Author : Krisha Shah – LLB from Jitendra Chauhan College of Law
To the Point
Corporate Social Responsibility (CSR) in India is now a mandatory requirement rather than a choice. As per Section 135 of the Companies Act, 2013, eligible companies must spend a part of their profits on activities that benefit society. This aims to make businesses more responsible towards social and environmental development.
Use of Legal Jargon
• Statutory compliance: Adherence to legal mandates under the Companies Act, 2013 and related rules governing CSR.
• Fiduciary duty: The legal responsibility of company directors to oversee CSR policies in the interest of all stakeholders.
• Corporate governance: Framework of rules and practices guiding a company’s ethical and legal conduct, including CSR implementation.
• Regulatory oversight: Supervision by authorities such as the Ministry of Corporate Affairs (MCA) to ensure CSR compliance.
• Penal provisions: Legal sanctions imposed on companies and officers for non-compliance under Section 135(7).
• Implementing agencies: Registered entities authorized to execute CSR projects on behalf of companies.
• Impact assessment: A structured process used to evaluate the social, economic, and environmental results of CSR initiatives.
The Proof
A. Statutory Backing
– Section 135 of the Companies Act, 2013, is the cornerstone of CSR in India. It applies to companies that meet any of the following criteria during a financial year:
•Net worth of ₹500 crore or more
•Turnover of ₹1000 crore or more
•Net profit of ₹5 crore or more
– Such companies are required to constitute a CSR Committee comprising at least three directors, including one independent director. The Committee is responsible for:
•Formulating and recommending a CSR Policy
•Recommending the amount of expenditure on CSR activities
•Monitoring the implementation of the CSR policy and projects
– CSR activities must align with Schedule VII, covering areas such as education, healthcare, environmental sustainability, gender equality, rural development, and disaster relief.
– CSR expenditure must be at least 2% of the average net profits of the previous three years.
B. Schedule VII of the Companies Act:
– Permissible CSR activities:
1. Addressing issues related to hunger, poverty, and malnutrition; promoting overall healthcare including preventive measures, improving sanitation, and ensuring access to clean drinking water.
2. Supporting education at all levels, with special focus on skill development for children, women, senior citizens, and persons with disabilities; implementing livelihood improvement programs.
3. Promoting gender equity and empowering women by establishing shelters and hostels for women and orphans; creating facilities such as day care centers and old age homes for senior citizens, and initiatives to bridge the social and economic gap for marginalized groups.
4. Encouraging environmental protection through sustainable practices, conserving biodiversity, animal care, agroforestry, and maintaining air, water, and soil quality.
5. Preserving India’s cultural and historical legacy by restoring heritage buildings and art pieces, establishing public libraries, and promoting indigenous art forms and handicrafts.
6. Providing support to ex-servicemen, war widows, and their dependents through welfare initiatives.
7. Facilitating the growth of rural and recognized sports, including Paralympic and Olympic disciplines, through training and development programs.
8. Donating to the Prime Minister’s National Relief Fund or other government-established funds aimed at the welfare and upliftment of SCs, STs, OBCs, minorities, and women.
9. Funding technology incubators within government-approved academic institutions to promote innovation and research.
10. Executing developmental projects aimed at improving rural infrastructure and overall community well-being.
– Additional Activities Added Later (via notifications/amendments):
1. Slum area development: Activities for improving the living conditions of people residing in slum areas.
2. Contribution to the PM CARES Fund: Added via MCA circular during the COVID-19 pandemic in 2020.
3. Disaster management, including relief, rehabilitation, and reconstruction activities (especially invoked during natural calamities and the pandemic).
4. COVID-19 related expenditures: Such as contributions to public health infrastructure, preventive health measures, vaccination drives, awareness campaigns etc.
– List of Non-CSR Activities (As per Rule 2(1)(d) of CSR Rules):
1. Activities that are part of a company’s regular business operations are not considered as CSR.
Exception: In certain cases, during COVID-19, companies engaged in R&D of vaccines, drugs, and medical devices were temporarily allowed to treat it as CSR under specified conditions.
2. Activities undertaken outside India.
Exception: Providing training to athletes who represent India in international sporting events qualifies as an allowable CSR activity.
3. Giving money to political parties, as allowed under Section 182 of the Companies Act, 2013, is not counted as a CSR activity.
4. Activities benefiting employees of the company (as defined under Section 2(k) of the Code on Wages, 2019) and their families directly.
5. Sponsorships for marketing, brand building or publicity purposes.
For example: Activities done with the intention of deriving commercial benefit or promoting the company’s brand are not CSR.
6. Activities carried out for statutory obligations under any law in force in India.
For instance: Tree plantation to comply with environmental clearance conditions does not qualify as CSR.
