Corporate Social Responsibility (CSR) is a great initiative to encourage corporates to give back to the society, a portion of what they have made good from the society. The Business community earns money from the various stakeholders in the society and the law has mandated thatCompanies must return a portion of the huge profits that was made on account of this trade, back to the society. This is the concept of round tripping from a CSR viewpoint, what starts from the society goes back to the society.
An analysis of various Public and Private Sector Companies reveals that this initiative may in fact be the beginning of round tripping of the profits rather than effective end use of the funds of shareholders.
Meaning of Round Tripping:
According to Wikipedia “Round-tripping, also known as round-trip transactions or "Lazy Susans", is defined by The Wall Street Journal, as a form of barter that involves a company selling "an unused asset to another company, while at the same time agreeing to buy back the same or similar assets at about the same price."
According to the busines dictionary.com the definition of Round Tripping would mean “a strategy used by businesses who sell an asset to another business with an agreement that the asset will be bought back at a time in the future. The strategy is used to increase the apparent amount of revenue and sales that have been made during a specific period of time. This practice is common in the business world but not everyone agrees it is a good business practice”. Also known as round trip transactions.
Round Tripping in CSR
The company generates profit that legally belongs to the shareholders and the company is supposed to deploy this money back in the business or distribute it as dividend to shareholders. In a round tripping of CSR, the 2% of the profit that is mandated by law to be spent by companies, instead of being paid as dividend to shareholders, are being diverted to the pet projects of the promoter CEO. This is round tripping of money in CSR, which results in the profits moving out of the system, which actually comes back into the system (promoter) in a different form.
There are many ways in which this round tripping in CSR happens, some of the visible forms or concepts can be:
- Related Party Transaction
- Conflict of Interest
- Vested Interest
- Money Laundering
- Politically Affected Person
- Politically Exposed Person
Instances of Round Tripping in CSR
Related Party Transaction: In the case of a listed real estate company there was an overspend of CSR money, which is instead of spending X the company spend 3X on CSR. While in the normal course one would have felt happy about this, the notes to accounts of this company reveals that the money was actually spend for a cause in which the CEO was interested and the same was reported as a related party transaction.
Conflict of Interest: In another case a large listed entity chose to spend almost 80% of the CSR amount in the family’s pet project, which was a hospital in the name of the father of the CEO. The amounts of CSR spend in building this hospital was quite substantial. The revenues from the hospital moves back to the trustee, who may happen to be family members of promoters.
Vested Interest: In yet another case the majority of the CSR fund was spent in building the old government school. The school was in the village where the CEO had studied about 25 years back. This transaction may not directly result in a monetary benefit to the CEO but was a transaction resulting in a vested interest that gave him emotional satisfaction.
If round tripping was a common feature in Private Sector, in large public sector companies (PSU) there are instances of companies spending most of the CSR fund in Swatch Bharat Abhigyan, the pet project of the Prime Minister. The Government puts money in a PSU (which is the common man’s money from taxes), this money generates profits and in turn the profit is ploughed back into another government project. Will this not result in round tripping of CSR in a PSU?
In another instance a large PSU has spent its entire CSR funds of a few crores in about 513 beneficiaries across the country.These small little amounts are put in the various projects that may satisfy the ego of the various individuals in the company and the contributions are as low as thirty five thousand rupees. How can a Board of director in these companies approve of so many transactions in a year that may be round tripping in a small way?
Honey, it is all about Money
Round Tripping in accounting terms for a business may provide real economic benefit to the CEO or shareholders but in CSR it fails to provide real economic benefit to the society.Round tripping in CSR may not be illegal but to re-route the shareholders money to a destination that belongs to the promoter seems a little far-fetched. Are these companies ably assisted by the board of directors to color transaction to make it look legitimate?
CSR in letter; but is it misused in spirit
Round tripping in CSR is not spending for a cause but a cause to spend; to make the company look like it's doing more charity than it really is.
Tags :Corporate Law