnote 63
This was matched, and perhaps expanded upon, in the introductory note by the Chief Secretary to the MCA, R. Bandyopadhyay, who said:
A number of initiatives are underway on the legislative, service delivery and capacity building sides so that the corporate sector is provided with a buoyant and enabling regulatory environment for its growth. Simultaneously, the Ministry is also focusing on various issues related to inclusive growth in relation to the development of corporate sector.Footnote 64
Here the connection between further reforms and inclusive growth seems more clearly drawn. This suggests that political elites within the government were keen to encourage firms in India to engage in more CSR activities in a more visible manner.Footnote 65
In spite of these appeals, it appears that the guidelines had little effect.Footnote 66 Soon thereafter the Ministry decided it was going to propose reforms to India’s Companies Laws that would install CSR as a requirement. The earliest inkling of this came in August 2010 with reports that the Government was thinking of inserting a mandatory provision into the draft Companies Bill requiring CSR in some circumstances.Footnote 67
This generated negative responses from the business elites in the Indian corporate sector (often known collectively as “India Inc.”) suggesting some tension on this point between the business and political elites.Footnote 68 Key industry trade associations, including the Confederation of Indian Industry (a very influential and large trade group), opposed the proposed rule. They did not necessarily oppose the notion of firms having social responsibilities, but rather were concerned that turning what had traditionally been voluntary into a mandated behavior was wrong and likely to be counterproductive, and also that the desire for a CSR mandate may be a signal that the support for liberalization efforts was weakening.Footnote 69 Their opposition appeared to have some effect because, by December 2010, there were reports that the government was backing away from mandating CSR spending and moving toward a “comply-or-explain” rule.Footnote 70 By 2011, the draft Companies Bill had a provision in it mandating that firms above certain thresholds spend 2 percent of their net profits on activities designated as CSR or explain why they did not (i.e., a “comply-or-explain” rule) along with mandating the formation of a CSR committee and other requirements that track the final provisions in the 2013 Act.Footnote 71
Along with the proposed bill there were other developments indicating a concerted push toward CSR initiatives from the government. In April 2010 the Department of Public Enterprises issued “Guidelines for Corporate Social Responsibility for Central Public Sector Enterprises.”Footnote 72 These tracked in large measure the voluntary guidelines from 2009, but with additional requirements and limitations for Public Enterprises. In 2011, the MCA issued the “National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business,” which also stressed the importance of CSR-oriented activities among other things.Footnote 73 Further, in 2012, SEBI required the 100 largest firms in India to file Business Responsibility Reports which required disclosure of CSR activity.Footnote 74
Thus, by 2012, there was a draft Companies Bill with CSR provisions, guidelines for public sector enterprises on CSR, and a requirement for India’s 100 largest firms (regardless of net worth, sales, or profits) to disclose their CSR activities. Clearly, the government was pushing for CSR to be an important issue across virtually all sectors of corporate activity in India underscoring the importance of India Inc. and India’s business elites contributing to India’s development in a visible manner.
9.4.2 Why Not a CSR Tax?
That brings us back to the question which began this section – if the government wanted to enhance the provision of public goods and services through funds provided by India Inc. it could have enacted a CSR spending requirement (as it eventually did) or it could have enacted a CSR tax (which was considered). Why then choose the relatively more heterodox CSR spending requirement? Although there could be multiple explanations (and indeed they need not be mutually exclusive), the two that I focus on are: (i) that a CSR spending requirement was more efficient in some sense than a CSR tax and (ii) that a CSR spending requirement would suit the political economy of the times better than a CSR tax.
The efficiency argument is premised on the notion that the Indian private sector may have some advantages in providing public goods and services over the Government in India. For instance, if private sector employees have greater expertise than government employees on where to spend funds for the greatest impact for certain activities (e.g., ITC’s efforts for farmers in villages).Footnote 75 Also, we might think that private sector employees are more strongly motivated to make some decisions because they might generate business goodwill that inures more directly to their benefit. On a different note, we might be concerned that government employees in certain environments are more likely to siphon off funds than private sector employees. Of course, one might imagine circumstances in which government employees might have better incentives than private sector employees (e.g., where the CSR activity has more long-term payoffs, government employees have greater experience, or where the risk of siphoning funds is greater in the private sector). In addition, there may be areas where public and private sector employees working together might generate better outcomes than just one set of employees.Footnote 76 In essence, the question depends on the relative advantages of one set of employees making decisions compared to another.
