How you CSR, not what, matters: India's CSR mandate and the hidden cost for companies

In his keynote address at the inaugural OECD Roundtable on Global Financial Markets in 2025, US SEC chairman Paul Atkins argued that regulation should require companies to provide investors only with information that is material to investment decisions. In his view, rules written for shareholders who seek to effect social change, rather than maximise financial returns, have little place in corporate regulation.

Yet, this shareholder-first conception of corporate regulation sits uneasily with the direction in which some governments are moving. They are taking a more active role in shaping how companies respond to wider social and environmental responsibilities. Some have encouraged firms to spend on CSR, while others have required companies to disclose their social and environmental impact. A handful have gone further. India, for instance, has made CSR spending a legal requirement for certain firms.

For more than 5 decades, economists have debated whether a corporation's primary responsibility is to its shareholders or to society, and consensus remains elusive. Part of the difficulty lies in establishing how spending on social objectives affects financial performance. This tension has persisted despite empirical scrutiny, largely because of reverse causality. For instance, firms that are doing well, and are, therefore, less financially constrained, are more likely to devote resources to CSR activities. This can create a positive association between CSR expenditure and firm performance even when CSR does not cause better performance.


India's mandatory CSR law offers economists a rare chance to cut through this noise. Since April 2014, companies that cross any one of 3 statutory thresholds, based on net worth, turnover or net profits, have been required to spend at least 2% of their 3-yr average net profits on CSR activities. Because eligibility is defined explicitly by statute, the policy creates something close to a natural experiment.

What happens to a firm when CSR spending is no longer optional? The emerging evidence is, at first glance, not encouraging.

In their 2021 paper, 'Does a Government Mandate Crowd Out Voluntary Corporate Social Responsibility? Evidence from India', Shivaram Rajgopal and Prasanna Tantri find that government-mandated CSR crowds out voluntary spending on social and environmental activities, making CSR more of a compliance exercise than a genuine commitment to social causes.

This displacement, in turn, dilutes the signalling value of CSR and makes obligatory CSR akin to a tax on affected firms, thereby creating incentives to remain below the statutory threshold. Consistent with this possibility, a 2021 Journal of Contemporary Accounting & Economics paper, 'Did Mandatory CSR Compliance Impact Accounting Conservatism? Evidence from the Indian Companies Act 2013', finds evidence of downward earnings management among firms close to the threshold. Such behaviour can reduce the quality of financial information available to investors.

Costs may extend beyond firms' accounts to financial markets. By diverting cash to CSR activities that might otherwise have been available for debt service, mandatory CSR could lead lenders, who are generally risk-averse, to either demand higher interest rates, offer loans with shorter maturities, or both. This could make it more difficult for affected firms to finance otherwise-profitable projects.

Shareholders appear to have anticipated these pressures. A 2017 paper by Hariom Manchiraju and Shivaram Rajgopal, 'Does Corporate Social Responsibility (CSR) Create Shareholder Value? Evidence from the Indian Companies Act 2013', examining legislative events leading up to the law, found that firms subject to the mandate experienced negative share-price reactions relative to unaffected peers.

These findings point to a familiar tension: a policy designed to make businesses more socially responsible may impose costs on private investors. Yet, none of this establishes either that CSR is harmful, or that underlying social objectives are unworthy. The evidence suggests something more nuanced: the mechanism matters.

If a social objective is genuinely valuable - and many are - the relevant question is whether gains to society are large enough to offset the costs that social responsibility rules impose on companies and their investors. In most cases, they probably aren't.

Targeted public expenditure, funded through taxation, can direct resources more precisely, reach communities that CSR programmes may never reach, and be subject to democratic accountability in ways that boardroom philanthropy cannot. The lesson from India's experiment with mandatory CSR is not that companies should be indifferent to the societies in which they operate, but that using the corporate form as a vehicle for social policy can often misfire.

Srivastava is assistant professor, IIM, Ranchi, and Kasaudhan is assistant professor, Birla Institute of Management Technology, Greater Noida