Corporate Social Responsibility (CSR)

Meaning: CSR is the obligation of a business to act in ways that benefit society and the environment beyond its profit motive and legal minimum. India is widely described as the first country to legislate a mandatory CSR spending requirement (Companies Act, 2013, s.135, effective 1 April 2014).

Key theories and models (frequent concept questions):

• Milton Friedman (shareholder theory): the only social responsibility of business is to increase its profits within the rules of the game.

• Stakeholder theory (R. Edward Freeman, 1984): a firm owes duties to all stakeholders (employees, customers, suppliers, community, environment), not only to shareholders.

• Carroll’s pyramid of CSR (1991): four layers: economic (base), legal, ethical, philanthropic (top).

• Triple bottom line (John Elkington, 1994): People, Planet, Profit.

• Gandhian trusteeship (the Indian roots of CSR): wealth is held in trust for society. Early Indian business philanthropy: the Tata and Birla groups.

Soft-law and international frameworks: the UN Global Compact (2000; ten principles on human rights, labour, environment and anti-corruption); UN Sustainable Development Goals (2015); the UN Guiding Principles on Business and Human Rights (2011); ISO 26000 (guidance, not a certifiable standard); OECD Guidelines for Multinational Enterprises.

Indian evolution: MCA Voluntary Guidelines on CSR, 2009; DPE guidelines for public sector enterprises (2010); the National Voluntary Guidelines (NVG) on Social, Environmental and Economic Responsibilities of Business, 2011 (nine principles); SEBI’s Business Responsibility Report (BRR), replaced by the Business Responsibility and Sustainability Report (BRSR), which is mandatory for the top 1,000 listed companies by market capitalisation (from FY 2022–23); the Companies Act, 2013 (s.135, Schedule VII, and the CSR Rules).

Sources: s.135 of the Companies Act, 2013; Schedule VII; the Companies (Corporate Social Responsibility Policy) Rules, 2014, substantially amended by the Companies (CSR Policy) Amendment Rules, 2021 (effective 22 January 2021); and the Companies (Amendment) Act, 2019 (unspent CSR provisions) and 2020.

Applicability (s.135(1)): every company, including its holding or subsidiary, and a foreign company having its branch or project office in India, which in the immediately preceding financial year has: (a) net worth of Rs. 500 crore or more, or (b) turnover of Rs. 1,000 crore or more, or (c) net profit of Rs. 5 crore or more. Satisfying any one of the conditions suffices. The obligation continues until the company ceases to meet these thresholds for three consecutive financial years.

CSR Committee:

• The Board of a company to which s.135 applies must constitute a CSR Committee of the Board with three or more directors, at least one of whom is an independent director. An unlisted public company or a private company that is not required to appoint an independent director need have only two directors. A foreign company must have at least two persons, one resident in India and another nominated by the foreign company.

• Where the company’s CSR obligation does not exceed Rs. 50 lakh, the CSR Committee is not required, and the functions are discharged by the Board (2021 amendment).

• Functions (s.135(3)): formulate and recommend a CSR Policy indicating the activities to be undertaken (as per Schedule VII); recommend the amount of expenditure; and monitor the CSR Policy from time to time. The Committee also formulates and recommends an annual action plan to the Board.

Board’s responsibilities (s.135(4)–(5)): approve the CSR Policy after considering the Committee’s recommendations; disclose the contents of the policy in its report and on the company’s website; ensure that the activities are undertaken as per the policy; and ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy. A company should give preference to the local area and areas around which it operates. If a company is newly incorporated and has not completed three financial years, the average is of the profits for the immediately preceding financial years since incorporation.

Net profit is calculated as per s.198 and excludes profits arising from branches outside India and dividends received from other Indian companies that are covered under and complying with s.135.

1. Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care, sanitation (including contribution to the Swachh Bharat Kosh) and making available safe drinking water.

2. Promoting education, including special education and employment-enhancing vocation skills, especially among children, women, elderly and the differently abled, and livelihood enhancement projects.

3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans, old age homes, day care centres and such other facilities for senior citizens, and measures for reducing inequalities faced by socially and economically backward groups.

4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining the quality of soil, air and water (including contribution to the Clean Ganga Fund).

5. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts.

6. Measures for the benefit of armed forces veterans, war widows and their dependents, including Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans and their dependents.

7. Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports.

8. Contribution to the Prime Minister’s National Relief Fund, or PM CARES Fund, or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.

9. (a) Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and (b) contributions to public-funded Universities; IITs; National Laboratories and autonomous bodies established under bodies such as the DAE, DBT, DST, MeitY, ICAR, ICMR and CSIR, engaged in research in science, technology, engineering and medicine aimed at promoting the SDGs.

10. Rural development projects.

11. Slum area development (the explanation defines ‘slum area’ as one notified by the Central or State Government).

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

Memory aid for the Schedule: Hunger/Health, Education, Gender, Environment, Heritage, Veterans, Sports, PM funds, R&D, Rural, Slums, Disaster. Items (viii) (PM funds) and (ix) (R&D) are favourites for ‘which is included’ questions. Local area preference and ‘employment-enhancing vocational skills’ are also frequent.

