The contemporary world presents growing complexities, encompassing global environmental, social, cultural, and economic challenges that are now integral to daily life. Companies can no longer focus solely on profit maximization as their primary performance metric; they must also embrace their roles as responsible corporate citizens, recognizing their duties toward society. In India, the Ministry of Corporate Affairs (MCA) established Corporate Social Responsibility (CSR) as a mandatory requirement for specific companies under the Companies Act, 2013. This legislative obligation encourages companies to engage in CSR activities and projects that contribute to sustainable development goals and yield positive societal impacts.

Understanding Corporate Social Responsibility

Corporate Social Responsibility (CSR) signifies the voluntary contributions companies make toward fostering a better society and a cleaner environment. It represents a framework wherein companies integrate social and other beneficial considerations into their core business operations, aiming to improve conditions for their stakeholders and society at large.

However, Section 135 of the Companies Act, 2013 (referred to as "the Act") makes it mandatory for certain companies to allocate a specific sum toward CSR initiatives. According to the Act, 'Corporate Social Responsibility' encompasses, but is not limited to:

• Projects or programs related to the activities outlined in Schedule VII of the Act.
• Projects or programs involving activities undertaken by the Board of Directors upon the recommendation of the CSR Committee, in accordance with the company's stated CSR Policy. These policies must cover subjects specified in Schedule VII of the Act.

Applicability of CSR in India

CSR provisions are applicable to all companies that met any of the following criteria in the preceding financial year:

• A net worth exceeding Rs. 500 crore.
• A turnover exceeding Rs. 1000 crore.
• A net profit exceeding Rs. 5 crore.

The Board of Directors of every company falling under CSR provisions must ensure that the company allocates a minimum of 2% of its average net profits from the three immediately preceding financial years toward CSR activities, as per its CSR policy. If a company has not completed three financial years since its incorporation, it must spend 2% of its average net profits from the preceding financial years as defined by its CSR policy.

Significance and Advantages of Corporate Social Responsibility

CSR is a broad concept that describes a company's efforts to meaningfully improve society. The following points highlight why CSR is crucial:

• CSR enhances public perception by publicizing efforts directed at societal improvement, increasing the company's favorability among consumers.
• CSR boosts media coverage, as positive media visibility reflects well on the organization.
• CSR strengthens a company’s brand value by cultivating robust social relationships with customers.
• CSR helps companies differentiate themselves from competitors, especially when they actively participate in community engagement.

Board of Directors' Role

Key responsibilities of the Board of Directors in CSR implementation include:

• Reviewing recommendations from the CSR Committee and approving the company's CSR policy, making its contents public on the company's website.
• Ensuring that only activities explicitly mentioned in the policy are undertaken.
• Verifying that the company spends a minimum of 2% of its average net profits from the three immediately preceding financial years on CSR, as stipulated by the CSR policy.
• For companies incorporated less than three financial years ago, calculating average net profits based on the financial years completed since incorporation.
• Disclosing the following in the Board’s Report:
  • The composition of the CSR Committee.
  • The contents of the CSR Policy.
  • Reasons for any failure to meet the 2% CSR spending target and details of any unspent amount transferred to a designated fund (within six months of the financial year's end) for an ongoing project.

Approved CSR Activities Under Schedule VII

The Board of Directors must ensure that activities included in a company's CSR Policy align with those listed in Schedule VII of the Act. Schedule VII specifies the activities companies may incorporate into their Corporate Social Responsibility Policies:

Instances of CSR Initiatives

During 2023-2024, 24,392 Indian companies contributed to CSR efforts through 51,966 projects, collectively spending approximately Rs. 29,987 crore across 14 development sectors. Prominent companies undertaking CSR activities and projects in India include Reliance Industries Limited, Apollo Tyres Limited, Adani Group, Tata Consumer Products Limited, Asian Paints Limited, and Procter and Gamble.

Notable CSR examples from 2023-24 in India are:

Example 1:

According to the CSR Journal, Reliance Industries Limited (RIL) invested Rs. 1,592 crore in its CSR initiatives in 2023-24. The company focused on water conservation, significantly increasing water harvesting capacity by about 28.5 million cubic meters. It also implemented programs to enhance agricultural practices, benefiting over 39,000 hectares of farmland. Its healthcare initiatives positively impacted more than 9.29 million people, and digital literacy programs empowered 84,000 women in the last financial year alone.

