CORPORATE SOCIAL RESPONSIBILITY (CSR)
UNDER THE COMPANIES ACT, 2013
In
today’s business environment, companies are not just profit-making
entities—they are expected to contribute meaningfully to society. This is where
Corporate Social Responsibility (CSR)
comes into play. With the introduction of CSR provisions under the Companies
Act, 2013, India took a pioneering step by making social responsibility a legal obligation rather than a
voluntary choice. Over time, the framework has evolved with several amendments
to ensure transparency, accountability, and real impact.
What is
Corporate Social Responsibility?
Corporate
Social Responsibility (‘CSR’) refers to the obligation of companies to
contribute towards the well-being of society while conducting their business
operations. It goes beyond the primary objective of earning profits and focuses
on creating a positive impact on social, environmental, and economic aspects of
the community. In India, CSR has been given a statutory framework under the
Companies Act, 2013, which mandates certain companies to spend a prescribed
portion of their profits on specified social activities such as education,
healthcare, environmental sustainability, poverty alleviation, and rural
development. CSR encourages businesses to act responsibly, ethically, and
sustainably by aligning their corporate goals with societal needs. It not only
helps in improving the quality of life of people but also enhances the
company’s reputation, stakeholder trust, and long-term growth, making it an
integral part of modern corporate governance. Below are some illustrations why
CSR is important for the Companies:
- Builds brand reputation and trust
- Promotes sustainable development
- Strengthens stakeholder
relationships
- Aligns business goals with
societal needs
CSR
today is no longer limited to mere legal compliance, it has evolved into a
strategic responsibility for companies. Organizations now view CSR as an
integral part of their business strategy, aligning social and environmental
initiatives with their core objectives to create long-term value. By adopting a
strategic approach, companies not only fulfill regulatory requirements but also
enhance their brand reputation, strengthen stakeholder relationships, and
contribute to sustainable development. This shift reflects a broader
understanding that responsible business practices drive growth, innovation, and
competitive advantage while positively impacting society.
Applicability of CSR Provisions
Pursuant to
Section 135 of the Companies Act, 2013, CSR applies to companies meeting any of
the following criteria in the preceding financial year:
-
Net
worth of ₹500 crore or more;
-
Turnover
of ₹1,000 crore or more; or
-
Net
profit of ₹5 crore or more
If
any of the above-mentioned conditions is satisfied, the CSR provisions shall
become applicable to the Company. Accordingly, the Company is required to spend
at least 2% of the average net profits of the last three financial years on CSR
activities. In case the Company has not completed three financial years since
its incorporation, such expenditure shall be calculated based on the
immediately preceding financial years. The Company shall also give preference
to the local area and areas in which it operates while undertaking CSR
activities. This framework ensures that companies contribute to societal
development in a structured and meaningful manner.
It
is important to note that the CSR Provisions are applicable independently on
every company whether it is a holding Company or subsidiary Company, or a
foreign company and applicability criteria are needed to check separately for
each company on standalone basis.
Corporate
Social Responsibility Committee
If CSR
provisions under the Companies Act, 2013 are applicable on the Company, then it
is compulsory for the company to setup Corporate Social Responsibility
Committee for performing below mentioned functions:
-
Formulate
and recommend CSR Policy indicating CSR activities to be undertaken by the
Company
-
To
evaluate and recommend the amount of expenditure (2% of average net profit) to
be incurred on the CSR activities.
-
Monitor
CSR activities and policy of the Company
-
Formulation
of Annual Action Plan covering CSR Projects or Programmes, Manner of execution
of such projects or programmes, details of utilisation of funds, monitoring and
reporting mechanism and impact assessment, if needed.
Composition of
Committee: Composition
of CSR Committee should comprise of three or more directors, out of which at
least one director shall be an independent director. However, if the company is
not required to appoint an independent director as per applicable provisions, Committee
can be constituted without such director. A Private Limited Company is generally
have only two Directors only. That Company can have Committee with only Two
Members in its composition. In case of foreign company at least two
persons are required in committee in which one person shall resident in India as
specified under section 380(1)(d) of the Act and another person shall be nominated by
the foreign company.
It
is to be noted here that if the amount to be spent by a company (2% of average
net profit) does not exceed Rs. 50 Lakh, the constitution of the Corporate
Social Responsibility Committee is optional.
It
is also mandatory for the Company to disclose the Composition of CSR Committee in
its Annual Report.
Corporate
Social Responsibility Policy and its Implementation
As stated above, it is the duty of the CSR Committee
to formulate and recommend the CSR Policy, indicating the activities to be
undertaken by the Company. The Board of Directors, based on the recommendations
of the Committee, shall approve the CSR Policy and ensure that it is placed on
the Company’s website. The Board is further responsible for ensuring that the
activities included in the CSR Policy are duly undertaken by the Company.
CSR Activities can be undertaken by the Company
itself or through any NGO which are including:
1.
