Mandated CSR expenditure: the Indian experience

Abstract

The idea that companies service a broad range of stakeholders dates back to the 19th century but has gained increasing traction in more recent times. The question is what to do when the corporate sector fails to keep pace with societal expectations. The Indian Government’s response was to pass legislation on 12 August 2012 to make it mandatory for large corporations to spend a minimum of 2% of their profits on CSR activities, and then to amend this legislation 18 months later to specify the area where these funds must be allocated. In this thesis, we use India as an example of the success or otherwise of taking decisions related to CSR largely out of the hands of management. We analyse the impact that the mandatory CSR regulation may have on investors’ perceptions about what the resulting increased expenditure on CSR will have on corporate profitability, and we then investigate how the companies perceive the mandatory CSR regulation. There are three studies in this dissertation. The first study uses the flow of information relating to the introduction of mandatory CSR expenditure in India as a means of measuring investor perceptions of the impact that the resulting increase in CSR expenditure will have on company profitability. We use both event study and regression analysis and find that when mandatory CSR spending was first mooted in mid-2008, investors expected that more CSR expenditure would increase future corporate profitability. However, by the time the legislation was passed in August 2012, these expectations had changed to the opposite view. In the second study, we investigate the drivers and barriers of CSR expenditure, determine the attitudes of corporations towards CSR activities and the impact of making CSR spending mandatory. We surveyed 223 Indian corporations and find that the attitudes of companies on CSR spending largely vary with age, size and type of ownership of firms. The results of this study indicate that the expenditure on CSR in India is very much dependent on the availability of funds. Also, we provide an explanation for why a large number of Indian companies failed to comply with the requirement under the legislation to allocate 2% of profit towards CSR. In the third study, we test both the relationship between CSR expenditure and financial performance, both before and after the legislation was introduced. We use panel regressions to analyse the direction of the relationship between CSR spending and firm performance, and then the difference in difference regression analysis to examine the overall impact of mandatory CSR regulation on firm performance. Our findings suggest that the legislation has fallen short of expectations both in terms of the volume of CSR expenditure that has been generated, and the purposes to which it has been directed. In particular, we find that the law has weakened the previously positive relationship between CSR and profitability which can have a perverse effect on the willingness of companies to spend in this area. We conclude that great care has to be taken when implementing mandatory CSR if it is to be effective.