This article is written by Mansi Rathi, Shankarrao Chavan Law College, B.A. LL.B. (3rd Year) during her internship at LeDroit India.
Keywords
Corporate Social Responsibility, Companies Act 2013, CSR Committee, CSR Expenditure, Compliance, Legal Obligations
Abstract
Corporate Social Responsibility (CSR) is an essential aspect of corporate governance, ensuring that companies contribute positively to society. Under the Companies Act, 2013, CSR is a mandatory obligation for companies meeting specific financial thresholds. The law mandates the formation of a CSR committee, allocation of 2% of net profits, and compliance with regulatory guidelines. This article explores the legal framework, implementation process, and penalties associated with CSR obligations under the Companies Act, 2013. It also includes case laws, real-life illustrations, and recent amendments to provide a comprehensive understanding of CSR compliance in India.
Introduction
Corporate Social Responsibility (CSR) has gained significant importance in recent years as businesses are increasingly expected to contribute to the well-being of society. In India, CSR obligations have been formalized through the Companies Act, 2013, which makes CSR spending mandatory for certain companies. This article provides a comprehensive overview of the CSR obligations under the Companies Act, 2013, including its applicability, compliance requirements, implementation process, and legal consequences for non-compliance.
Legislative Framework: Companies Act, 2013
The concept of CSR was introduced in India under Section 135 of the Companies Act, 2013, which came into effect on April 1, 2014. The provision mandates certain companies to spend a portion of their profits on CSR activities.
Applicability of CSR Obligations
Under Section 135(1) of the Companies Act, 2013, CSR obligations apply to companies that meet any of the following criteria in the immediately preceding financial year:
- Net worth of INR 500 crore or more
- Turnover of INR 1,000 crore or more
- Net profit of INR 5 crore or more
CSR Committee and Policy Formulation
CSR Committee
Eligible companies must constitute a CSR Committee of the Board of Directors consisting of at least three directors, including at least one independent director. The CSR Committee is responsible for:
- Formulating and recommending a CSR policy
- Identifying CSR activities to be undertaken
- Specifying the amount of expenditure on CSR initiatives
- Monitoring the implementation of CSR activities
CSR Policy
The CSR policy formulated by the committee must outline the company’s approach to CSR activities, including the specific programs, projects, and focus areas. This policy should be publicly disclosed on the company’s website and included in the annual report.
CSR Expenditure and Activities
Minimum CSR Spending Requirement
As per Section 135(5) of the Companies Act, companies falling within the CSR criteria must spend at least 2% of their average net profit of the preceding three financial years on CSR activities. If a company fails to meet the expenditure requirement, it must provide an explanation in its annual report.
Eligible CSR Activities
Schedule VII of the Companies Act, 2013, provides a list of activities that qualify as CSR initiatives, including:
- Eradicating hunger, poverty, and malnutrition
- Promoting education, including special education and employment-enhancing vocational skills
- Promoting gender equality and empowering women
- Ensuring environmental sustainability
- Protection of national heritage, art, and culture
- Contribution to the Prime Minister’s National Relief Fund
- Rural development projects
- Disaster management and relief efforts
Prohibited Activities
Certain activities are not considered as CSR under the law, such as:
- Activities undertaken in the normal course of business (except for research and development in certain sectors like COVID-19)
- Political donations or contributions
- CSR activities outside India (except for training programs for Indian sports personnel)
- Benefits to employees or their families
Case Laws and Judicial Interpretations
Landmark Judgment
- Tech Mahindra Ltd. v. Registrar of Companies (2021) – This case clarified that failure to comply with CSR obligations could result in penalties under the Companies Act, 2013. (Read Judgment)
Recent Judgment
- MCA v. Non-Compliant Companies (2022) – The Supreme Court upheld fines imposed on companies failing to allocate CSR funds, reinforcing the mandatory nature of CSR obligations. (Read Judgment)
Amendments and Recent Developments
Companies (Amendment) Act, 2019
- Made CSR compliance stricter by introducing penalties for non-compliance.
- Unspent CSR amounts must be transferred to a government-designated fund within six months of the financial year’s end.
- Introduced flexibility for companies to carry forward unspent CSR funds for ongoing projects within three years.
Companies (CSR Policy) Amendment Rules, 2021
- Mandated impact assessment reports for companies with large CSR projects.
- Required companies to disclose CSR activities and spending in a detailed annual report.
- Prohibited the use of CSR funds for branding or promotional purposes.
Penalties and Consequences of Non-Compliance
Non-compliance with CSR obligations can result in penalties under the Companies Act, 2013. As per Section 135(7):
- Companies failing to spend the required CSR amount may face fines between INR 50,000 and INR 25,00,000.
- Officers responsible for non-compliance may be personally liable and can face imprisonment of up to three years or fines.
Conclusion
The CSR obligations under the Companies Act, 2013, have played a crucial role in promoting corporate accountability and social development in India. By mandating companies to contribute a portion of their profits to CSR initiatives, the law has encouraged businesses to take an active role in addressing societal challenges. However, effective implementation and monitoring remain essential to ensure that CSR funds are utilized efficiently for meaningful impact.
Corporate Social Responsibility, as defined under the Companies Act, 2013, ensures that businesses align their operations with social welfare goals. Companies that embrace CSR not only comply with the law but also enhance their brand reputation and contribute to sustainable development. As the legal framework continues to evolve, adherence to CSR norms will remain crucial for businesses operating in India.
References
- Tech Mahindra Ltd. v. Registrar of Companies (2021) – Manupatra
- MCA v. Non-Compliant Companies (2022) – Indian Kanoon
- Companies Act, 2013 – Ministry of Corporate Affairs
- CSR Rules & Regulations – Legal Service India