Section 8 Company/ Trust/ Society
2.
Section 8 Company/ Trust/ Society established by Central
or State Government
3.
any entity established under an Act of Parliament or
a State legislature;
4.
Section 8 Company/ Trust/ Society, exempted
under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or
registered under section 12A and approved under 80 G of the Income Tax
Act, 1961, and having an established track record of at least three years
in undertaking similar activities.
While undertaking CSR Projects, the may take
following points in consideration:
-
Hiring
experts for CSR work: A company is allowed to take help from international
organisations to design, monitor, and evaluate its CSR projects. These
organisations can also help train the company’s staff so they can manage CSR
activities more effectively.
- Working
together with other companies: A company can join hands with other companies to
carry out CSR projects. However, each company must keep proper records and be
able to report its own contribution and activities separately.
- Responsibility
for proper use of funds: The company’s Board must ensure that the CSR funds
are used only for the approved purpose. Additionally, the Chief Financial
Officer (CFO) or the person handling finances must officially confirm that the
money has been properly utilised.
- Monitoring
ongoing projects: For CSR projects that run over multiple years, the
Board must regularly track progress based on timelines and yearly budgets. If
needed, the Board can make changes to ensure smooth completion of the project,
as long as it stays within the allowed time limit.
For NGO/Entity eligible to undertake CSR projects or
Programmes: NGO
RECEIVING CSR FUND IN INDIA: LEGAL FRAMEWORK, ELIGIBILITY AND COMPLIANCE
Expenditures on Corporate Social Responsibility
CSR provisions ensure that companies contribute
responsibly towards social and environmental development. Companies should
ensure that CSR funds should be spent and transparency, accountability, and
proper monitoring of such activities also maintained.
Below para explains the key requirements related to
utilisation of CSR funds, collaboration, monitoring, and compliance obligations
of the Board:
- Limit on administrative expenses: The company must ensure that expenses related to managing CSR activities (like staff, office costs, etc.) do not exceed 5% of the total CSR spending in a financial year.
-
Treatment
of surplus from CSR activities: If any profit or surplus is generated from CSR activities,
it cannot be treated as business profit. Instead, the company must:
o Reinvest it
in the same CSR project, or
o Transfer it
to the Unspent CSR Account and use it as per CSR policy, or
o Transfer it to a government-specified CSR fund (as per Schedule VII). This must be done within 6 months after the financial year ends.
-
Adjustment
of excess CSR spending: If a company spends more than the required CSR
amount, it can adjust (set off) the extra amount against CSR obligations of the
next 3 financial years, subject to:
o The extra
amount should not include surplus generated from CSR activities, and
o The Board must pass a resolution approving such adjustment.
-
Creation
of capital assets through CSR: CSR funds can be used to create or acquire assets
(like schools, hospitals, equipment, etc.), but such assets cannot be owned by
the company. They must be held by:
o A registered
charitable organisation (Section 8 company, trust, or society with CSR registration),
or
o The beneficiaries
(such as self-help groups or community groups), or
o A government/public
authority
Disclosure and Reporting:
- Every company on which CSR provisions are applicable
must include a separate CSR report in its Board’s Report each year. This report
should follow the prescribed format (Annexure I or II) and provide details of
CSR activities, spending, and projects.
-
Companies with an average CSR obligation of ₹10
crore or more in the last 3 financial years must conduct an impact assessment
of their major CSR projects through an independent agency for their CSR
projects having outlays of one crore rupees or more, and which have been
completed not less than one year before undertaking the impact study.
- The impact assessment report must be placed before
the Board, and attached to the annual CSR report.
- If the company fails to spend prescribed amount, the
Board shall specify the reasons for not spending the amount and transfer
such unspent amount to a Fund specified in Schedule VII, within a period
of six months of the expiry of the financial year. However, provision
for transfer of fund to specified fund is not applicable for the unspent amount
relates to any ongoing project.
- Company must disclose on its website, if any: 1. Composition
of the CSR Committee; 2. and CSR Policy; and 3. Projects approved.
CSR in India has evolved significantly over the years, transforming from a voluntary philanthropic activity into a well-defined, structured, and impactful legal framework embedded within corporate governance practices. It is no longer confined to acts of charity or short-term contributions; rather, it focuses on creating sustainable and long-term value for both society and businesses. CSR initiatives today encourage inclusive and sustainable growth by addressing critical social, environmental, and economic challenges. They also play a vital role in strengthening corporate governance by promoting transparency, accountability, and ethical business conduct. Furthermore, CSR is closely aligned with Environmental, Social, and Governance (ESG) principles, enabling companies to integrate responsible practices into their core strategies. Companies that adopt a strategic and thoughtful approach towards CSR not only contribute meaningfully to societal development but also enhance their reputation, build stakeholder trust, and establish a strong and responsible brand identity in the long run.
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