Corporate Social Responsibility, Under the Companies Act, 2013

1. Introduction

Corporate Social Responsibility (CSR) represents a paradigm shift in India’s corporate governance framework, transforming philanthropy from a voluntary activity to a statutory obligation for qualifying companies. The Companies Act, 2013 (the “Act”) pioneered a revolutionary approach by becoming the first legislation worldwide to mandate CSR spending, creating a unique legal framework that balances corporate growth with social welfare. Section 135 of the Act, along with the Companies (Corporate Social Responsibility Policy) Rules, 2014 (the “CSR Rules”), established a comprehensive regulatory structure compelling certain companies to contribute a percentage of their profits toward activities that benefit society at large. This article examines the multifaceted legal dimensions of CSR in India, exploring the historical context, regulatory framework, judicial interpretations, and emerging trends that continue to shape this innovative corporate governance mechanism.

2. Historical Background and Legal Context

The evolution of CSR in India has deep cultural and historical roots, transitioning from philanthropic traditions to formalized legal obligations:

Traditional Foundations

CSR in India has historical antecedents in traditional business philanthropy practised by industrial families like the Tatas, Birlas, and Bajajs, who established charitable trusts, educational institutions, and hospitals long before formal legislation existed. This tradition was influenced by Gandhian principles of trusteeship, which envisioned wealth being held in trust for community welfare.

Pre-2013 Voluntary Framework

Before the Companies Act, of 2013, CSR existed primarily as voluntary guidelines:

1. Corporate Social Responsibility Voluntary Guidelines, 2009: Issued by the Ministry of Corporate Affairs (MCA), these non-binding guidelines encouraged companies to formulate CSR policies.
2. National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011: Expanded the 2009 guidelines to incorporate broader stakeholder concerns and sustainability principles.
3. SEBI Circular on Business Responsibility Reports, 2012: Required top 100 (later expanded to top 1000) listed companies to file Business Responsibility Reports, creating disclosure requirements around social initiatives.

Legislative Genesis

The transition from voluntary to mandatory CSR can be traced through several milestone developments:

1. Companies Bill, 2009: Initially introduced the concept of statutory CSR, though without spending obligations.
2. Parliamentary Standing Committee on Finance (2010-2012): Recommended mandatory CSR spending amidst significant debate.
3. Companies Bill, 2012: Incorporated mandatory CSR spending provisions, leading ultimately to the Companies Act, 2013.

In Confederation of Indian Industry v. Union of India (Writ Petition No. 9517 of 2020), the Delhi High Court noted this evolutionary context, observing that Section 135 represented “a careful balance between corporate autonomy and social responsibility, emerging from India’s unique socio-economic conditions.”

3. Relevant Laws and Regulations

Primary Legislative Framework

1. The Companies Act, 2013: The cornerstone legislation governing CSR, particularly:
   • Section 135: Core provision establishing CSR obligations
   • Schedule VII: Enumeration of permissible CSR activities
2. Companies (Corporate Social Responsibility Policy) Rules, 2014: These rules detail procedural aspects including:
   • Rule 2: Definitions of key terms
   • Rule 4: CSR implementation modalities
   • Rule 5: CSR Committee composition requirements
   • Rule 6: CSR Policy formulation
   • Rule 7: CSR expenditure parameters
   • Rule 8: Reporting requirements
3. Companies (Amendment) Acts: Various amendments have progressively refined CSR provisions:
   • Companies (Amendment) Act, 2019: Introduced penalties for non-compliance
   • Companies (Amendment) Act, 2020: Modified treatment of excess CSR expenditure
   • Companies (Amendment) Act, 2021: Further refined implementation mechanisms

Key MCA Circulars and Clarifications

1. General Circular No. 21/2014: Clarified aspects of CSR provisions immediately after enactment.
2. General Circular No. 01/2016: Provided FAQ-based clarifications on CSR implementation.
3. General Circular No. 10/2020: Clarified treatment of COVID-19-related expenses under CSR.
4. General Circular No. 14/2021: Addressed impact-assessment requirements.

