When corporate social responsibility is an obligation: The unique case of India

Abstract

India’s Companies Act mandates qualifying firms to spend two percent of their average profits on corporate social responsibility (CSR) activities, from 2015 onwards. We hand collect data on the first years of application of this rule, for BSE500 firms. We find evidence of the existence of group policies for CSR, as firms in business groups have a higher probability of spending only the required value. Moreover, we document that the probability of spending more than the required amount increases with (i) the firm’s involvement with its CSR activities (area where firms operate and whether firms spend the money directly), (ii) the level of ownership of an Indian controlling shareholder, (iii) the research and development expenses. However, at mean values of ownership, group firms have a higher probability of spending only the required amount, even when there is a controlling shareholder. Finally, we document the existence of severe underspending by Indian firms.