Today, CSR is no longer just a “good to have” initiative tucked away in an annual report; it is a critical regulatory requirement and a core component of corporate strategy. For businesses, it represents a “social license to operate.” For the government, it is a mechanism to involve the private sector in solving the nation’s most pressing developmental challenges.
In this comprehensive guide, we will break down the legalities, eligibility, and practical implications of CSR under Section 135 of the Companies Act, 2013.
What Exactly is CSR Under Indian Law?
In the context of the Companies Act, 2013, CSR is defined as the process by which a company integrates social, environmental, and ethical responsibilities into its business operations. It is not about “charity” in the traditional sense; it is about accountability.
The law mandates that companies of a certain size must spend a portion of their profits on activities that benefit society. These activities are specifically listed under Schedule VII of the Act, ensuring that corporate funds are directed toward national priorities like education, healthcare, and environmental sustainability.
Eligibility: Is Your Company Mandated to Spend?
Not every company is required to undertake CSR activities. The mandate kicks in only when a company crosses specific financial thresholds. According to Section 135(1) of the Companies Act, 2013, any company (including its holding, subsidiary, and foreign companies with branches in India) that meets any of the following criteria during the immediately preceding financial year must comply with CSR norms:
- Net Worth: ₹500 crore or more.
- Turnover: ₹1,000 crore or more.
- Net Profit: ₹5 crore or more.
It is worth noting that the “Net Profit” criterion is the one that most frequently triggers compliance for mid-sized enterprises. Even if a company is not a giant in terms of turnover, a relatively small net profit of ₹5 crore brings it under the regulatory scanner.
The Core Requirements: How Much and Where?
Once a company meets the eligibility criteria, three primary obligations arise:
- The 2% Spending Rule
The law requires companies to spend, in every financial year, at least 2% of their average net profits made during the three immediately preceding financial years.
- Constitution of a CSR Committee
Eligible companies must form a CSR Committee of the Board. This committee usually consists of three or more directors, at least one of whom must be an Independent Director.
- Formulation of a CSR Policy
The CSR Committee is responsible for drafting a formal CSR Policy. This policy acts as a roadmap, outlining which activities will be undertaken, the budget allocation, and the monitoring mechanism to ensure the funds are used effectively.
Schedule VII: Permissible CSR Activities
Companies cannot simply spend money on any “good cause.” To qualify as CSR under the Act, the expenditure must fall within the activities listed in Schedule VII These include:
- Education: Including special education and employment-enhancing vocational skills.
- Gender Equality: Empowering women, setting up homes for orphans, and reducing inequalities faced by socially and economically backward groups.
- Environmental Sustainability: Maintaining the quality of soil, air, and water, and conserving natural resources.
- Protection of National Heritage: Restoring historical buildings and promoting traditional arts and handicrafts.
- Measures for Veterans: Benefiting Armed Forces veterans, war widows, and their dependents.
- Technology Incubators: Funding incubators within academic institutions which are approved by the Central Government.
- Rural and Slum Area Development: Projects aimed at improving infrastructure and livelihoods in underdeveloped regions.
What does NOT count as CSR?
- Activities undertaken in the “normal course of business.”
- Activities benefiting only the employees of the company.
- Political contributions.
- Activities supported on a sponsorship basis for deriving marketing benefits.
The Shift from “Comply or Explain” to Mandatory Compliance
In the early years of the Act, the philosophy was “Comply or Explain.” If a company failed to spend the 2% amount, they simply had to state the reasons in their Board Report. However, recent amendments (specifically the 2019 and 2020 amendments) have made the law significantly more stringent. Now, CSR spending is effectively mandatory.
Unspent Funds (Ongoing Projects):
If a company has unspent CSR funds related to an “ongoing project,” the money must be transferred to a special account called the “Unspent CSR Account” within 30 days of the end of the financial year. This money must be spent within three financial years.
Unspent Funds (Other):
If the money is not tied to an ongoing project, it must be transferred to a fund specified in Schedule VII (such as the PM National Relief Fund) within six months of the end of the financial year.
Calculating Net Profit: The Specifics
The calculation of “Net Profit” for CSR purposes is governed by Section 198 of the Companies Act. It is not simply the bottom-line figure from your P&L statement. Certain deductions and exclusions apply, such as: Any profit from overseas branches. Dividends received from other companies in India that are also covered under Section 135.This ensures that the same profit isn’t “taxed” for CSR twice across different entities within the same corporate group.
Reporting and Transparency
Transparency is a cornerstone of the CSR mandate. Companies are required to:
- Disclose the CSR Policy on their official website.
The Penalties for Non-Compliance
The government has signal that it takes CSR compliance very seriously. Failure to comply with the provisions of Section 135 can lead to heavy penalties For the Company: A penalty of twice the amount required to be transferred to the specified fund or the Unspent CSR Account, or ₹1 crore, whichever is less. For Every Officer in Default: A penalty of 1/10th of the amount required to be transferred, or ₹2 lakh, whichever is less.
Why CSR is Good for Business (Beyond Compliance)
While the legal requirements might seem like a burden, there is a strong business case for robust CSR participation:
- Brand Reputation and Trust
In an age of conscious consumerism, customers prefer buying from brands that demonstrate a commitment to social good. A strong CSR track record builds immense brand equity.
- Talent Attraction and Retention
Millennials and Gen Z professionals want to work for companies that have a purpose beyond profit. CSR initiatives often boost employee morale and help attract top-tier talent.
- Risk Mitigation
By engaging with local communities, companies can mitigate operational risks and build a supportive environment for their business activities.