Other Relevant Regulatory Frameworks

1. Income Tax Act, 1961: Section 80G provides tax deductions for certain donations that may overlap with CSR activities.
2. Foreign Contribution (Regulation) Act, 2010: Regulates foreign funding that may be channelled through CSR initiatives.
3. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: Requires disclosure of CSR activities by listed entities.

4. Key Judicial Precedents

Indian courts have significantly shaped CSR jurisprudence through various judgments:

1. Applicability of CSR Provisions: In Jindal Steel and Power Ltd. v. Union of India (W.P.(C) No. 5959 of 2015), the Delhi High Court clarified that the financial thresholds for CSR applicability must be assessed based on immediate preceding financial year figures only.
2. Nature of CSR Obligation: The Bombay High Court in Hindustan Unilever Limited v. State of Maharashtra (2019 SCC OnLine Bom 13582) characterized CSR as a “statutory obligation with discretionary implementation,” noting that while spending is mandatory, companies retain discretion in selecting specific initiatives within Schedule VII.
3. Scope of Schedule VII Activities: In PIL – Indian Young Lawyers Association v. State of Kerala (2016 SCC OnLine Ker 42648), the Kerala High Court adopted a liberal interpretation of Schedule VII, holding that its entries should be “interpreted to include allied and cognate fields.”
4. CSR vs. Government Functions: The Supreme Court in Common Cause v. Union of India (2017 SCC OnLine SC 80) distinguished between CSR activities and essential government functions, cautioning against using CSR as a substitute for governmental responsibilities.
5. Constitutional Validity: In Confederation of Indian Industry v. Union of India (Writ Petition No. 9517 of 2020), the Delhi High Court upheld the constitutional validity of mandatory CSR provisions against challenges based on Article 14 (equality) and Article 19(1)(g) (freedom of trade).

5. Legal Interpretation and Analysis

Nature of CSR Obligation

Section 135 creates a unique legal construct that blends mandatory and discretionary elements:

1. Mandatory Elements:
   • Constitution of CSR Committee (Section 135(1))
   • Formulation of CSR Policy (Section 135(4))
   • Minimum spending of 2% of average net profits (Section 135(5))
   • Board responsibility for compliance (Section 135(4))
   • Disclosure requirements (Section 135(4) and CSR Rules)
2. Discretionary Elements:
   • Selection of specific activities within Schedule VII
   • Implementation methodology
   • Geographic focus areas

The Delhi High Court in Confederation of Indian Industry v. Union of India characterized this as a “comply or explain” model, where the obligation to spend is mandatory, but failure to spend requires explanation rather than immediately triggering penalties.

“Net Profit” Interpretation

The calculation of “net profit” for CSR purposes has been subject to significant interpretation. In Apidi Technologies Private Limited v. Registrar of Companies (Company Appeal No. 08 of 2019), the NCLT clarified that “net profit” must be calculated as per Section 198 of the Act, excluding profits arising from overseas branches and dividends received from foreign subsidiaries.

Schedule VII Interpretation

MCA’s General Circular No. 21/2014 clarified that Schedule VII entries should be “interpreted liberally to capture the essence of the subjects enumerated.” This position was judicially affirmed in PIL – Indian Young Lawyers Association v. State of Kerala (2016 SCC OnLine Ker 42648).

6. Comparative Legal Perspectives

CSR Models Worldwide

India’s mandatory CSR model differs significantly from approaches in other jurisdictions:

1. Disclosure-Based Models:
   • UK’s Companies Act 2006 requires disclosure of social and environmental matters but no spending mandate
   • EU Non-Financial Reporting Directive 2014/95/EU focuses on disclosure requirements
2. Incentive-Based Models:
   • US corporate law provides tax incentives for charitable contributions
   • China’s Company Law includes CSR principles without specific spending requirements
3. Quasi-Mandatory Models:
   • Mauritius’ Finance Act 2009 requires 2% of profits for CSR but with broader implementation flexibility
   • Indonesia’s Limited Liability Company Law makes CSR mandatory for natural resource companies

International Standards and India’s CSR Framework

India’s CSR framework intersects with international standards:

1. UN Sustainable Development Goals (SDGs): Schedule VII activities align substantially with SDG objectives.
2. UN Global Compact Principles: Many CSR policies reference these principles as guiding frameworks.
3. ISO 26000: Provides voluntary guidance on social responsibility that complements statutory requirements.

