Corporate Social Responsibility

Corporate Social Responsibility (“CSR”) was formally introduced into Indian company law through Section 135 of the Companies Act, 2013, marking a shift from voluntary philanthropy to a regulated framework mandating social accountability for qualifying companies. The CSR regime seeks to ensure that companies contribute to sustainable development while balancing economic growth with social and environmental concerns.

Applicability of CSR provisions:

CSR provisions apply to a company if it satisfies any one of the following criteria during the immediately preceding financial year:

• Net worth of INR 5 billion or more;
• Turnover of INR 10 billion or more; or
• Net profit of INR 50 million or more.

Once a company meets any of the above thresholds in a financial year, it is required to comply with the CSR provisions for the following financial year.

For the purpose of CSR applicability, the term "company" includes:

• an Indian company;
• its holding or subsidiary company; and
• a foreign company having a branch office or project office in India, provided it independently meets the prescribed thresholds.

Quantum of CSR Expenditure

A qualifying company is required to spend, in every applicable financial year, at least 2% of the average net profits made during the three immediately preceding financial years on CSR activities.

The computation of “net profit” for CSR purposes is carried out in accordance with Section 198 of the Companies Act, 2013, subject to specific exclusions.

Constitution of the CSR Committee

Where the CSR obligation of a company exceeds INR 5 million in a financial year, the company is required to constitute a Corporate Social Responsibility Committee of the Board.

The CSR Committee shall comprise:

• Three or more directors; and
• At least one independent director, where the appointment of an independent director is otherwise mandated under the Act.

In cases where the CSR obligation does not exceed INR 5 million, the functions of the CSR Committee may be discharged directly by the Board of Directors.

Roles and Responsibility of the Board:

The Act provides the following roles and responsibilities (in regard to CSR) for the Board of Directors:

• Approve the CSR Policy of the company;
• Ensure that the CSR activities are undertaken in accordance with the approved policy;
• Ensure that the prescribed CSR expenditure is incurred during the financial year;
• Monitor implementation and utilisation of CSR funds;
• Disclose CSR-related information in the Board’s Report; and
• Place the CSR Policy and details of CSR activities on the company’s website, if any.

Permissible CSR Activities

CSR expenditure may be incurred only on activities specified under Schedule VII of the Companies Act, 2013, which includes, inter alia:

• Eradication of hunger, poverty, and malnutrition;
• Promotion of education and vocational skills;
• Promotion of gender equality and women empowerment;
• Environmental sustainability and conservation of natural resources;
• Disaster management and relief;
• Rural development projects.

CSR activities must be distinct from the company’s normal business operations and should not result in direct commercial benefit to the company

The Act expressly states that during the implementation of the CSR Policy, preference must be given by the company to the local area and the area around which it operates.

Treatment of Unspent CSR Amounts

The Act prescribes a structured mechanism for dealing with unspent CSR amounts:

• Ongoing projects: Any unspent amount relating to an ongoing project must be transferred to a dedicated “Unspent CSR Account” within 30 days from the end of the financial year and spent within the next three financial years. If not spent within this period, the amount must be transferred to a fund specified in Schedule VII.
• Non-ongoing projects: Unspent amounts not relating to ongoing projects must be transferred to a Schedule VII fund within six months from the end of the financial year.

Implementation and Monitoring

CSR activities may be implemented:

• Directly by the company; or
• Through eligible implementing agencies registered in accordance with the CSR Rules.

Administrative overheads incurred for CSR implementation are capped at 5% of the total CSR expenditure for the financial year.

Companies having an average CSR obligation of INR 100 million or more in the immediately preceding three financial years are required to undertake impact assessment of certain CSR projects, in the manner prescribed

Consequences of Non-Compliance

Failure to comply with the CSR provisions attracts monetary penalties on the company and its officers in default. Additionally, non-compliance may attract adverse governance and reputational implications, particularly in the context of investor and stakeholder scrutiny.