Such arguments also suggest that limits on state capacity – for instance, in the state’s ability to police its own employees or to enforce its tax rulesFootnote 77 – might have played a role in the choice of reform (as has been discussed in Chapter 2). If the state is limited in its ability to enforce tax rules or police its own employees then relying on a CSR tax where government collects and disburses funds is likely to run into many problems and a more heterodox CSR spending requirement may be better. Indeed, commentary after the enactment of Section 135 stressed that the CSR spending requirement might have advantages because it was attempting to push the private sector into doing activities that it might do better (i.e., more efficiently) than the public sector.Footnote 78
Such an efficiency or state capacity argument is certainly a compelling account for why the government might prefer a CSR spending requirement over a CSR tax. Moreover, there are occasional hints that the government did not think it could meet the goals for inclusive development by itself,Footnote 79 which is consistent with concerns over state capacity and efficiency. Having said that, this may not have been the only motivation for the CSR reforms at the time. Much of the discussion and news reports leading up to the voluntary guidelines, the 2011 Bill, and the Companies Act 2013 did not emphasize state capacity or efficiency considerations.Footnote 80 Indeed, even later studies found that much CSR spending in India does not take advantage of the potential efficiencies provided by firms, suggesting that even if enhanced efficiency and addressing state capacity concerns were primary considerations their promise has yet to be fulfilled.Footnote 81
Another explanation – one that is not inconsistent with the state capacity or efficiency argument – relates to the political economy of the times. This was hinted at in Minister Khurshid’s statement as well as that of the MCA’s Chief Secretary. In particular, it appears that the Government was keen for it to look like the firms were providing these public goods or services to the citizenry rather than it looking like the state was doing it. Moreover, a CSR tax is more likely to face opposition from business.
To better appreciate why the optics of the benefits coming from the corporate sector are important we need to note what the economic liberalization reforms in India were advertised to do. In essence, the reforms involved the state pulling itself back from managing large parts of the economy and society. Prior to the early 1990s the state occupied the “commanding heights” of the economy and social life.Footnote 82 However, by the late 1980s and early 1990s, it was becoming clear that the state’s management of the economy was not what had been advertised.Footnote 83 On many metrics of development, India seemed to have stalled or, worse yet, regressed from just two decades earlier.Footnote 84 There was a sense that, to improve the situation, the State needed to pull back and allow market forces and the business sector to grow with less of the “old” style state regulation.Footnote 85 The belief was that this would engender economic growth by fueling the market (or mixed-market) economy and that, although there would be gains to business, many gains would accrue to the general citizenry as well.Footnote 86 One must note that this was not an easy case to make in India, where many believe that so-called free market policies during the British Raj led to the impoverishment of the subcontinent.Footnote 87 Thus, it was essential that whatever market-oriented reforms were adopted actually provided benefits to the citizenry rather than appearing to be a repeat of earlier policies.
By 2009, it was clear that economic growth had certainly improved, but there was a strong sense that the growth had not been well distributed, with the lion’s share of growth going to a small sliver of society.Footnote 88 Concerns were mounting that this was not sustainable and that further economic reforms were likely to face significant headwinds if some of the promised gains to the citizenry had not materialized after nearly two decades of reforms.Footnote 89 Indeed, much of the national election in 2009 turned on issues related to the effects of economic reforms on the general citizenry. These concerns were underscored by the global financial crisis in 2008 and the Satyam fraud – India’s largest – in early 2009.
