Corporate Social Responsibility (CSR) is a concept that has gained considerable significance in the business world, especially in India, where companies are increasingly realizing the importance of giving back to society. In India, CSR is not only a voluntary activity but also a mandatory obligation under the Companies Act, 2013. In this article, we will discuss the legal framework of CSR in India and the recent developments in this area.
Legal Framework of CSR in India
Section 135 of the Companies Act 2013 (Act), mandates that certain companies must allocate at least 2% of their average net profits from the preceding three financial years towards CSR activities. This provision applies to companies with a net worth of Rs. 500 crores or more, a turnover of Rs. 1000 crores or more, or a net profit of Rs. 5 crores or more during the immediately preceding financial year. Such companies shall constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. However, if a company is not required to appoint independent director as per section 149(4) of Act, then CSR committee shall consist of two or more directors.
The role of the CSR Committee is to formulate and recommend to the board a CSR policy, which should indicate the activities to be undertaken by the company in areas or subject, as specified in Schedule VII of the Act and should also monitor the implementation of the CSR policy. The committee is responsible for preparing an annual report on the company’s CSR activities, which should be included in the board’s report to shareholders. The report should provide specifics of the CSR initiatives or activities that the business conducted throughout the year, the money allocated to each initiative, and the impact of the activities on society.
The Act provides that the CSR activities must be undertaken in areas such as promoting education, eradicating hunger, poverty, promoting gender equality, protecting the environment, and other areas or subject, as specified in Schedule VII.
Apart from the Companies Act, several other laws and regulations in India promote CSR. For instance, the Securities and Exchange Board of India (SEBI) mandates that companies listed on the stock exchange must provide a Business Responsibility and Sustainability Report (BRSR), which outlines their CSR activities. Additionally, the Ministry of Corporate Affairs (MCA) has issued various guidelines and circulars on CSR.
Recent Developments in CSR in India
In recent years, CSR in India has undergone significant developments, with companies expanding their CSR activities and the government introducing new regulations to promote CSR. Here are some of the recent developments in CSR in India:
Digitalisation of CSR: The government has launched an online portal for companies to register and report their CSR activities. The portal has made it easier for companies to track and manage their CSR spending and to showcase their initiatives to stakeholders.
The inclusion of COVID-19 relief measures under CSR: In 2020, the Ministry of Corporate Affairs issued a circular stating that companies could undertake COVID-19 relief measures, such as providing healthcare facilities, setting up hospitals, or contributing to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations (PM CARES) Fund, under CSR.
The introduction of the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs): In 2011, the Ministry of Corporate Affairs introduced the NVGs, which provide guidance to companies on integrating CSR into their business operations. The NVGs emphasize the need for companies to take a sustainable approach to CSR.
Emphasis on Education: With companies funding programmes like building school infrastructure, training teachers, and providing scholarships for deserving kids, education has been a major focus of CSR operations in India.
Partnership with Non-Profits: To carry out their CSR programmes, companies are increasingly collaborating with charitable institutions. This has made it easier for companies to take advantage of NGOs’ experience and knowledge in particular social development fields.
The promotion of social entrepreneurship: In 2013, the MCA introduced the CSR Rules, which allow companies to contribute to incubators and research organizations that support social entrepreneurship. This provision aims to promote innovation and entrepreneurship in the social sector.
The focus on impact assessment: In recent years, there has been a greater emphasis on the need for companies to assess the impact of their CSR activities. In the past, impact assessments were permitted under the CSR Rules up to 5% of CSR expenditures, or Rs. 50 lakhs. According to the Companies (Corporate Social Responsibility Policy) Amendment Rules 2022[1], the cost of social impact evaluations, which can be classified as CSR spending, is limited to 2% of all CSR spending or Rs. 50 lakhs, whichever is higher. The change authorizes higher impact assessment spending for major CSR projects.
Transparency and Accountability: Amendment rules of 2022 have introduced a new format for the yearly report on CSR efforts. The annual report must include information such as the CSR policy, CSR committee members’ details, and an executive summary and impact assessments of CSR projects. Additionally, companies must declare the amount allocated to active and additional projects, surplus amounts for set-off, and unspent CSR amounts for the previous three financial years. The annual report should also include information about capital assets generated or bought via CSR spending and an explanation if the company fails to spend 2% of the average net income of the preceding three financial years. These changes reflect a growing emphasis on transparency and accountability in CSR reporting in India.
Conclusion
CSR is no longer just a voluntary activity but a mandatory obligation for certain companies in India. The legal framework of CSR in India has evolved significantly, with the government introducing new regulations and guidelines to promote CSR. Recent developments in CSR in India have focused on sustainable development, social entrepreneurship, impact assessment, and COVID-19 relief measures. CSR has become an essential aspect of the business landscape in India. Companies are expected to continue expanding their CSR activities due to increasing awareness of its importance. Besides benefiting society, CSR helps improve a company’s reputation and brand image, leading to cost savings and attracting and retaining customers, employees, and investors. However, critics argue that CSR initiatives lack effectiveness and should go beyond the mandated 2% spending requirement. Despite criticisms, CSR is becoming more critical for companies to promote sustainable development and contribute to society.
[1] https://www.mca.gov.in/bin/dms/getdocument?mds=1Wt3uUYzV0rGCr2Vxa8ztQ%253D%253D&type=open
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