Author: Shagun Kothari, Maharashtra National Law University, Nagpur
To the Point
In India, CSR connects corporate activity to social needs. Section 135 of the Companies Act, 2013 declares that CSR will involve responsibility in the form of requiring eligible companies to reserve a percentage of their profits for development programs. This paper reviews the structure of regulations, the implementation barriers, judicial views, and the broad impact of CSR.
CSR by way of Section 135 of the Companies Act of 2013 mandates that the eligible corporate must contribute a minimum 2% average of their three past financial years’ net profit, as described in section 198 to CSR initiatives. This rule is strictly applicable to those companies satisfying the eligibility criteria of certain Net worth, Turnover or Net profit. Rule 7 of the Companies (CSR Policy) Rules, 2014 deals with surplus utilization to ensure that surplus funds shall be utilized only for CSR activities. The same is also checked through disclosure requirements in MCA Form CSR-1 and CSR-2.
THE PROOF
Indian CSR operates within a clearly defined legal framework set under the Companies Act, 2013. Its major provisions are:
Eligibility Criteria: – Companies having a net worth of ₹500 crores, a turnover of ₹1,000 crores, or net profits of ₹5 crores in the last financial year are mandatorily required to adhere to the CSR provisions.
CSR Expenditure: – Companies that qualify are mandated to spend 2% of their average net profits for the last three years on CSR activities. If companies have been operational for less than three years, then their average net profit of those operational years is considered.
According to Section 198, net profit does not include capital expenditure, receipt, and income tax and considers permissible variations as referred under Rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014.
Activities Permitted: – The Companies Act, 2013 Schedule VII provides what all CSR activities are permissible under the act, which comprises fighting hunger, enhancing access to education, and ensuring environmental protection.
Surplus utilization: – Any surplus from CSR activities shall be ploughed back into CSR projects. Under Rule 7(3), any such surplus could arise from earnings of CSR projects, interest on CSR funds, or income derived from sale of materials used for CSR activities. Any surplus generated in CSR expenditure shall only be carried forward from 22nd January 2021 for CSR expenses.
Monitoring Mechanism: – CSR is governed by the CSR Board of the company in its role with its CSR Committee. Companies must report CSR activities undertaken in their financial statements and file their details in the MCA21 registry through Forms CSR-1 and CSR-2.
Penalties for Non-Compliance: – Companies that do not utilize the mandatory CSR amount or transfer unused funds are liable to penalty up to ₹10 million or twice the unused amount, whichever is lower.
Penalties on Responsible Officers: – Responsible officers may also be liable for penalty up to ₹2 lakh or one-tenth of the unused amount.
ABSTRACT
From a voluntary venture to the mandatory status under Indian law, CSR focuses on sustainable and inclusive business. Legal framework on CSR can be envisaged under Section 135 of Companies Act 2013 coupled with Schedule VII. Despite an effective framework in structuring corporate responsibility, various problems have arisen concerning the implementation and compliance of CSR. Case laws undergird the strategic character of CSR that strives to harmonize the bottom lines of profits with socially responsible obligations.
CASE LAWS
Indian Petrochemicals Corporation Ltd. v. MC Mehta
The said case established the principle of the polluter pays. The judgment holds corporations accountable for the degradation of the environment. It underlines the fact that businesses must reduce their cause of harm to the communities affected by their very operations.
Union Carbide Corporation v. Union of India (Bhopal Gas Tragedy)
This judgment was the landmark case of corporate accountability, whereby companies were responsible for compensation and disaster relief due to negligence in such incidents.
Tata Power Company Ltd. v. Maharashtra Electricity Regulatory Commission
This case connected CSR to good corporate governance in the sense that companies are to integrate social welfare with business activities in order to realize sustainable development.
CONCLUSION
CSR in India is an example of the ethical practice embedded in the legal framework. Though Section 135 and related rules are a good structure, shallow compliance and inconsistency are still there. Stronger enforcement and cultural change towards real accountability will be crucial to unlock the transformative power of CSR. CSR enables corporate interests to merge with societal progress, leading to balanced growth.
FAQS
1. What is Corporate Social Responsibility?
Corporate Social Responsibility, briefly known as CSR, is commitment by a business entity towards societal welfare through socially, economically and environmentally aligned activities. In India, CSR activities are legally stipulated under the Companies Act 2013. Section 135 of the act applies to the following eligible companies.
2. Which companies do CSR activities need to be followed?
As per Companies Act, 2013 CSR provisions apply if any of these conditions is fulfilled by a company in the immediate preceding financial year:
Net worth of ₹ 500 crores or more.
Turn over of ₹1,000 crores or more.
Net profit of ₹5 crores or more.
3. What does an eligible company have to incur on CSR expenditure?
Eligible companies will have to expend at least 2% of their average net profits of immediate three preceding financial years for undertaking CSR initiatives.
4. Can unused CSR amount be carried forward?
Surplus generated from CSR can be carried forward for CSR expenses for the subsequent years. This has been made effective from January 22, 2021.
5. What are Forms CSR-1 and CSR-2?
Form CSR-1: Entities that are conducting CSR activities need to file it with the MCA.
Form CSR-2: Annual CSR activities and expenditures need to be filed along with the annual return.