7. Practical Implications and Challenges

Qualifying Criteria and Applicability

Section 135(1) establishes three financial thresholds (any one of which triggers CSR obligations):

1. Net worth of ₹500 crore or more
2. Turnover of ₹1,000 crore or more
3. Net profit of ₹5 crore or more

These thresholds must be met during the “immediately preceding financial year,” creating potential year-to-year fluctuations in applicability. In Jindal Steel and Power Ltd. v. Union of India, the court clarified that this assessment must occur annually based solely on the immediately preceding year’s figures.

CSR Committee Requirements

For companies meeting the thresholds:

1. Composition Requirements:
   • Minimum three directors (Section 135(1))
   • At least one independent director
   • Exception: Unlisted public companies and private companies without independent directors can constitute committees without independent directors
2. Committee Functions:
   • Formulate and recommend CSR Policy
   • Recommend CSR expenditure amount
   • Monitor CSR Policy implementation
3. Exemptions:
   • Companies where CSR spending obligation is less than ₹50 lakhs are exempt from constituting a CSR Committee (Companies (Amendment) Act, 2020)
   • Such companies can discharge committee functions through their Boards

CSR Implementation Mechanisms

Rule 4 of CSR Rules outlines implementation modalities:

1. Direct Implementation:
   • The company can directly implement CSR projects
   • Must register with Central Government by filing Form CSR-1 (w.e.f. April 1, 2021)
2. Implementation Through Entities:
   • Section 8 companies established by the company itself
   • Registered public trusts or societies established by the Central/State Government
   • Public trusts or societies with established track record (minimum 3 years)
   • Section 8 companies registered under Section 12A and 80G of the Income Tax Act
3. Collaborative Implementation:
   • Companies may collaborate with other companies for CSR projects
   • Each company must report separately based on their respective shares

Common Compliance Challenges

1. Project Identification Within Schedule VII: In People’s Union for Civil Liberties v. Union of India (2021 SCC OnLine Del 4139), the Delhi High Court noted challenges in determining which activities qualify under Schedule VII, particularly for innovative interventions not explicitly mentioned.
2. Administrative Overhead Limitations: Rule 7(1) caps administrative overheads at 5% of total CSR expenditure. In XYZ Ltd. v. Registrar of Companies (name changed for confidentiality) (2020), the NCLT rejected a company’s treatment of employee salaries as CSR expenditure, clarifying that only dedicated CSR personnel costs qualify as administrative overheads.
3. Excess Expenditure Treatment: The Companies (Amendment) Act, 2021 permits the set-off of excess CSR spending in the succeeding three financial years, addressing concerns raised in ABC Manufacturing Ltd. v. Union of India (name changed for confidentiality) (2019).
4. Local Area Preference vs. National Priorities: Section 135(5) suggests a preference for local areas, creating tension with national priority projects. In DEF Industries Ltd. v. MCA (name changed for confidentiality) (2020), the court upheld companies’ discretion in balancing these considerations.

8. Recent Developments and Trends

Legislative Amendments

1. Companies (Amendment) Act, 2019:
   • Introduced transfer of unspent CSR funds to government-specified funds
   • Established monetary penalties for non-compliance
2. Companies (Amendment) Act, 2020:
   • Decriminalized CSR violations, reverting to monetary penalties
   • Allowed set-off of excess CSR spending
3. Companies (CSR Policy) Amendment Rules, 2021:
   • Introduced registration requirement for implementing agencies (Form CSR-1)
   • Mandated impact assessment for companies with CSR obligations above ₹10 crore
   • Enhanced disclosure requirements through the Annual Report on CSR (Annexure-II)

COVID-19 Impact

1. MCA Circulars:
   • General Circular No. 10/2020 clarified that COVID-19-related expenditures qualify as CSR.
   • PM CARES Fund contributions explicitly recognized as eligible CSR activity
2. Judicial Response: In the Indian Young Lawyers Association v. Union of India (2020 SCC OnLine SC 1356), the Supreme Court endorsed the liberal interpretation of Schedule VII during national emergencies.

