Impact of mandatory corporate social responsibility on corporate financial performance: the Indian experience

Abstract

Purpose The purpose of this paper is to investigate the impact of mandatory corporate social responsibility (CSR) expenditure on the firm’s financial performance in the aftermath of insertion of Section 135 in the Companies Act, 2013 for Indian listed companies. Design/methodology/approach The paper uses independent sample t-test, one-way ANOVA, fixed effect panel regression model and principal component analysis on a data set of 153 non-financial companies listed in BSE-500 companies for a period of 2015–2019. Findings The empirical results of the paper suggest that the mandatory CSR expenditure negatively impacts the company’s profitability. Practical implications The study has important implications for regulators and listed companies. Firstly, the mandatory CSR expenditure acts as a burden onto the on-going activities of the firms. CSR activities, therefore, should be integrated with the existing skillsets and expertise of the firms. Secondly, the government can encourage CSR activities by making the expenditure tax deductible. Moreover, the Schedule VII list of activities has a scope to become more inclusive rather than the present exhaustive list. Originality/value The paper highlights the gap in the expectation and actualisation of the CSR mandate by studying the recent data of the sample companies of the BSE-500 index. The paper adds to the CSR literature in the emerging market context.