Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) is when companies take responsibility for their impact on society and the environment. It ensures that businesses focus not only on profits but also on social welfare and sustainable development. CSR is now an essential part of corporate governance in India.

Provisions

CSR provisions are the rules that specify which companies must follow CSR laws, how much they must spend, and how to report their CSR activities. These laws guide companies in implementing CSR in a structured way.

• Section 135 of the Companies Act.

Rules

CSR Rules provide detailed instructions for companies on implementing CSR policies, carrying out activities, and reporting results to the authorities. These rules ensure transparency and accountability in CSR.

• Rules 3 to 9 of The Companies (Corporate Social Responsibility Policy) Rules, 2014.

Introduction

The National Corporate Social Responsibility Data Portal is run by the Ministry of Corporate Affairs, Government of India, to share CSR-related data filed by registered companies. CSR in India is governed by Section 135 of the Companies Act, 2013, Schedule VII, and the Companies (CSR Policy) Rules, 2014. These laws explain how to check CSR eligibility, implement CSR, and report activities. India has a comprehensive CSR system that helps achieve sustainability goals and encourages companies to participate in nation-building.

Corporate Social Responsibility

CSR is growing bigger every year and is becoming a vital knowledge source for achieving sustainability goals in large economies. India mandates CSR through law to make sure companies actively contribute to society.

CSR includes:

• Programs related to activities listed in Schedule VII of the Act.

Projects or programs approved by the Board, following CSR Committee recommendations, as long as the policy covers topics in Schedule VII.

I. India’s Applicability of CSR

CSR rules apply to companies that meet certain financial limits in the previous fiscal year. These rules ensure large, profitable companies invest in social development.

Applicable companies include those with:

• Net worth over Rs. 500 crore.

• Revenue more than Rs. 1000 crore.

• Net profit over Rs. 5 crore.

All applicable companies must have a Board of Directors to ensure they spend at least 2% of their average net profit over the last 3 years on CSR. If the company has not completed three years, the spending is calculated based on the years available.

II. Constitution of CSR

Companies must form a CSR Committee to manage CSR activities. The committee ensures proper planning, monitoring, and reporting. 

• 3 or more directors, with at least 1 independent director. 

• If an independent director is not required under law, the committee must have at least 2 directors. 

The Board’s report must disclose the composition of the CSR Committee.

III. Importance of CSR

CSR is how companies make a positive contribution to society. It improves reputation, builds trust, and strengthens relationships with customers and communities. Companies that practise CSR also receive favourable media attention and stand out from competitors. 

CSR benefits include: 

• Enhancing a company’s reputation by supporting society. 

• Gaining favourable media coverage. 

• Building strong relationships with customers and communities. 

Standing out from competitors by engaging in social activities.

IV. Role of the Board

The Board of Directors ensures CSR is appropriately implemented. It approves the CSR policy, monitors spending, and reports activities. The Board ensures that at least 2% of average net profits over the last 3 years are spent on CSR. 

Board responsibilities include: 

• Approve the CSR policy after the CSR Committee’s suggestions. 

• Ensure only approved activities are carried out. 

• Monitor spending and ensure compliance with 2% rule. 

• Disclose in Board report: 

• Composition of the CSR Committee. 

• Contents of CSR Policy. 

Reasons for underspending, if any, and transfer details to designated funds within 6 months of year-end. 

V. Net Profit for Application to CSR

Companies must spend 2% of their average net profit from the last three years on CSR. Section 198 of the Companies Act defines how net profit is calculated. Certain government subsidies are included, while some incomes and gains are excluded.

Net profit cannot include: 

• Profits from share premiums (unless an investment company). 

• Profits from the sale of forfeited shares. 

• Capital gains from the sale of assets or undertakings (unless a trading business). 

• Unrealised or notional gains from asset revaluation. 

• Change in carrying amount of assets or liabilities in equity reserves.

Net profit must be deducted: 

• Usual working charges. 

• Directors’ remuneration. 

• Staff bonuses or commissions. 

• Taxes on abnormal or exceptional profits. 

• Interest on debentures, mortgages, loans (secured and unsecured). 

• Repair expenses (non-capital). 

• Section 181 contributions. 

• Depreciation per Section 123. 

• Excess expenditure over income. 

• Legal damages or insurance costs. 
• Bad debts written off.

Net profit cannot be deducted: 

• Income tax and super-tax. 

• Voluntary payments or damages. 

• Loss of capital nature (except for a written-down asset discarded or sold). 

Unrealised gains/losses in equity reserves.

VI. Transfer and Utilisation of Unused Funds

If a company does not spend the full CSR amount in a financial year, the unspent funds must be transferred to designated accounts. This ensures that CSR funds are used for social welfare, even if the company cannot spend them directly.

Unused CSR funds can be transferred to: 

• The National Relief Fund of the Prime Minister. 

• Central government funds for socio-economic development and welfare of Scheduled Castes, minorities, tribes, women, and other underprivileged groups. 

• Incubators funded by the central or state government, public sector enterprises, or other authorised bodies.

