Corporate Social Responsibility (CSR) And Its Legal Challenges In India

Corporate Social Responsibility (CSR) And Its Legal Challenges In India

Introduction

Corporate Social Responsibility (CSR) {Section 135 of Companies Act, 2013} has emerged as an important aspect of corporate governance in India. It shows the commitment of companies to contribute to societal, economic, and environmental development beyond just profit-making. The legal framework of CSR is distinctive, placing mandatory obligations on certain companies to engage in CSR activities. While this approach highlights India’s dedication to comprehensive growth, it also presents significant legal challenges.

Legal Framework for CSR in India

The Companies Act, 2013, marked a milestone in the growth of CSR in India by making it a statutory obligation.

Section 135 of the Act mandates that companies meeting specific thresholds of net worth, turnover, or net profit should contribute at least 2% of their average net profits of the preceding three financial years towards CSR activities.

These activities are listed under Schedule VII of the Act and include areas such as:

• Eradicating hunger, poverty, and malnutrition.
• Promoting health care.
• Promoting education.
• Promoting gender equality and empowering women.
• Ensuring environmental sustainability.
• Protection of national heritage.
• Measures for the benefit of armed forces veterans.
• Promotion of rural sports.
• Contributing to Prime Minister’s National Relief Fund or other government funds.
• Slum area development.
• Disaster management.

Key Provisions under Section 135

1. CSR Applicability: As per Section 135 of the Companies Act, 2013, the CSR provisions apply to companies that meet any of the following criteria during any financial year:

• A net worth of INR 500 crore or more.
• A turnover of  INR 1,000 crore or more.
• A net profit of INR 5 crore or more.

2. CSR Committee: Companies meeting the above criteria are required to form a CSR Committee consisting of at least three directors, including one independent director, to formulate and monitor CSR policies. [Section 135(1)]

3. CSR Reporting

• Companies are required to spend at least 2% of their average net profits of the preceding three financial years on CSR activities.
• If a company fails to spend the required amount, the Board must specify the reasons for not spending the amount in its report.
• Additionally, companies must disclose their CSR activities and expenditure in the annual report and on their website. [Section 135(4) and Section 134(3)(o)]

4. Unspent CSR Funds

• Companies are liable to transfer unspent CSR funds to a specific fund or account, such as the Prime Minister’s National Relief Fund or any other fund initiated by the central government for social and economic development, relief, and welfare of society within six months of the financial year’s end. [Section 135(5) and Section 135(6)]

5. Penalties for Non-Compliance: If a company fails to fulfill the requirements of CSR, it may face fines, and the officers in default may also be liable for penalties.

• Penalty for Companies: A penalty equal to twice the unspent CSR amount or INR 1 crore, whichever is less. [Section 135(7)]
• Penalty for Officers in Default: A penalty of up to INR 2 lakh on each officer in default. [Section 135(7)]
• These penalties are formed to ensure the implementation of CSR policies and encourage companies to fulfill CSR obligations responsibly.
• The Companies (Corporate Social Responsibility Policy) Rules, 2014, provide detailed guidelines for implementing CSR activities and highlight the accountability and transparency required from companies.

Recent Developments in CSR Regulations

Recent years have witnessed significant developments in CSR regulations:

1. MCA Circulars and Amendments: The Ministry of Corporate Affairs (MCA) has made amendments and given clarifications to make Corporate Social Responsibility (CSR) work better. For example, the Companies (Amendment) Act, 2020, allows companies to use leftover CSR funds for ongoing projects instead of wasting them. [Section 135(6)]

2. Impact Assessment: Companies with CSR expenditures exceeding INR 10 crore in a financial year are required to conduct impact assessments of their projects to ensure that the funds are being used effectively and that the projects are making a meaningful difference. [Rule 8(3) of the Companies (CSR Policy) Rules, 2014]

3. Decriminalization of Violations: The Companies (Amendment) Act, 2020, decriminalized penalties for some offenses related to Corporate Social Responsibility (CSR), making it less harsh for companies that commit minor or unintentional mistakes. However, it kept financial penalties for serious violations where companies intentionally avoid following the rules. This ensures companies are held accountable without overly strict measures, allowing them to operate more smoothly. [Section 135(7)]

Legal Challenges in CSR Implementation

Even though strong laws for Corporate Social Responsibility (CSR) exist, there are still some challenges in making it work smoothly:

• The definition of permissible CSR activities under Schedule VII remains broad and open to interpretation. This makes it hard for companies to clearly understand what qualifies as CSR, leading to different ways of implementing it.
• Smaller companies that meet the financial criteria for CSR often find it tough to handle the extra costs and paperwork needed to comply with the rules, leading to a heavy workload for smaller companies.
• Many businesses are not fully aware of the CSR requirements. This can lead to accidental non-compliance with the law.
• There are penalties formed for non-enforcement of CSR laws, but still, the authorities often face challenges like limited resources, which makes it hard to implement the rules consistently.
• A key challenge is ensuring that CSR money is used effectively to benefit the intended communities, rather than being wasted on projects that are just for show or for marketing purposes.

Conclusion

The Companies Act, 2013, has revolutionized responsible business practices in India through its CSR provisions. By mandating CSR activities, it convinces companies to move beyond profit-driven motives and actively engage in the nation’s socio-economic transformation. It not only enhances the company’s reputation but also helps drive sustainable development and exceptional growth, ensuring the benefits of progress reach all sections of society.