Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a self-regulating business model that enables companies to be socially accountable to themselves, their stakeholders, and the public. In India, CSR is a mandatory statutory obligation governed by the Companies Act, 2013. India was the first country in the world to make CSR spending legally binding for eligible corporations.

Statutory Framework and Applicability

Legal Basis

Section 135 of the Companies Act, 2013, read with the Companies (Corporate Social Responsibility Policy) Rules, 2014, sets out the mandatory CSR framework.

Eligibility Criteria

A company registered in India—including private, public, holding, subsidiary, or foreign company branches—must comply with CSR provisions if it satisfies any of the following conditions during the immediately preceding financial year:

Spending Requirement

Eligible companies must spend at least 2% of their average net profits earned during the three immediately preceding financial years on approved CSR activities. For newly incorporated companies that have not completed three financial years, the spending calculation applies to the financial years since incorporation.

Governance and Committee Structure

CSR Committee Composition

• Companies falling under the criteria must constitute a CSR Committee of the Board.

• The committee must consist of three or more directors, with at least one independent director.

• Unlisted public companies and private companies not required to appoint an independent director can form a committee without one.

• Private companies with only two directors can form a committee with both directors.

• If the required CSR expenditure does not exceed ₹50 lakh in a financial year, the company does not need to form a separate CSR Committee; the Board of Directors discharges all committee functions directly.

Functions of the Board and Committee

• The CSR Committee formulates and recommends a CSR Policy to the Board.

• The committee indicates the specific activities to be undertaken as per Schedule VII.

• The committee recommends the expenditure amount for these activities.

• The Board approves the policy, ensures implementation, and discloses the full details in the annual board report.

Permissible and Non-Permissible Activities

Schedule VII Eligible Areas

Section 135 mandates that CSR expenditure must fall within the broad areas listed under Schedule VII of the Companies Act, 2013:

• Eradicating hunger, poverty, and malnutrition; promoting healthcare and sanitation, including contributions to the Swachh Bharat Kosh.

• Promoting education, special education, and employment-enhancing vocational skills, especially among children, women, and the elderly.

• Promoting gender equality, empowering women, setting up homes and hostels for women and orphans, and setting up old age homes.

• Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, and contributions to the Clean Ganga Fund.

• Protection of national heritage, art, and culture, including restoration of historical buildings and promotion of traditional arts and handicrafts.

• Measures for the benefit of armed forces veterans, war widows, and their dependents.

• Training to promote rural sports, nationally recognized sports, Paralympic sports, and Olympic sports.

• Contributions to the Prime Minister’s National Relief Fund, PM CARES Fund, or any other central government fund set up for socio-economic development.

• Contributions to public-funded incubators, national research laboratories, universities, and institutions engaged in research in science, technology, engineering, and medicine.

• Rural development projects and slum area development.

• Disaster management, including relief, rehabilitation, and reconstruction activities.

Excluded Activities

Certain business expenditures and activities do not qualify as CSR spending:

• Activities undertaken in the normal course of business.

• Activities benefiting only the company’s employees and their families.

• Direct or indirect political contributions to any political party under Section 182.

• Sponsorship activities for deriving marketing benefits for the company’s products or services.

• Activities carried out to fulfill statutory obligations under other laws.

• Activities implemented outside India, except for the training of Indian sports personnel outside India.

Implementation and Compliance Rules

Implementation Modes

Companies can execute CSR activities directly or through registered implementing agencies. An entity acting as an implementing agency must register with the Central Government by filing Form CSR-1 electronically to obtain a unique CSR Registration Number. Eligible entities include:

• A Section 8 company, registered public trust, or registered society established by the company itself or jointly with another company.

• A Section 8 company, registered public trust, or registered society established by the Central or State Government.

• Any entity established under an Act of Parliament or a State Legislature.

• An independent Section 8 company, registered trust, or registered society with an established track record of at least three years in similar activities.

Treatment of Unspent and Excess Amounts

• Ongoing Projects: Any unspent amount allocated to an ongoing multi-year project must be transferred within 30 days of the end of the financial year to a special bank account called the “Unspent Corporate Social Responsibility Account.” The company must spend this amount within three financial years. If it remains unspent, it must be transferred to a Schedule VII fund within 30 days of the completion of the third financial year.

• Non-Ongoing Projects: Unspent amounts not tied to ongoing projects must be transferred directly to a fund specified in Schedule VII within six months of the end of that financial year.

• Excess CSR Spending: If a company spends an amount exceeding the required 2%, the Board may pass a resolution to set off the excess amount against future CSR spending obligations for up to the immediate next three consecutive financial years.

• Administrative Overheads: Administrative expenses incurred on general management and execution of CSR functions cannot exceed 5% of the total CSR expenditure of the company for that financial year.

• Impact Assessment: Companies with an average CSR obligation of ₹10 crore or more in the three preceding financial years must conduct an independent impact assessment for projects with outlays of ₹1 crore or more. The impact assessment expenditure cannot exceed 2% of total CSR expenditure or ₹50 lakh, whichever is higher.

Penal Provisions

Non-compliance with CSR fund transfer obligations attracts monetary penalties:

• The defaulting company is liable to a penalty equal to twice the amount required to be transferred to the specified fund or Unspent CSR Account, or ₹1 crore, whichever is less.

• Every defaulting officer is liable to a penalty equal to one-tenth of the required transfer amount, or ₹2 lakh, whichever is less.

Key Exam-Oriented Facts

• India became the first country to enact a legally binding CSR mandate when the provisions took effect on April 1, 2014.

• CSR rules apply equally to foreign companies operating in India through branches or project offices.

• Section 135 computation excludes profits from foreign branches and dividend income received from other Indian companies complying with CSR provisions.

• The high-level committee on CSR chaired by Injeti Srinivas submitted key recommendations in 2019 that shaped the current rules on penal liabilities, registration through Form CSR-1, and impact assessments.

• Companies are prohibited from acquiring or creating capital assets using CSR funds in their own name; such assets must be held by beneficiaries, Section 8 entities, or public authorities.

• The Ministry of Corporate Affairs maintains the National CSR Portal to publicly track company-wise and sector-wise spending across India.