Example 2:

The CSR Journal reported that Apollo Tyres Limited spent Rs. 15.7 crore on its CSR initiatives in 2024, reaching over 1.23 million people in India. Apollo Tyres supports the Indian Government's goal to eliminate Tuberculosis by 2025 through a dedicated healthcare program for the trucking community, established in partnership with the Union and Central TB Division, USAID, and the Ministry of Health and Family Welfare. Additionally, its Project Navya, a CSR initiative, aims to empower rural women by providing access to microfinancing for Self-Help Groups (SHGs) and skill training to foster entrepreneurial ventures.

Example 3:

The CSR Journal states that the Adani Group expended more than Rs. 650 crore on CSR during FY 2023-24. The group has committed to investing $100 billion over the next decade in various green energy projects, aligning with India’s objective of achieving net-zero emissions by 2070. This includes investments in developing 10 gigawatts (GW) of international hydroelectric projects.

Transfer and Utilization of Unspent Amounts

If a company fails to spend the mandated 2% of its average net profits on CSR, it must transfer the unspent CSR amount to one of the following specified funds within six months of the financial year's end:

• A contribution made to the Prime Minister’s National Relief Fund.
• Any other fund established by the central government for socio-economic development, relief, and welfare of Scheduled Castes, minorities, tribes, women, and other backward classes.
• A contribution made to an incubator funded by either the central government, the state government, a public sector undertaking of the state or central government, or any other agency.
• Contributions made to:
  • Public-funded universities.
  • Indian Institutes of Technology (IITs).
  • National Laboratories and Autonomous Bodies established under:
    • Indian Council of Agricultural Research (ICAR).
    • Council of Scientific and Industrial Research (CSIR).
    • Department of Atomic Energy (DAE).
    • Department of Biotechnology (DBT).
    • Department of Pharmaceuticals.
    • Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH).
    • Ministry of Electronics and Information Technology.
    • Indian Council of Medical Research (ICMR).
    • Defence Research and Development Organisation (DRDO).
    • Department of Science and Technology (DST) engaged in technology, science, medicine, and engineering research aimed at promoting Sustainable Development Goals (SDGs).

For any unspent amount related to an ongoing project under the company’s CSR policy, the company must transfer this sum to a dedicated account, known as the ‘Unspent Corporate Social Responsibility Account,’ within any scheduled bank within 30 days from the end of the financial year.

The company must then utilize the funds in this ‘Unspent Corporate Social Responsibility Account’ to fulfill its CSR policy obligations within three financial years from the transfer date.

If the company fails to use these funds by the end of the three financial years, the remaining funds must be transferred to one of the specified funds mentioned above within 30 days after the completion of the third financial year.

Net Profit Calculation for CSR Applicability

Companies required to comply with CSR provisions must spend 2% of their average net profits from the preceding three years according to their CSR policy. The calculation of net profit for CSR follows Section 198 of the Companies Act, 2013.

Section 198 dictates that when computing a company's net profits, subsidies and bounties received from any government or authorized public authority should be credited.

When calculating net profits, the following sums should not be credited:

• Profits derived from share premiums, unless the company is an investment firm.
• Profits from the sale of forfeited shares.
• Profits of a capital nature, including those from the sale of the undertaking or any part thereof.
• Profits from the sale of any fixed assets or immovable property of a capital nature within the undertaking, unless the company's business involves buying and selling such assets or property.
• Any change in the carrying amount of an asset or liability recognized in equity reserves, including surplus in profit and loss accounts for fair value measurement of the asset or liability.
• Any amount representing notional gains, unrealized gains, or asset revaluation adjustments.

In computing net profits, the following sums should be deducted:

• All customary working charges.
• Directors’ remuneration.
• Bonus or commission paid or payable to any staff member, technician, engineer, or person engaged or employed by the company, whether on a part-time or full-time basis.
• Any tax designated by the Central Government as a tax on abnormal or excess profits.
• Any tax on business profits levied for specific reasons or circumstances and notified by the Central Government.
• Interest on debentures issued by the company.
• Interest on mortgages executed by the company and on advances and loans secured by a charge on its floating or fixed assets.
• Interest on unsecured advances and loans.
• Expenses for repairs, whether to movable or immovable property, provided these repairs are not capital in nature.
• Outgoings, including contributions made under Section 181.
• Depreciation as specified in Section 123.
• Any excess of expenditure over income.
• Damages or compensation to be paid due to legal liability and any amount paid for insurance against such liability.
• Debts deemed bad and adjusted or written off during the accounting year.

Conversely, the following sums cannot be deducted when calculating net profits:

• Income-tax and super-tax payable by the company under the Income-tax Act, 1961.
• Any damages, compensation, or payments made voluntarily.
• Losses of a capital nature, including losses from the sale of the undertaking or any part thereof, excluding any excess of the written-down value of an asset (discarded, sold, destroyed, or demolished) over its sale proceeds or scrap value.
• Any change in the carrying amount of an asset or liability recognized in equity reserves, including surplus in profit and loss accounts for fair value measurement of the asset or liability.

