Author: Abhijit Singh, New Law College, Pune
Introduction
Corporate Social Responsibility (CSR) in India has undergone significant transformation from being a purely voluntary business practice to being an obligation under law for specific companies. This change of CSR from a gesture of goodwill to a framework under law marks India’s step towards the promotion of a more socially responsible corporate culture. The legal transformation is essentially encapsulated within Section 135 of the Companies Act, 2013, which is the first holistic CSR mandate to be enacted for Indian companies.
In a country where social inequalities, environmental degradation, and other community welfare challenges face much adversity, CSR law seeks to ensure that businesses contribute to nation socio-economic development. With legal provisions, corporations must respond to their roles as these issues are placed under responsibility, compelling them into doing actions that will eventually help society at large. The CSR practice has been prevalent in India since before the enactment of law. The legalization, however, has brought forth a proper and well-structured framework through which companies can conduct business to be aligned with social and environmental goals.
This article discusses the legal framework that governs CSR in India, its objectives, and the implications for businesses. The landmark introduction of CSR obligations through the Companies Act, 2013 marks a significant milestone in corporate governance and social responsibility, setting a global precedent for corporate accountability and societal contribution.
Key Aspects of CSR Legislation in India
The Companies Act, 2013, introduced mandatory CSR provisions that require certain businesses to allocate a percentage of their profits towards socially beneficial activities. This has resulted in a paradigm shift, urging corporations to recognize their role beyond profit-making and take active responsibility for the welfare of society. The law defines the scope of those businesses that have to observe the CSR norm, fields for CSR-related activities, and procedures for monitoring and reporting CSR spending.
The evolution of CSR in India shows the growing trend of expecting businesses to meanfully contribute to national development, environmental sustainability, and community welfare. As the legal requirements for CSR continue to evolve in India, it will no doubt become a model of other countries seeking to put business responsibility together with a social impact.
This introduction establishes the basis of CSR law in India and leads further into a discussion on the legislative background, implementation mechanism, and other general social impacts.
Abstract
Corporate Social Responsibility (CSR) in India has witnessed a major change with the incorporation of Section 135 of the Companies Act, 2013, which legally requires certain companies to set aside a percentage of their profits for social and environmental initiatives. This legal framework represents a shift from CSR being a voluntary practice to a compulsory obligation, aimed at encouraging businesses to contribute to national development, address social disparities, and promote environmental sustainability. The introduction of mandatory CSR provisions in India has set a global precedent for integrating corporate operations with societal welfare. This article discusses and analyses the main features of the CSR law in India concerning eligibility criteria for compliance, CSR activities scope, and also the mechanisms of monitoring as well as reporting CSR initiatives undertaken. It further analyzes what implications this legal framework places on corporate behavior, accountability as well as transparency while considering the problems and opportunities businesses face about the effective implementation of CSR. Through this analytical approach, the article presents the impact of the law on the overall socio-economic development of India and corporate governance practices.
Compliance and Monitoring
The CSR provision in India also prescribes specific compliance and reporting obligations:
Annual Report: Companies are required to disclose their CSR expenditure in their annual reports, along with the reasons for not spending the required 2% if applicable.
Non-Compliance: A company that fails to expend the required CSR amount needs to explain its reasons in the annual report. Penalties can be fines and even imprisonment, but the intention of the law is transparency and accountability rather than punishment.
In 2020, MCA made several amendments to Section 135, including the provisions of penalizing the directors who fail to ensure compliance. The law further empowers companies to open a CSR fund, which is permitted to carry forward unspent CSR amounts for future expenses if used within the next three financial years.
Developments and Amendments
Over the years, there have been several important amendments brought about to strengthen CSR compliance and transparency:
CSR Reporting: In 2020, the MCA came with the Companies (Corporate Social Responsibility Policy) Amendment Rules, requiring companies to mention detailed information regarding their CSR activities in their annual reports.
CSR Implementation: Companies can implement CSR activities directly or through a registered public trust, society, or NGO. The implementing agency must meet specific criteria to ensure accountability and transparency.
Covid-19 and CSR: During the COVID-19 pandemic, the government made temporary amendments allowing companies to contribute CSR funds to activities such as healthcare infrastructure development and relief efforts directly related to COVID-19, recognizing the pandemic’s impact on society.
