Introduction
In India, CSR has shifted from voluntary philanthropy to a legal obligation. Introduced through Section 135 of the Companies Act, 2013, it requires eligible companies to contribute to social and environmental welfare. This law made India the first country to legally enforce CSR spending, embedding social responsibility into corporate governance.
Evolution and Legislative Framework
Before the 2013 Act, CSR in India was mostly voluntary. The Companies Act, 1956 did not require any legal obligation for contributions. Influenced by international initiatives like the UN Global Compact and OECD Guidelines, India recognized the need for structured social accountability.
Judicial decisions, including M.K. Ranjitsinh vs. Union of India (2021) 15 SCC 1, established CSR as a real legal duty rather than simply a symbolic measure. The Bombay High Court in Court on its Own Motion vs. Union of India (2021) SCC Online Bom 742 highlighted corporate responsibility for unspent CSR funds and supported stricter enforcement and transparency. These rulings, along with Schedule VII and the Companies (CSR Policy) Rules, 2014, shaped the current CSR framework that promotes legal compliance and benefits communities.
Applicability of CSR under Section 135
CSR rules apply to companies that meet any of the following criteria during a financial year:
* Net worth of ₹500 crore or more;
* Turnover of ₹1000 crore or more;
* Net profit of ₹5 crore or more.
Eligible firms must spend at least 2% of their average net profits from the previous three years on CSR activities. Profits are calculated as per Section 198 of the said Act, excluding income from capital and taxes.
Role of the Board and CSR Committee
According to Section 135(4), the Board of Directors must:
* Approve and publish the CSR Policy;
* Ensure implementation of CSR projects under Schedule VII;
* Disclose reasons for any unspent amounts in the Board’s Report;
* Transfer unspent funds to designated accounts as specified in the CSR Amendment Rules, 2021.
The CSR Committee, made up of at least three directors (including one independent), is responsible for creating the CSR policy, recommending spending, and monitoring results. The 2021 amendments improved transparency and required assessments based on impact.
Permissible CSR Activities
Schedule VII lists approved CSR activities, which include:
* Eradication of hunger and poverty;
* Promotion of education and gender equality;
* Environmental sustainability and renewable energy projects;
* Development in rural and tribal areas;
* Contributions to national relief funds like the PM CARES Fund.
The Ministry of Corporate Affairs interprets Schedule VII broadly to address changing social needs.
Non-Compliance and Penalties
Under Section 135(7), companies that do not spend or transfer the required CSR amount face penalties:
* The company could be fined up to Rs. 1 crore or double the unspent amount, whichever is lower;
* Officers in default may be fined up to Rs. 2 lakh or one-tenth of the unspent amount.
This provision ensures compliance and discourages empty gestures in CSR spending.
Advantages of CSR
Mandatory CSR provides various benefits for society and businesses:
1. Enhanced Transparency and Accountability: Section 135 requires companies to reveal their CSR policies, spending details, and reasons for any unspent amounts. This ensures companies stay open about their social contributions, allowing stakeholders, including shareholders and the public, to closely monitor CSR activities. Such transparency reduces misuse of funds and encourages ethical spending practices.
2. Strengthened Stakeholder Relationships: By actively supporting social causes, companies show they care about more than just profits. This builds trust and goodwill among employees, customers, government agencies, and local communities. Strong relationships lead to better customer loyalty, improved employee morale, and easier regulatory approvals.
3. Promotion of Socioeconomic Development: CSR initiatives usually focus on important issues like education, healthcare, poverty reduction, and environmental sustainability. When companies invest in these social welfare projects, they help empower communities and create self-sustaining societies. These efforts connect corporate goals with larger aims like the United Nations Sustainable Development Goals (SDGs), fostering inclusive growth.
4. Improved Brand Image and Market Position: Companies that engage in meaningful social initiatives gain reputations as responsible and ethical organizations. This positive public image builds customer goodwill and attracts investors. A strong CSR profile can lead to a larger market share, greater profitability, and better employee retention rates, supporting long-term business success.
Challenges and Recommendations for Effective Corporate Social Responsibility (CSR)
While the CSR framework under the Companies Act, 2013 has established social responsibility, it also poses several challenges that can limit its effectiveness:
1. Compliance over Impact: Many companies see CSR as a legal requirement or a way to improve their image. This focus on compliance often leads to spending on insignificant or short-term projects with limited long-term benefits, which diminishes the real impact of CSR initiatives.
2. Resource Constraints for Smaller Companies: Even small companies that meet the CSR threshold must allocate 2% of their net profits, which can be a financial and administrative strain. Limited resources and capabilities can hinder efficient project management and affect the sustainability of CSR efforts.
3. Bureaucratic and Administrative Delays: CSR requires various approvals, committee oversight, audits, and reports, resulting in a lot of paperwork. These formalities slow down project execution, impacting the timeliness and effectiveness of social interventions.
4. Lack of Measurable Outcomes: The current system mandates spending but does not require companies to assess their social results thoroughly. This lack of standard measurement often leads to poorly evaluated projects, making it hard to determine if CSR efforts truly meet community needs.
Recommendations to Maximize CSR Impact
To address these challenges and improve the social benefits of CSR, a shift from just financial compliance to impact-driven strategies is crucial:
1. Shift Focus from Spending to Measurable Impact: Use clear metrics and Key Performance Indicators (KPIs) to assess the social outcomes of CSR projects. This approach ensures that funds contribute to real, lasting change rather than just superficial spending, promoting project effectiveness and meaningful community development.
2. Enhance CSR Committee Independence: Give CSR Committees more autonomy by including independent directors and experts in relevant fields. This independence from profit-driven board pressures encourages strategic, ethical decision-making that aims for genuine social impact.
3. Introduce Tax Incentives for Impactful Projects: Offer greater tax benefits or deductions for CSR initiatives that show measurable and sustainable social outcomes. These incentives motivate companies to think creatively beyond the required spending and invest in long-term projects in education, healthcare, and environmental sustainability.
4. Mandate Regular Audits and Transparent Reporting: Require independent audits and public reporting of CSR activities. This transparency builds trust among stakeholders, verifies effective use of funds, and enforces accountability, ensuring that compliance leads to real social progress.
Conclusion
Corporate Social Responsibility under the Companies Act, 2013 reflects India’s progressive approach to balancing profit with purpose. It requires companies to incorporate ethical behaviour into their business practices. For CSR to genuinely transform society, corporations must go beyond compliance and embrace social responsibility as a central part of their business philosophy.
