Deregulate large-scale philanthropy

The income tax department is reportedly insisting on provisions that require charitable institutions which have held equity in companies prior to 1973 to wind up such investments. The reason for the move is the belief in certain quarters that a charitable trust should not be able to misuse its tax-exempt status to control companies.  

But that’s barking up the wrong tree. The question to ask is this: Should the issue be shareholding, its extent and, as a corollary, control over firms, or the purpose and performance these institutions demonstrate with such control?

The attention and law-making should focus on to what end control is being exercised. Is it for the benefit of the owning body or entity solely, or for the organisation’s overall business goals, and shared prosperity of all connected stakeholders?

Let’s consider shareholding patterns. In India, there are companies with a diversified shareholder base (L&T, for example), family-run businesses or a company like Tata Sons— which is majority-owned by a clutch of Tata Trusts and is the principal holding company of the Tata group — or foreign company-controlled subsidiaries like Hindustan Unilever.

The purpose and performance of these companies do not demonstrate that any one class, on a secular basis, is superior or inferior in these respects. 

Similarly, many companies, with all types of shareholding patterns, are well-run, including those where charitable institutions, by dint of their shareholding influence, have a navigating role.

In fact, the government should think of a level playing field— by restoring the pre-1973 status, under which foundations could hold equity with income tax exemption, and bringing other foundations on a par with the Tata and Birla Trusts.

Successive governments have desired that companies should aggressively share the cost of providing social development inputs. It is this desire that is at the core of the mandate that companies must spend 2 per cent of their profits on corporate social responsibility.

What India needs is large-scale charitable giving or philanthropy. India’s wealthy today have the means to do so. In the US, for example, charitable giving is close to 2 per cent of its GDP. If India Inc follows suit, it will be around $60 billion.

As elsewhere, India’s entrepreneurs hold an overwhelming share of their wealth in the equity of their companies. Allowing promoters to donate their equity to charity and allowing such charities income tax exemption will give a fillip to the government’s purpose of driving wealth towards social causes.

Just like the Tatas or the Birlas, some of the world’s most renowned organisations — Heineken, Ikea, Robert Bosch, Carlsberg, etc — are owned by foundations. The Wallenburg Foundations themselves directly or indirectly via investment firms (Investor AB and FAM AB) own ABB, AstraZeneca and Atlas Copco, among others.

The thinking that a charity cannot run a business is at cross-purposes with the desire that businesses become more charitable. It takes us back to the 1970s’ thinking in India. The fact that it was a regressive approach is well established today. The decision to disallow foundations from holding equity, without losing income tax exemption, was one such. Out of a mistrust of business, the government had also introduced Monopolistic and Restrictive Trade Practices ACT in 1969, following up with the Foreign Exchange Regulation Act in 1973. Eventually that led to the crisis of 1991, and deregulation.

But that total mistrust has given way to some trust. So, it is time to deregulate large-scale philanthropy as well. The government can learn a lesson from the post-1973 period. When IBM and Coke left, Unilever engaged with the government to allow a 51 per cent shareholding resting point, on the condition that such multi-national corporations will engage in backward area development and in high-tech industries. The Janata Party government would have allowed that (the late George Fernandes was industry minister) but the government did not last a full term. Eventually, the succeeding Indira Gandhi-led government approved the proposal. The word “liberalisation” was first uttered by her industries minister, the late ND Tiwari.

So, the issue perhaps is not about the form of control, but the substance of results.

Take the Tata Trusts, for example. There is no denying that the trusts, through their participation in Tata Sons, helped establish many new businesses. The trusts own two-thirds of the stock holding of Tata Sons. The wealth that accrues from this asset supports an assortment of social causes.

So why try to fix something that is not broken?