The government could surely tax corporations in order to provide those benefits,Footnote 90 but that would involve the government essentially getting more involved in managing economic matters (the opposite of what economic reforms were sold as doing) and that might send mixed (or contradictory) messages about whether the general reform effort (to reduce and reimagine the role of the state) was worth it and undermine support for existing and proposed reforms from citizens and business. On the other hand, if the government could persuade or cajole corporations to spend resources to benefit the citizenry then the optics would probably be better for future economic reforms.Footnote 91 After all, a citizenry that was told economic reforms reducing the role of the state will benefit them are unlikely to find further economic reforms palatable unless those benefits emerge. Indeed, if the emergence of those benefits depended in a visible manner on state involvement, then the case for further reducing the role of the state would not be easy. Moreover, businesses might also question the state’s commitment to reform if a CSR tax was put forward.
It would then appear that, for further economic reforms reducing the role of the state to have stronger support, the last generation of reforms reducing the role of the state needed to provide tangible benefits that did not appear as if they depended on the state. Optically, it would be helpful if it appeared as if the benefits were coming from the activity of the corporations rather than the activity of the state, and a tax does not send that message. A nudge via voluntary guidelines or a comply-or-explain rule just might.
In addition, a CSR tax is more likely to raise the ire of India Inc. Although a CSR spending requirement was not cheered on by India Inc., one suspects that a CSR tax would be received much more negatively. Indeed, India Inc.’s reactions to the 2019 amendments (which moved CSR closer to a tax) reflected substantial opposition and led to the 2021 amendments that back-tracked.Footnote 92 Trying to enact a CSR tax in the earlier 2011–2013 window seems like it would have faced even more opposition.
One suspects that a mix of political optics and anticipated opposition to a CSR tax likely influenced the government in designing the CSR reform as a spending requirement rather than a tax. This, combined with potential state capacity and efficiency considerations, likely directed efforts toward the more heterodox CSR spending formulation.
An interesting tidbit related to the optics explanation is that, as the CSR provisions were being debated in the Companies Bill, other provisions in the Bill seemed to be making further attempts at liberalization that would be attractive to India Inc. The Bill was allowing firms to customize their corporate governance more than had been allowed in the 1956 Act as well as reducing constraints on the level of executive compensation.Footnote 93 It thus appeared that, as the Companies Bill was pushing further liberalization reforms, it was also pushing firms to engage in more CSR.Footnote 94 This is consistent with the optics account.
In light of this, it appears that the CSR reforms reflected a blend of political optics and state capacity and efficiency concerns against the background of a skeptical citizenry when it came to market-oriented policies which had a checkered history since the British Raj. Although the forces shaping the 2013 CSR reforms are fascinating, the regulatory and legislative activities in the CSR space did not end in 2013 – they had just begun.
9.5 Post-2013 CSR Developments
Over time, various organizations and groups pushed for further reforms and greater involvement by Indian firms in CSR. This led to the 2019 and 2021 amendments, but also has involved other efforts to encourage firms to engage in CSR. In addition, concerns have been raised about the influence of politics on CSR and the potential for CSR to become an entry barrier of sorts to newer firms and small- and medium-sized enterprises (SMSEs).
Let us begin with the 2019 and 2021 amendments. One way to read the 2019 and 2021 amendments is that they are moving CSR regulation in India closer to a CSR tax structure.Footnote 95 The 2019 and 2021 amendments moved away from the “comply-or-explain” rule toward a mandatory spending rule. Further, they required that unspent CSR funds had to either be spent on CSR activities or be deposited in special funds earmarked for CSR activities (e.g., the Prime Minister’s Relief Fund).Footnote 96 Thus, now the CSR rule is mandatory (like a tax rule) and the funds to be spent on CSR must be spent on that or go to accounts which seem heavily oriented to government control (in some senses like a tax).
One question raised by this is why the government moved closer to a tax structure in just six years since the 2013 reforms? There are a few likely explanations. First, the Government may not have needed to rely on political optics in 2019 as much as it did for the 2013 reforms. Economic growth in India – although hardly uniform – seemed less lop-sided than in 2009 and the government had a larger majority in Parliament to push through reforms compared to the less stable 2009 coalition.