CSR Committee Structure

• Every company to which CSR provisions apply must establish a Corporate Social Responsibility (CSR) Committee.
• The CSR Committee should consist of at least three directors, with at least one director being an independent director.
• An unlisted public company or a private company may form its CSR Committee without an independent director if one is not legally required.
• A private company with only two directors on its Board must form its CSR Committee with these two directors.
• For a foreign company, the CSR Committee must include at least two individuals: one resident in India authorized to receive notices and other documents on behalf of the foreign company, and another person nominated by the foreign company.
• Any company holding funds in its Unspent Corporate Social Responsibility Account must constitute a CSR Committee and adhere to all CSR provisions.

Responsibilities of the CSR Committee

• The CSR Committee is responsible for formulating and recommending a CSR policy to the Board. This policy should specify the activities the company will undertake, as outlined in Schedule VII of the Act.
• The Committee will recommend the financial expenditure for the company's CSR activities.
• The CSR Committee is tasked with regularly monitoring the company’s CSR policy.
• It must also establish a transparent oversight mechanism for the implementation of CSR projects, programs, or activities undertaken by the company.

CSR Policy Guidelines

The CSR Policy details the activities a company will undertake, as specified in Schedule VII of the Act. These activities must be distinct from those conducted in the company's normal course of business. Additionally, the Act stipulates the following regarding CSR Policy:

• The Board must publish the contents of the CSR Policy on the company’s website.
• The company must undertake the activities outlined in the policy.
• Companies can collaborate with other companies on projects, programs, or CSR activities, provided they report separately on such initiatives.
• The CSR policy should include monitoring mechanisms for its projects and programs.

CSR Reporting Requirements

Regarding CSR reporting, the provisions are:

• The Board’s Report for any financial year commencing on or after April 1, 2014, must include an annual report on CSR activities.
• For foreign companies, the balance sheet filed must contain an Annexure providing a CSR report.

Penalties for Non-Compliance

If a company fails to comply with provisions related to CSR spending, transferring, and utilizing unspent amounts, it faces a penalty of Rs. 1 crore or twice the amount required to be transferred to the CSR fund specified in Schedule VII of the Act or the Unspent Corporate Social Responsibility Account, whichever is less.

Furthermore, any officer of such a company who defaults on compliance will be liable to a penalty of Rs. 2 lakh or one-tenth of the amount required to be transferred by the company to the CSR fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, whichever is less.

The introduction of Corporate Social Responsibility (CSR) through the Companies Act, 2013, places significant responsibility on Indian companies to establish clear CSR frameworks. This Act promotes a culture of corporate social responsibility, requiring companies to formulate CSR policies and invest in social upliftment activities. Essentially, CSR embodies the principle of corporations contributing back to society.

Further Reading

• Form CSR-1
• GST on Supplies made under Corporate Social Responsibility
• CSR Amendment Rules 2021

Frequently Asked Questions

Why is CSR mandatory for certain companies?

The Companies Act, 2013, specifically Section 135, makes CSR mandatory for qualifying companies in India. This legislative requirement ensures that eligible companies contribute a minimum of 2% of their net profit over the preceding three years to societal development efforts.

How is the mandatory CSR spending amount determined?

Companies that fall under Section 135(1) of the Companies Act, 2013, are required to spend a minimum of 2% of their average net profit calculated over the three immediately preceding financial years, as guided by their CSR policy.

Does CSR apply to Section 8 companies, which are typically non-profit?

Yes, CSR provisions can apply to Section 8 companies registered for charitable purposes under the Companies Act, 2013. Section 135(1) mandates a CSR committee for any company meeting specific net worth, turnover, or net profit criteria. Therefore, if a Section 8 company meets these financial thresholds, it must establish a CSR committee and comply with CSR provisions.

What types of activities are generally excluded from qualifying as CSR?

Rule 2(1)(d) of the Companies (CSR Policy) Rules, 2014, clarifies that certain activities do not count as eligible CSR. These include activities conducted in the company's normal course of business, activities performed outside India (with rare exceptions for Indian sports personnel training), contributions to political parties under Section 182, activities primarily benefiting the company's own employees, sponsorship events for marketing benefits, and actions taken to fulfill statutory obligations under other Indian laws.

How does the government monitor CSR compliance?

The government oversees CSR compliance primarily through disclosures submitted by companies on the Ministry of Corporate Affairs (MCA) portal. If violations of CSR provisions are identified, the government can initiate action against non-compliant companies after a thorough examination of their records. The system relies on transparency and accountability in reporting.