Author: Khushi Pursnani, Subodh Law College, Jaipur
To the Point
CSR is Corporate Social Responsibility which means a company has to contribute a minimum of its 2 percent of average net profit of past three financial years to be provided for social services to society (section 198).CSR is not defined under Companies Act, 2013 but it has been defined under Rule 2(d) of Companies (CSR) Rules, 2014 defines CSR. Rule 7 of The Companies (CSR Policy) Rules, 2014 deals with unspent amounts of CSR to ensure that unspent funds shall be utilized only for CSR activities. It shall also be checked through disclosure requirements in MCA Form CSR-1 and CSR-2. It is a pivotal part of corporate governance.
Abstract
In India initially Corporate Social Responsibility (CSR) was a voluntary initiative by the companies but it has evolved and has become a mandatory legal obligation for the eligible companies under Companies Act, 2013. This article examines the compliance, legal framework and eligibility which are dealt under Section 135 of Companies Act, 2013 read with Rules given under The Companies (CSR Policy) Rules, 2014. The study also explores the compliance mechanisms, including reporting obligations through the Board’s Report and the role of the Ministry of Corporate Affairs in monitoring implementation. It highlights the criteria for CSR applicability, mandatory spending threshold, and disclosure requirements imposed on eligible companies.
Though it has become mandatory for the eligible companies to do CSR expenditure there are several loop holes through which companies try to save their money as the penalties given under the Act are inadequate to be honest there was an amendment which came before the present law in which there were stricter rules then now which included penalties like imprisonment for directors and KMPs which was opposed by everyone but if that would have continued the companies would not have any kind of loop holes. Furthermore, the article concludes by emphasizing the need for a more robust enforcement mechanism, increased transparency, and stakeholder participation to ensure that CSR efforts contribute meaningfully to national development goals.
Use of Legal Jargon
The CSR regime under the Companies Act, 2013 imposes a statutory mandate, binding companies and officers in default under Section 2(60). The Board and CSR Committee bear fiduciary duties to act in good faith. Moving from a “comply-or-explain” to a stricter “comply-or-suffer” model, CSR contravention constitutes a civil wrong with penal consequences, extending quasi-criminal liability.
The Proof
Applicability: Section 135(1) of The Companies Act, 2013 read with Rule 3 provides applicability of CSR i.e. Every company having Net worth of Rs. 500 crore or more or turnover of Rs. 1000 crore or more or net profit 5 crore or more, during immediately preceding financial year needs to constitute a CSR committee of Board consisting of 3 or more directors, one of whom shall be an Independent Director and whichever company falls under this criteria is known as an eligible company for CSR. There is an exception to formation of CSR Committee is that if the total amount to be spent on CSR is less than equal to Rs. 50 Lakh then BOD shall also discharge its functions of CSR Committee.
Expenditure Requirement: Companies which fall under the above criteria are required to spend 2% of their average net profit of previous 3 financial years or where the company has not completed 3 financial years since its incorporation, average net profit of such immediately preceding operating financial years.[ Section 135(5)]
Rule 2(1)h defines Net profit.
Activities on which CSR amount shall be utilized: Activities which are provided by the Companies Act, 2013 under Schedule VII and which the eligible company has included in its CSR Policy, the eligible company is obliged to utilize CSR Amount on such activities. (Refer Schedule VII details of such activities)
Surplus Utilization: As per Section 135(6), any surplus generated from CSR activities shall not be treated as business profit of the company.
Instead, it must be reinvested in the same project, transferred to the unspent CSR account for utilization in line with the CSR Policy and Annual Action Plan, or transferred to Schedule VII funds within six months of the financial year’s end.
Disclosure: Details about CSR Committee Composition, CSR Policy, Amount of CSR or CSR Annual Report shall be disclosed in Board Report (Section 134(3)(o) and on Companies Website, if any.
Monitoring Mechanism: The Board of Directors is responsible for ensuring compliance and disclosing CSR activities in the annual report. Companies are also required to file the CSR-1 and CSR-2 form with the Ministry of Corporate Affairs (MCA), providing detailed information on CSR expenditure and outcomes.
Penalty: Company in default with the provisions of sub section (5) and (6) of section 135 shall be liable twice the amount required to be transferred to the fund specified in Sch. VII or the Unspent CSR A/c or one Crore whichever is less while the officer in default shall be liable of 1/10th of the amount of such fund or A/c or two lakh whichever is less.
Case Laws
Tata Power Company Limited vs Maharashtra Electricity Regulatory
The State Commission held that CSR expenses are not essential for utility operations and cannot be passed on to consumers, as they derive no direct benefit. Such costs must be borne by TPC itself, though TPC-D is free to incur them.
Conclusion
Corporate Social Responsibility in India is now a mandatory legal obligation which every eligible company has to comply with. CSR imposes a responsibility towards the big profit making companies to contribute to some extent out of their profits towards the development of the society on activities provided under Schedule VII.The absence of stringent penalties for non-compliance until recent amendments, coupled with inadequate monitoring and evaluation mechanisms, has limited the effectiveness of CSR initiatives in many cases. India’s CSR regime has the potential not only to bridge social and economic gaps but also to promote responsible business conduct that contributes meaningfully to the nation’s development.
FAQS
What does CSR actually mean?
Corporate Social Responsibility (CSR) is the ethical duty of businesses to contribute to societal and environmental well-being while pursuing their operations. It goes beyond profit-making, requiring companies to engage in social, environmental, and economic development initiatives, thereby creating a positive and sustainable impact on the communities in which they function.
What is CSR Committee?
CSR Committee is a group established by a company’s board of directors to oversee and manage the company’s social responsibility initiatives. The CSR Committee is entrusted with formulating, recommending, and overseeing the company’s CSR policy, as well as monitoring the implementation of CSR activities in alignment with statutory requirements. In essence, it ensures the company is actively contributing to society and the environment beyond its core business operations.
Which Government changed CSR as a mandatory provision from voluntary provision?
In the year 2013 Congress Government, Mr. Sachin Pilot as the minister of Ministry of Corporate Affairs made CSR as a mandatory legal provision.
What is role of Form CSR-1 and CSR-2?
Form CSR-1 is filed by implementing agencies such as Section 8 companies, registered public trusts, registered societies, or government entities to get registered for carrying out CSR activities on behalf of eligible companies. Submitted to the ROC with certification by a PCA/PCS/PCMA, it enables issuance of a unique CSR Registration Number, ensuring compliance and accountability.
Form CSR-2
It is Report of CSR which provides details of expenditure and implementation of CSR activities and it supplements the information already provided in the Board Report which shall be filed with the ROC annually.