Funds can also be given to: 

• Publicly funded universities. 

• IITs and National Laboratories. 

• Organisations under: 

• ARCI (Agricultural Research Council of India). 

• CSIR (Council of Scientific and Industrial Research). 

• DAE (Department of Atomic Energy). 

• DBT (Department of Biotechnology). 

• Drugs Division. 

• AYUSH Ministry. 

• Ministry of Information Technology and Electronics. 

• ICMR (Indian Council of Medical Research). 

• DRDO (Defence Research and Development Organisation). 

• DST (Department of Science and Technology).

For ongoing CSR projects, unspent amounts must be transferred within 30 days of year-end to a separate account called “Unspent Corporate Social Responsibility Account”. These funds must be used within three financial years for CSR projects. If not used within three years, the money must be transferred to the designated government fund within 30 days after the third year. 

VII. Applicability of CSR Committee

Companies covered by CSR rules must establish a Corporate Social Responsibility (CSR) Committee. The committee ensures proper planning, monitoring, and reporting of CSR activities.

• The CSR Committee must have 3 or more directors, with at least 1 independent director. 

• Unlisted public companies, or private companies not required to have an independent director, may form a committee with at least 2 directors. 

• Private companies with only 2 directors will have a CSR Committee with both directors. 

• Foreign companies must have at least 2 persons, one of whom is resident in India and authorised to accept notices, the other nominated by the company. 

• Any company with money in the Unspent CSR Account must form a CSR Committee and follow CSR rules.

VIII. The CSR Committee’s Obligations

The CSR Committee ensures that CSR is implemented in accordance with the law and policy. The committee plans activities, monitors execution, and recommends spending to the Board.

The committee’s duties include:

• Formulate and recommend a CSR policy to the Board, covering activities in Schedule VII. 

• Recommend the expenditure on CSR activities. 

• Monitor CSR policy and projects regularly. 
• Establish a transparent mechanism to implement and control CSR projects.

IX. CSR Reporting

Companies must report CSR activities in their annual reports. Reporting ensures transparency and allows the public and authorities to see how CSR funds are used.

• Annual Board’s Report must include CSR activities for any financial year starting on or after 1st April 2014. 
• Foreign companies must include a CSR Annexure in their balance sheet.

X. CSR Policy 

A CSR Policy is a formal plan that outlines the activities a company will undertake under its CSR program. It ensures that CSR actions are planned and transparent.

The policy rules include:

• Policy contents must be published on the company’s website. 

• The company must carry out activities in accordance with the policy. 

• Companies can partner with other companies for CSR projects and report separately on these collaborations.

XI. List of CSR Activities Specified Under Schedule VII 

The company’s Board must ensure that all CSR activities comply with Schedule VII of the Companies Act. These activities guide companies on what kind of social work they can support.

XII. CSR Initiatives

CSR initiatives are specific activities listed under Schedule VII. Companies can include the following in their CSR policy:

XIII. Penalties and Fines for Failure to Comply

Companies that do not comply with CSR spending, transfer, or utilisation rules face penalties to ensure compliance.

• Company penalty: Rs. 1 crore or twice the unspent amount (whichever is less) 

• Officer penalty: Rs. 2 lakh or one-tenth of the unspent amount (whichever is less)

XIV. Motivation for Companies’ Introduction of CSR

Companies face complex global social, economic, cultural, and environmental challenges. Profits alone are not enough; companies must act responsibly towards society. 

CSR was introduced under the Companies Act, 2013, requiring companies to establish a structured CSR framework. Companies like TATA and Birla voluntarily participate in CSR projects that benefit society and engage with agencies to ensure successful outcomes. CSR builds a responsible corporate culture in India. 

Company secretaries are expected to know CSR laws and requirements to advise management and the Board effectively.

XV. Statutory Requirements for Filing of CSR Forms with ROC

Companies must file CSR forms with the Registrar of Companies (ROC) to report and register CSR activities.

E-Form CSR-1:

• Entities receiving CSR funds must register by filing the CSR-1 form. 

• The form must be digitally signed by authorised personnel and certified by a professional. 

• Ministry of Corporate Affairs approves the registered entity. 

• The CSR-1 submitted to the ROC is shared with companies that contribute to CSR.

E-Form CSR-2:

• All eligible companies must file CSR-2 with all calculations and required inputs. 
• Must be digitally signed by authorised personnel and certified by a professional. 

• Filing must comply with amended regulations and deadlines.

Required details for CSR-2 filing on MCA V2 portal:

• Completion of AOC-4/AOC-4 (NBFC Ind AS)/AOC-4 (XBRL) filing. 

• Details of the CSR Committee, meetings, and disclosures. 

• Capital assets created/acquired through CSR expenditure. 

• CSR policy and approved projects on the company’s website. 

• CSR project investments and unspent funds. 

• Impact assessment of CSR projects (as per CSR Rules 2014). 

• Submit CSR-2 separately to ROC by 31st March 2024 for FY 2022-23.