C. Amendments
The legal framework for Corporate Social Responsibility (CSR) in India has changed a lot over time through various amendments and rule updates. These changes were mainly made to ensure better compliance, transparency, and effective implementation of CSR activities by eligible companies.
1. Companies (Amendment) Act, 2019
The 2019 amendment to the Companies Act brought significant reforms to CSR provisions:
•Compulsory CSR Expenditure: Previously governed by a “comply or explain” principle, CSR spending became mandatory. Companies are now legally required to spend the stipulated amount on CSR initiatives. Any portion left unutilized must be deposited into a government-approved fund listed under Schedule VII (such as the PM CARES Fund) within six months following the end of the financial year.
•Treatment of Unspent Funds: Ongoing Projects: If the underutilized CSR funds pertain to ongoing projects, they must be deposited into a specially designated “Unspent CSR Account” maintained with a scheduled bank, within 30 days after the close of the financial year. These funds must be utilized within three subsequent financial years; failing which, the amount must be redirected to a notified fund.
•Penalties for Non-Compliance: If a company fails to fulfill its CSR obligations, it can be penalized with a fine ranging from ₹50,000 up to ₹25 lakh. Moreover, the officers in default may face imprisonment for a period of up to three years and/or be fined between ₹50,000 and ₹5 lakh, depending on the gravity of the violation.
2. Companies (Amendment) Act, 2020
This Act further rationalized the CSR framework:
•Decriminalization of Certain Offences: The threat of imprisonment for CSR non-compliance was diluted to encourage ease of doing business. The 2020 amendment removed imprisonment provisions and replaced them with monetary penalties.
•Clarification on Ongoing Projects: The definition of “ongoing project” was clarified to include multi-year projects not exceeding three years, excluding the financial year in which the project commenced.
3. Companies (CSR Policy) Amendment Rules, 2021
These Rules, effective from January 22, 2021, significantly strengthened the operational and reporting framework for CSR:
•Registration of Implementing Agencies: Companies can undertake CSR activities through third-party entities (NGOs, trusts, Section 8 companies), but such entities must be registered with the Ministry of Corporate Affairs by filing Form CSR-1.
•Impact Assessment: Companies with average CSR obligation of ₹10 crore or more in the past three financial years must undertake impact assessments through independent agencies for projects with outlays of ₹1 crore or more.
Annual Action Plan: CSR Committees must formulate a detailed annual action plan that includes a list of approved projects, execution timelines, modalities of fund utilization, and monitoring mechanisms.
•Board Responsibility: The Board of Directors holds the final responsibility for the effective implementation of CSR activities and disclosure in the annual report.
Enhanced Disclosures: Detailed CSR disclosures are now required in the company’s Board Report and on its website, including particulars of CSR policy, expenditure, and impact assessments.
4. Companies (CSR Policy) Amendment Rules, 2022
The 2022 update brought minor clarifications and refinements to the 2021 rules. These include:
•Relaxation in Impact Assessment: The requirement for mandatory impact assessment was reaffirmed but also allowed flexibility in the methodology and frequency.
•Expenditure Clarifications: Administrative overheads were clearly distinguished from project costs and capped at 5% of total CSR expenditure.
Abstract
The enactment of CSR provisions in India marked a global first — making CSR spending compulsory for companies meeting specified financial thresholds. This article explores the legal foundations of CSR, including key provisions under the Companies Act and Schedule VII, recent amendments, and the role of judicial interpretations in shaping CSR practices. It also examines practical challenges and the evolving landscape of CSR in the context of India’s sustainable development goals.
CSR: Legal Duty v. Moral Obligation
Corporate Social Responsibility (CSR) in India initially emerged as a voluntary, moral commitment by businesses to contribute positively to society through ethical values and philanthropy. Companies undertook social initiatives based on goodwill and a sense of ethical duty without any statutory compulsion.
The introduction of Section 135 under the Companies Act, 2013, shifted CSR from being a voluntary act to a legal requirement. It mandates qualifying companies to dedicate a specified portion of their profits to approved social initiatives and adhere to compliance norms. However, the real value of CSR lies beyond formal compliance—it is the ethical motivation and sincere engagement of businesses that determine its true impact. While fulfilling statutory obligations addresses legal requirements, it is the moral dedication that ensures genuine social transformation. Consequently, CSR in India embodies both a legal mandate and a voluntary commitment to ethical conduct.
Case Laws
1. Technicolor India Pvt. Ltd. v. Registrar of Companies, NCLT Bangalore, 2020
– Facts:
Technicolor India Pvt. Ltd. failed to transfer the unspent CSR amount to a designated account as required under Section 135(5) and (6) of the Companies Act, 2013.