• Activities undertaken in the normal course of business.

• Any contribution to a political party (s.182) or any political activity.

• Projects or programmes or activities that benefit only the employees of the company and their families.

• One-off events such as marathons, awards, charitable contributions, advertisements, sponsorships of TV programmes or movies (except as permitted).

• Activities outside India (except for training of Indian sports personnel representing any State or Union Territory at national or international level).

• Expenses incurred for fulfilment of any other statutory obligation under any law in force in India.

• Sponsorship activities for deriving marketing benefits for products or services.

• Modes of implementation (Rule 4): directly, or through a Section 8 company, registered public trust or registered society established by the company (alone or with others) or by the Central or State Government, or any entity established under an Act of Parliament or State legislature, or any other Section 8 company, registered trust or society with an established track record of three years in similar activities. Registration (Form CSR-1) with the Registrar of Companies is mandatory for implementing agencies from 1 April 2021, each receiving a unique CSR registration number. Implementing agencies must also hold 12A and 80G registrations under the Income-tax Act, 1961.

• Annual action plan (Rule 5(2)): to include the list of CSR projects, the manner of execution, the modalities of utilisation of funds, monitoring and reporting, and the details of the need and impact assessment, if any.

• Ongoing project (Rule 2(1)(i)): a multi-year project, not exceeding three years excluding the year of commencement, with timelines approved by the Board on the CSR Committee’s recommendation.

• Unspent CSR (s.135(5)–(6)) and Rule 7:

  • Ongoing projects: the unspent amount must be transferred to a special bank account (the Unspent CSR Account) within 30 days from the end of the financial year, to be spent within three financial years from the date of transfer. If it is not spent in that period, it must be transferred to a Fund specified in Schedule VII within 30 days of the end of the three financial years.

  • Non-ongoing projects: the unspent amount must be transferred to a Fund specified in Schedule VII within six months from the end of the financial year.

• Set-off (Rule 7(3)): where a company spends in excess of its 2% obligation, the excess may be set off against the CSR requirement of the succeeding three financial years, as per the Board’s resolution. Surplus arising out of CSR activities is not part of business profit and must be ploughed back or transferred.

• Administrative overheads: shall not exceed 5% of the total CSR expenditure of the company for the financial year.

• Impact assessment (Rule 8(3)): companies with an average CSR obligation of Rs. 10 crore or more in the three immediately preceding financial years must undertake an impact assessment through an independent agency for projects with an outlay of Rs. 1 crore or more that have been completed not less than one year before the assessment. The expenditure on impact assessment may be counted up to 5% of the total CSR expenditure for the year, or Rs. 50 lakh, whichever is higher.

• Capital assets created or acquired through CSR funds must be held by the beneficiaries, a registered public trust or society or Section 8 company (not by the company itself).

• Reporting: a brief outline of the CSR Policy and the composition of the CSR Committee in the Board’s report (Annexure); Form CSR-2 filed with the Registrar (as an addendum to AOC-4) from FY 2020–21; and web display of the CSR Committee composition, policy and approved projects.

• Penalty (s.135(7), as amended 2019/2020): if a company fails to transfer the unspent amount as required, the company is liable to a penalty of twice the amount required to be transferred, or Rs. 1 crore, whichever is less, and every officer in default is liable to a penalty of one-tenth of the amount required to be transferred, or Rs. 2 lakh, whichever is less. The older ‘comply or explain’ regime (non-spending with reasons) was replaced by this mandatory regime. The 2020 amendment decriminalised the offence (it earlier carried imprisonment).

• Criticism: CSR as a statutory 2% ‘tax’ versus a voluntary ethic; spending concentrated in a few states and sectors (education and health dominate; the North-east and aspirational districts get less); ‘box-ticking’; the capacity of implementing agencies; the local-area preference versus national needs.

• Trend: rising share of CSR funds towards health care, education and rural development; during the Covid-19 pandemic, contributions to PM CARES were counted as CSR, and MCA FAQs clarified that Covid-19 related expenses are eligible under the health care and disaster management items.

• Linkage with the directors’ duties: s.166(2) requires directors to act in the best interests of the company, its employees, shareholders, the community and the protection of the environment.

• Link with sustainability disclosures: BRSR, ESG and the SDGs.

• Likely traps: (i) the three alternative thresholds (500 / 1,000 / 5 crore: net worth / turnover / net profit); (ii) 2% of the average net profit of three preceding years, not of the current year’s profit; (iii) CSR Committee not needed if the obligation is up to Rs. 50 lakh; (iv) 30 days / 3 years / 6 months for unspent amounts; (v) political contributions and employee-only benefits are excluded; (vi) overheads 5%; (vii) Form CSR-1 and CSR-2; (viii) penalty twice the unspent amount or Rs. 1 crore, whichever is less.