Benefits and Challenges
Imposition of CSR obligations has been positive on one hand and negative on the other. Positive side-CSR initiatives have resulted in increased corporate participation in issues of social and environmental dimensions. Companies support education, healthcare, rural development, and other social causes, but the implementation of such obligations has been problematic along the lines of:
Lack of clear guidelines: Though Schedule VII mentions vast areas for CSR activities, most companies fail to outline their meaningful and impactful project proposals.
Monitoring and accountability: There is a concern about the effective use of CSR funds, as some companies are doing CSR just for compliance purposes rather than an actual commitment to social good.
Misuse of CSR funds: There have been cases where CSR funds were utilized in projects that do not serve the purpose for which CSR funds are given.
Case Laws –
In India, the concept of Corporate Social Responsibility gained momentum through legislative provisions particularly through the Companies Act, 2013. There are numerous case laws and judicial interpretations over the years, which have shaped CSR practice in the country. Nonetheless, CSR is a fairly new area of law; hence there are fewer case laws as compared to the other areas of corporate law. However, a few landmark decisions and regulatory actions have provided clarity and guidance in the implementation and compliance of CSR in India.
Here are some important case laws and regulatory developments associated with CSR in India:
1. State of Gujarat v. V. B. Desai Financial Services Ltd. (1993)
Although not a CSR case per se, this case is very frequently referred to in the literature relating to corporate governance and responsibility. It deals with the overarching responsibility of a company towards its stakeholders, employees, shareholders, and society as a whole. The court of its own accord stated that the companies cannot operate in the sole interest of profits; they must also think of the social implications arising from their operations. This formed the basis of later formulations of CSR in India.
2. Tata Power Company Ltd. v. State of Maharashtra (2007)
This case is important as it explains the role of companies towards the welfare of their local community. Tata Power had initiated many social welfare programs as a part of CSR initiatives taken by it around its power plants. The court also appreciated the significance of CSR in modern corporate life even though, at that time, CSR was not made mandatory by law.
Although this case did not directly involve CSR regulations, it established a precedent by emphasizing the corporate duty to positively contribute to society, especially where they operate.
3. MCA’s Clarification on CSR Expenditure and CSR Activities (2019)
This is not a court case, but an important development from the Ministry of Corporate Affairs (MCA) clarified the scope and applicability of CSR regulations. In its notification issued in 2019, the MCA laid down guidelines with the intent of making CSR activities more transparent, accountable, and their implementation effective. The guidelines further clarified that CSR funds could not be used for political or religious activities, which, if challenged, may even have legal implications in the future.
4. Decision in “Foseco India Ltd. v. Union of India” (2014)
In this scenario, the Delhi High Court observed that CSR funds must not be utilized for the benefit of the directors and employees of the company to reap their personal benefits in line with the intent of the CSR provisions. It was observed in this case that CSR contributions need to be focused on public welfare and social causes and not for individual gain.
5. Tata Consultancy Services Ltd. v. State of Maharashtra (2019)
In this regard, the TCS had to be part of the CSR activities undertaken in the state of Maharashtra based on a wider obligation required under Section 135 of the Companies Act, 2013. TCS pleaded an exemption arguing that it was making good and significant contributions to many charitable causes in the country. The High Court opined that it was an obligation to make CSR expenditures, which cannot be met with voluntary charity donations. The judgment highlighted the requirement under the statute to mandatorily provide a percentage of profits for CSR activities.
6. Volkswagen India CSR Case (2021)
The case was of Volkswagen India, wherein the company was accused of not utilizing CSR programs effectively. The government intervened in the case and sought the company’s proper usage of CSR funds. The case did not involve any direct litigation, but it was essential to demonstrate how the government was monitoring CSR compliance by ensuring that the funds spent were on projects defined under the Companies Act, 2013.
Conclusion
The imposition of CSR regulations in India is an important shift in corporate governance, reflecting an increasing understanding of the role that business plays in the development of society. Even though a legal framework has been facilitated for increased corporate involvement in social welfare, challenges arise in ensuring meaningful, transparent, and genuinely beneficial CSR activities for society. Evolution of CSR in India would depend on constant monitoring, stricter enforcement, and conformity with the needs of the changing society.
Companies should perceive CSR not only as a legal obligation but as an opportunity to contribute to sustainable development, improve their public image, and create long-term value for both business and society.