– Issue:
Whether failure to transfer unspent CSR funds constitutes a statutory violation liable for penal consequences.
– Held:
The NCLT held that CSR compliance is not optional. A company’s failure to transfer unspent funds, regardless of intention, violates statutory provisions and invites penal action.
– Significance in CSR:
This case reinforced the mandatory nature of CSR obligations under the law and established that non-compliance leads to enforceable consequences, setting a precedent for strict regulatory scrutiny.
2. Rural Litigation and Entitlement Kendra v. State of Uttar Pradesh, AIR 1985 SC 652
– Facts:
This case involved unauthorized limestone mining in the Mussoorie Hills, leading to serious environmental degradation and health hazards.
– Issue:
Whether commercial exploitation of natural resources justifies environmental damage under the right to development.
– Held:
The Supreme Court prioritized the right to a clean environment under Article 21 of the Constitution and ordered closure of the mines in public interest.
– Significance in CSR:
Though predating CSR law, this judgment inspired CSR policies focused on environmental sustainability, later included in Schedule VII of the Companies Act, 2013. It demonstrated that corporate actions must align with environmental protection.
3. Keshub Mahindra v. Union of India, AIR 1996 SC 2001
– Facts:
The case dealt with the criminal liability of Union Carbide executives in the 1984 Bhopal Gas Leak tragedy, which caused widespread human and environmental harm.
– Issue:
Whether corporate executives could be held personally liable for large-scale industrial disasters resulting from negligence.
– Held:
The Supreme Court upheld that corporations and their officers can be criminally liable for industrial negligence and public harm.
– Significance in CSR:
The case laid the groundwork for corporate accountability in environmental and human rights matters, influencing future CSR laws that emphasize preventive responsibility and social safety.
4. In Re: CSR Obligation of Companies, MCA Circular No. 09/2020, dated 13 April 2020
– Facts:
Amidst the COVID-19 pandemic, many companies sought clarity on whether pandemic-related donations and healthcare spending qualified as CSR.
– Issue:
Whether contributions to pandemic relief and the PM CARES Fund could be considered valid CSR expenditure.
– Held:
The Ministry of Corporate Affairs clarified that such expenditures qualify as permissible CSR activities under Schedule VII.
– Significance in CSR:
This circular showcased the adaptive nature of CSR regulation, allowing companies to respond to urgent national needs. It reinforced CSR’s dynamic role in addressing real-time societal crises.
Conclusion
In India, Corporate Social Responsibility (CSR) now plays a crucial role in shaping responsible business practices and aligning corporate actions with societal needs. With the legal mandate under Section 135 of the Companies Act, 2013, CSR is no longer voluntary but a statutory duty for qualifying companies. Judicial pronouncements and regulatory updates reinforce the importance of meaningful and transparent CSR initiatives. The introduction of penal provisions and enhanced disclosure norms marks a shift towards a performance-oriented CSR regime.
For businesses, CSR is not just about compliance—it’s an opportunity to build trust, contribute to social development, and align with national and global sustainability goals.
FAQS
1. Is CSR mandatory for all companies?
No. CSR is mandatory only for companies meeting the financial thresholds specified in Section 135 of the Companies Act, 2013.
2. What happens if a company fails to comply with CSR requirements?
Non-compliance can result in penalties up to ₹25 lakh for the company and fines or imprisonment upto 3 years for responsible officers.
3. Can CSR activities be conducted outside India?
No. CSR projects must be implemented within Indian territory as per current legal provisions.
4. Are political donations considered CSR expenditure?
No. Contributions to political parties are explicitly excluded from CSR under Section 182 of the Companies Act.
5. What qualifies as an implementing agency?
NGOs, trusts, Section 8 companies with at least 3 years of track record, registered on the MCA CSR portal (CSR-1), are eligible as implementing agencies.
6. Are CSR expenses tax-deductible?
Generally, CSR expenditures are not deductible under Income Tax provisions; however, certain donations may qualify for deductions under specific sections like 80G.
7. Why is impact assessment important?
It measures the effectiveness and outcomes of CSR projects, helping companies improve future planning and demonstrate compliance.
7. Can unspent CSR funds be carried forward?
Yes, but only for ongoing projects, and funds must be transferred to a designated account and utilized within three years.
8. How is CSR different from philanthropy?
CSR is legally mandated and focused on Schedule VII activities, while philanthropy is voluntary and broader in scope.
9. Does the law specify how to distribute CSR funds across different activities?
No. Companies have discretion to select and prioritize activities from the Schedule VII list based on their business strategy and societal needs.
