Introduction
The Companies Act, 2013 marked a significant milestone in the history of Corporate Social Responsibility (CSR) in India. For the first time, CSR became a statutory obligation for eligible companies. The Act introduced specific provisions to ensure that businesses actively contribute to social development. The key CSR-related provisions are found under Section 135 and its related rules and amendments.
Explanation: The CSR provisions under the Companies Act, 2013 make India one of the few countries in the world where corporate social responsibility is legally mandated.
Key CSR-Related Provisions in the Companies Act, 2013
1. Section 135: Applicability
CSR provisions apply to companies (including holding or subsidiary companies) that meet any of the following criteria during the immediately preceding financial year:
- Net worth of ₹500 crore or more
- Turnover of ₹1,000 crore or more
- Net profit of ₹5 crore or more
Explanation: Only large or financially strong companies are required to follow the CSR rules to ensure that the burden is not placed on small or struggling firms.
2. CSR Committee
Companies falling under Section 135 must form a CSR Committee of the Board with at least three directors, including one independent director (if applicable).
Explanation: The committee is responsible for formulating the CSR policy, recommending activities, and monitoring implementation.
3. CSR Expenditure
Companies must spend at least 2% of their average net profit (before tax) made during the three immediately preceding financial years on CSR activities.
Explanation: If the company fails to spend this amount, it must explain the reasons in its Board Report. Recent amendments have also made unspent amounts liable to transfer to specified funds.
4. CSR Policy
The CSR Committee must develop a CSR Policy that outlines the activities the company will undertake. The policy should be approved by the Board and disclosed in the company’s annual report and website.
Explanation: This promotes transparency and accountability in CSR operations and helps stakeholders understand the company’s social initiatives.
Schedule VII of the Companies Act
This schedule lists the areas where companies can invest their CSR funds. These include:
- Eradicating hunger, poverty, and malnutrition
- Promoting education, especially among women and the differently abled
- Promoting gender equality and women empowerment
- Environmental sustainability
- Protection of national heritage, art, and culture
- Measures for the benefit of armed forces veterans, war widows
- Training to promote sports
- Rural and slum area development
- Disaster management, including COVID-19 relief
Explanation: The list ensures that CSR spending is aligned with national development goals.
Recent Amendments and Updates
- Amendment (2021): Made CSR spending mandatory. Unspent CSR amounts related to ongoing projects must be transferred to a special “Unspent CSR Account” and used within 3 years.
- Penalties: Failure to comply can result in penalties for both the company and the officers in default.
- Impact Assessment: Companies spending ₹10 crore or more on CSR must conduct impact assessments of their projects.
Explanation: These amendments ensure proper planning, execution, and evaluation of CSR initiatives.
Conclusion
The CSR-related sections of the Companies Act, 2013 have institutionalized corporate responsibility in India. By making CSR legally enforceable, the Act ensures that companies contribute meaningfully to social development. Clear guidelines, reporting requirements, and penalties have helped create a transparent framework for CSR, encouraging businesses to take their social obligations seriously and contribute to the nation’s progress.