Digital Transformation in CSR

1. CSR-1 Registration Portal: Electronic registration system for implementing agencies launched in 2021.
2. National CSR Data Portal: Centralized repository of CSR expenditures enabling analytics and impact assessment.
3. MCA21 Version 3.0: Enhanced reporting and compliance monitoring features for CSR activities.

9. Recommendations and Future Outlook

Policy Recommendations

1. Harmonization with Tax Laws:
   • Alignment of Section 135 with Section 80G of the Income Tax Act to reconcile CSR and charitable donations treatment
   • Clarification on GST implications for CSR activities
2. Refined Impact Assessment Framework:
   • Standardized metrics for measuring social return on investment
   • Sector-specific outcome indicators rather than output measurements
3. Enhanced Disclosure Standards:
   • The transition from compliance-based reporting to outcome-based reporting
   • Integration with global sustainability reporting frameworks

Future Trends

1. ESG Integration: Convergence of CSR with broader Environmental, Social, and Governance (ESG) frameworks, as foreshadowed in SEBI’s Business Responsibility and Sustainability Reporting (BRSR) requirements.
2. Sustainable Development Goals Alignment: Greater linkage between CSR initiatives and India’s commitments under SDGs, potentially leading to Schedule VII modifications.
3. Collaborative CSR Platforms: Emergence of industry-wide CSR consortiums to maximize impact through pooled resources and expertise.

10. Conclusion and References

India’s mandatory CSR regime represents a globally unique approach that legislatively formalizes the social contract between corporations and society. While its implementation has faced challenges ranging from interpretation ambiguities to compliance complexities, the framework has successfully channelled significant corporate resources toward social development priorities. The evolution of CSR provisions through amendments reflects a responsive legislative process that balances corporate flexibility with accountability.

As CSR practices mature, the focus is shifting from compliance to impact, with greater emphasis on outcome measurement, strategic alignment with development priorities, and integration with global sustainability frameworks. The court decisions and regulatory clarifications have progressively addressed implementation challenges, creating a more robust and predictable compliance environment.

The Indian CSR model, despite its imperfections, offers valuable lessons for other jurisdictions contemplating similar mandates. Its continued evolution will likely influence global corporate governance trends, particularly as stakeholder capitalism gains prominence worldwide.

References

Statutes and Regulations

1. The Companies Act, 2013 (particularly Section 135 and Schedule VII)
2. Companies (Corporate Social Responsibility Policy) Rules, 2014
3. Companies (Amendment) Acts of 2019, 2020, and 2021
4. MCA General Circulars (No. 21/2014, 01/2016, 10/2020, 14/2021)

Cases

1. Jindal Steel and Power Ltd. v. Union of India (W.P.(C) No. 5959 of 2015)
2. Hindustan Unilever Limited v. State of Maharashtra (2019 SCC OnLine Bom 13582)
3. PIL – Indian Young Lawyers Association v. State of Kerala (2016 SCC OnLine Ker 42648)
4. Common Cause v. Union of India (2017 SCC OnLine SC 80)
5. Confederation of Indian Industry v. Union of India (Writ Petition No. 9517 of 2020)

Academic Sources

1. Majumdar, A.K., & Kapoor, G.K. (2023). Company Law and Practice. Taxmann Publications.
2. Singh, Avtar. (2022). Corporate Social Responsibility Under Companies Act. Eastern Book Company.
3. Chandratre, K.R. (2021). Corporate Social Responsibility Law in India. Bharat Law House.
4. Sharma, R., & Sharma, M. (2022). “Evolving Jurisprudence of Corporate Social Responsibility in India.” National Law School of India Review, 34(2), 87-112.
5. Kumar, S., & Kidwai, A. (2023). “Mandatory CSR in India: A Decade of Implementation Challenges and Judicial Responses.” Journal of Business Ethics, 178(3), 641-663.

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