Legal Frameworks Governing C.S.R in India: An In-Depth Analysis

Introduction

Corporate Social Responsibility (CSR) today is an important aspect of corporate governance in India, reflecting the commitment of businesses towards social and environmental sustainability. This legal framework relating to CSR in India is primarily shaped not only by the Companies Act, 2013 but also by various governments' policies and judicial pronouncements. The article summarizes the legal foundations to CSR in India, with an undertaking of statutory provisions, and with the challenges of implementation. 

Evolution of CSR in India

CSR in India has changed from a voluntary philanthropic activity to a mandatory legal obligation. Initially, CSR was driven by ethical and moral considerations, but with the passage of the Companies Act, 2013, it became a statutory duty for certain corporations.1

Legal Provisions Governing CSR in India

1. Companies Act, 2013 – Section 135

The landmark provision for CSR in India is enshrined under Section 135 of the Companies Act, 2013, which mandates that, if the gross revenues of a company exceed a particular amount, 2% of its profits must be allocated to CSR activities.2 Other key features of the provision include: 

Applicability: Companies with:3

• A net worth of ₹500 crore or more, or

• A turnover of ₹1000 crore or more, or

• A net profit of ₹5 crore or more in a financial year.

  
  

CSR Committee: Companies meeting the criteria must constitute a CSR Committee comprising at least three directors, including one independent director.4

Mandatory Expenditure: Companies must spend at least 2% of their average net profits from the last three financial years on CSR activities.

CSR Activities: Schedule VII of the Act specifies permissible CSR activities like:5

• Eradicating hunger, poverty, and malnutrition;

• Promoting education and employment-enhancing vocational skills;

• Environmental sustainability;

• Contribution to the Prime Minister’s National Relief Fund;

• Rural development projects;

• Slum area development, etc.

2. Companies (CSR Policy) Rules, 2014

The Companies (Corporate Social Responsibility Policy) Rules, 2014, provide additional guidelines for CSR implementation. These rules mandate that companies must:6

• Disclose CSR policies on their official website.

• Ensure that CSR funds are not used for the benefit of employees or political parties.

• Prefer implementing CSR projects in areas where they operate.

Challenges in CSR Implementation7

Despite a well-defined legal framework, CSR implementation in India faces several challenges:

1. Non-Compliance: Many companies fail to meet CSR obligations due to weak enforcement mechanisms.

2. Misuse of Funds: There have been instances of CSR funds being misused for self-promotion rather than genuine social impact.

3. Lack of Transparency: Many companies do not provide adequate disclosures on CSR spending.

4. Preference for Short-Term Projects: Companies often invest in short-term projects instead of long-term sustainable development initiatives.

Legal Compliance and Penalties

Non-compliance with CSR obligations can attract penalties under Section 134(8) of the Companies Act, 2013. Companies failing to spend the required amount on CSR must provide reasons in their Board’s Report. If the unspent amount is not transferred to a specified fund (e.g., the Unspent CSR Account), the company and its officers may face fines ranging from ₹50,000 to ₹25 lakh, and officers may be imprisoned for up to three years.8

Recent Developments in CSR

Recent amendments have strengthened CSR regulations:

• Companies (Amendment) Act, 2019, and Companies (CSR Policy) Amendment Rules, 2021,9 introduced stricter compliance requirements, allowing companies to carry forward unspent CSR funds for ongoing projects.

• The Ministry of Corporate Affairs (MCA) introduced Form CSR-2 to enhance transparency and accountability in CSR reporting.10

Conclusion

The CSR framework in India, regulated mainly by Section 135 of the Companies Act of 2013, has turned the voluntary exercise of corporate responsibility into a legal compulsion. However, challenges such as non-compliance, lack of transparency, and misallocation of funds hinder effective implementation. Strengthened enforcement mechanisms, encouraged transparency, and sustainable CSR initiatives could help further the social aim of inclusive and responsible corporate growth. As India continues to grow economically, the effective implementation of CSR laws will be crucial in addressing social, environmental, and economic challenges.

References

1  Ministry of Corporate Affairs, 'History' (National CSR Portal) https://www.csr.gov.in/content/csr/global/master/home/aboutcsr/history.html accessed 25 February 2025.

2  'Section 135. Corporate Social Responsibility' (Companies Act Integrated Ready Reckoner) https://ca2013.com/135-corporate-social-responsibility/ accessed 25 February 2025.

3  Nandni Chandrani, 'Corporate Social Responsibility (CSR) and Its Legal Challenges in India' (TaxGuru, 24 December 2024) https://taxguru.in/company-law/corporate-social-responsibility-csr-legal-challenges-india.html accessed 25 February 2025.

4  International Center for Not-for-Profit Law, 'Corporate Social Responsibility in India' (International Center for Not-for-Profit Law 2014) https://www.icnl.org/wp-content/uploads/India-FAQ-3---Corporate-Social-Responsibility-FINAL.pdf accessed 25 February 2025.

5  The Companies Act 2013, Schedule VII (India Code, Ministry of Law and Justice) https://upload.indiacode.nic.in/schedulefile?aid=AC_CEN_22_29_00008_201318_1517807327856&rid=79 accessed 25 February 2025.

6  IndiaFilings, 'Key Changes to India's CSR Policy for Companies' (IndiaFilings, 20 September 2022) https://www.indiafilings.com/learn/key-changes-to-indias-csr-policy-for-companies/ accessed 25 February 2025.

7  Sateesh Gouda M, S Parasuraman and A G Khan, 'Opportunities and Challenges for Corporate Social Responsibility in India' (2024) 29(3) IOSR Journal of Humanities and Social Science 36 https://www.iosrjournals.org/iosr-jhss/papers/Vol.29-Issue3/Ser-3/G2903033645.pdf accessed 25 February 2025.

8  Ministry of Corporate Affairs, Penalties and Offences under Companies Act, 2013 (Ministry of Corporate Affairs 2024) https://www.mca.gov.in/Ministry/pdf/Penalties-and-Offences-under-Companies-Act-2013.pdf accessed 25 February 2025.

9  Mayashree Acharya, 'CSR Amendment Rules 2021' (ClearTax, 16 June 2024) https://cleartax.in/s/csr-amendment-rules-2021 accessed 25 February 2025.

10  IndiaFilings, 'Key Changes to India's CSR Policy for Companies' (IndiaFilings, 20 September 2022) https://www.indiafilings.com/learn/key-changes-to-indias-csr-policy-for-companies/ accessed 25 February 2025.

This article is authored by Deepanshu Tembhre. He was among the Top 40 performers in the Corporate Law Quiz Competition organized by Lets Learn Law.