India’s Companies Act, 2013, specifically Section 135, mandates Corporate Social Responsibility (CSR) for large companies, shifting focus from shareholder capitalism to stakeholder welfare. This legal framework, uncommon globally, applies to companies with a turnover exceeding Rs. 1,000 crore, net worth over Rs. 500 crore, or net profit above Rs. 5 crore, including private and foreign entities with Indian subsidiaries. Applicable companies must spend 2% of their average net profits from the preceding three financial years on CSR activities. Unspent amounts must be transferred to a Schedule VII approved fund for non-ongoing projects or a separate CSR account for ongoing projects within six months. Eligible CSR activities are detailed in Schedule VII, encompassing areas like poverty eradication, education, healthcare, and environmental sustainability, while employee benefits or political donations do not qualify. Significant amendments in 2021 require CSR implementation solely through registered Section 8 companies, public trusts, or societies with a three-year track record, registered with the Ministry of Corporate Affairs via Form CSR-1. Impact assessments are now mandatory for projects exceeding Rs. 1 crore. Common errors include using CSR for branding, engaging unregistered NGOs, inadequate documentation, and non-disclosure in Board Reports, which can lead to substantial penalties. Best practices involve aligning CSR with core business values, focusing on impact, vetting partners, and having a CSR committee and annual action plan.
1. What is Corporate Social Responsibility?
- CSR is introduced under section 135 of the Indian Companies Act, 2013.
- The main objective of CSR is to move from shareholders capitalism to stakeholder welfare.
- CSR cast an obligation on large companies to give back to the society and ask said large enterprises to partner up with Government in development of society with its resources.
- India’s CSR mandate is one of the very few legally binding CSR frameworks in the world.
2. When does CSR apply? – The Applicability threshold.
- Turnover > 1,000 Crore or
- Net Worth > 500 Crore or
- Net Profit > 5 Crore (even private and foreign companies (with Indian subsidiaries) are included.
3. How much to spend? The 2% rule
- 2% of the average net profits (last 3 F. Ys), as per Section 198 of the Companies Act, 2013.
- It is mandatory to spend or transfer the unspent amount to a schedule VII approved fund (for non-ongoing projects) and/or to a separate CSR account (for ongoing projects) within six months.
4. What qualifies as CSR?
- Schedule VII of the Companies Act, 2013 gives us the list of the areas under which the amount spent can be qualifies as CSR spent. It among other things includes – Eradicating Hunger and Poverty, education, gender equality, healthcare, environment sustainability etc.
- It is not allowed to spend any amount for employee benefit expenses, political donations and disguising it as CSR.
5. The important amendments w.e.f. 2021.
- CSR implementation can now be only through a Section 8 Company, registered public trust or society with 3 years of the track record and entity must be registered with MCA via CSR-1 form.
- Impact assessment required for projects > 1 Crore.
6. Common mistakes and Loopholes
- Treating CSR as branding or marketing tool;
- Spending via unregistered or ineligible NGOs
- Not maintaining proper audit documentation and spend records
- Missing CSR disclosure in the Boards Report (It can attract huge amount of penalty for a Company with CSR applicability).
7. Best Practices
- Aligning CSR activities with core business value
- Focus on Impact assessment and not just spend
- Ensuring legal vetting of implementation partners
- Having a CSR committee and Annual Action Plan (Also, mandatory under the Act)
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About the Author:
I have worked with an MNC for over six years. The MNC also had the CSR applicable on it and I have created this post with my practical experience and reference from the Companies Act, 2013. If you are curious about the CSR as professional or you are a businessman and really wants to understand the CSR applicability on your Company and its benefits and Compliance aspects, please feel free to write to me at Mayank.rawal337@gmail.com
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