A recent study conducted by researchers at the Indian Institute of Management (IIM) in Lucknow has raised significant concerns about the impact of India's mandatory Corporate Social Responsibility (CSR) spending rule. The research suggests that this well-intentioned policy, unique to India, might inadvertently be eroding investor confidence and negatively affecting the valuation of companies.
The Core Findings: A Link Between Mandate and Market Perception
The study, authored by Professor Abhishek Srivastava and his team, analyzed data from over 1,300 listed companies spanning a period from 2014 to 2021. The central finding is striking: firms that are mandated to spend on CSR activities experience a notable decline in investor confidence compared to their peers who engage in CSR voluntarily.
This decline manifests as a lower Tobin's Q ratio, a key financial metric that compares a company's market value to the replacement value of its assets. A lower ratio suggests the market values the company less. The research indicates that the compulsory nature of the spending, rather than CSR itself, is the critical factor driving this negative perception.
Why Does Mandatory Spending Backfire?
The IIM researchers propose several compelling reasons for this counterintuitive outcome. First, investors may perceive mandatory CSR expenditure as a form of additional tax or a diversion of resources away from core business activities and shareholder returns. This can make the company appear less attractive from a pure investment standpoint.
Second, the mandate introduces what the study calls "agency costs." This refers to the risk that company managers might use CSR projects for personal gain or reputation-building rather than for genuine social good or strategic business alignment. This potential for misuse increases investor skepticism.
Finally, the study highlights a compliance burden. The effort and cost associated with identifying, implementing, and reporting on CSR projects as per the Companies Act, 2013, can be substantial. Investors might view these as unnecessary operational complexities that do not contribute to profitability.
Policy Implications and the Path Forward
The findings of this study carry profound implications for Indian policymakers and corporate regulators. India's CSR rule, which requires companies with a certain net worth, turnover, or profit to spend 2% of their average net profits on social development, was a pioneering step globally.
However, the IIM research suggests that the policy's compulsory character might be undermining its own goals. The study advocates for a shift in focus from mandating spending to incentivizing and recognizing genuine, strategic CSR. Recommendations include:
- Developing a more robust framework to assess and certify the quality and impact of CSR projects.
- Providing tax benefits or other incentives for companies that demonstrate effective and transparent CSR outcomes.
- Encouraging voluntary adoption by building stronger market and consumer recognition for responsible businesses.
The ultimate goal, as per the study, should be to move away from a "check-box" compliance culture and foster an environment where corporations see social responsibility as an integral, value-creating part of their long-term strategy, not a regulatory obligation.
In conclusion, the IIM Lucknow study provides crucial empirical evidence that while the intent behind mandatory CSR is laudable, its execution may need recalibration. Balancing social good with investor trust remains a key challenge for India's corporate governance landscape.