There are also, however, reasons to think that state capacity to enforce a tax-like CSR rule had improved. In particular, the government had been increasingly relying on better technology in the tax area. This was particularly so with the advent of the Goods and Service Tax in 2017 which created a greater document trail, thereby enhancing tax administration and collection.Footnote 97 Further, the rise in e-commerce in India has precipitated greater document trails enabling better tax administration and collections.Footnote 98 Of course, there are likely to be other matters that influenced the enactment of these amendments, but it is interesting to note that at least some of the changes can be viewed through the lenses of changes in state capacity, efficiency, and political optics.
Beyond the amendments, there has been a general push by civil society organizations and social elites, CSR consultants, and others to prod firms to take a more impactful role in CSR. This is in part due to the general push toward environment, social, and governance (ESG) seen at the global level, but also because increasingly there is a sense that collaborations between the public sector and private sector in providing public goods and services could be value-enhancing for almost all parties involved.Footnote 99 Although still in its early stages in India, there is increasing interest.
On the more troubling side are concerns about political interference in CSR spending and effects on smaller and newer firms. On the first point, there have been rising concerns that firms are, under the guise of CSR spending, providing financial support to certain politicians or political parties. Part of this is related to what counts as CSR spending, such as the various government schemes which tend to benefit those parties who initiated the schemes or who run them now. However, there are also concerns that, because individual states have the power to approve of new CSR programs that gives them an incentive to do so in order to secure votes or create vote banks.Footnote 100 Moreover, some managers of large public sector enterprises have expressed concerns over political interference in the choice of CSR projects.Footnote 101 If these sorts of concerns grow, then one can certainly see the likely problems from a corruption standpoint.
Another somewhat intriguing notion is that the increasing CSR requirements might operate as an entry barrier of sorts to newer or smaller firms. Although the spending requirement itself is keyed to profitability and net worth, the other requirements (forming a CSR committee, disclosure) are not. That suggests the CSR requirements might be costly for newer firms and reduce competition in India. For SMSEs the concerns are perhaps greater, but it is noteworthy that in the most recent amendments in 2021 the government did begin to ease some CSR requirements applied to smaller firms.Footnote 102
9.6 Conclusion
India’s landmark 2013 CSR reforms have generated a great deal of attention and discussion. There have been lively discussions about their effects, how they might be improved, whether they are consistent with the Indian ethos of business, and many more matters. However, little attention has been paid to the political economy behind the reforms. This chapter examines that question in some depth. The chapter starts by describing the reforms (and the ongoing reforms in this space) and examining some of their effects, and then transitions to exploring how the 2013 provisions came about. That analysis suggests that the genesis of the reforms was a concern that India’s nearly twenty-year-long liberalization efforts had led to substantial economic improvements for only a small section of society. These lopsided effects might undermine support for further reforms or perhaps even lead to increasing support for bringing the state back into the economy. Concerns surrounding this problem appeared to motivate the government in putting forward its 2009 Voluntary Guidelines and other efforts that eventually led to Section 135 of the 2013 Companies Act.
Yet, this only provides part of the answer. This is because if the goal of Section 135 was to have corporations give back more to society (in order to share the gains from liberalization), then perhaps a simpler way to do it would be for the government to impose a CSR tax rather than a more heterodox CSR spending requirement. The chapter then explores why the CSR reform took the specific shape that it did and suggests that it reflects a mix of efficiency or state capacity considerations as well as political optics tinged by skepticism over so-called market-oriented reforms. Early on it appears that the political optics may have carried the day because the government likely wanted it to look like firms were giving back to society rather than the state taxing them to do so. This was in part motivated by a concern that using a CSR tax would signal that liberalization efforts would not provide benefits without bringing the state back into the economy and may have led businesses to question the steadiness of the state in backing reforms. This was problematic because the government had additional reforms it was going to propose and without spreading the gains from liberalization these further reforms might lose support. A CSR spending requirement met both requirements while a CSR tax only met one. This account combines concerns of political optics with state capacity as likely explanations for the shape of the 2013 reforms, but it is increasingly looking like state capacity and efficiency issues may be influencing recent CSR developments in India. The space is still evolving rapidly so that firm conclusions on future developments may be premature, but what is clear is that interested participants and observers should stay tuned and pay close attention to the political economy concerns animating this sector of business and government interaction.
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