CSR (Corporate Social Responsibility)

Definition

Corporate Social Responsibility (CSR) in India refers to the statutory obligation under Section 135 of the Companies Act, 2013 that requires eligible companies to spend at least 2% of their average net profits (calculated over the preceding three financial years) on activities that promote social welfare, environmental sustainability, and community development. India was one of the first countries in the world to mandate CSR spending through legislation, making it a unique aspect of the Indian corporate compliance framework. The provision applies to companies with a net worth of Rs. 500 crore or more, turnover of Rs. 1,000 crore or more, or net profit of Rs. 5 crore or more during the immediately preceding financial year.

Companies subject to CSR requirements must constitute a CSR Committee of the Board comprising three or more directors, of whom at least one must be an independent director. The committee is responsible for formulating the CSR policy, recommending the amount of expenditure, and monitoring the implementation of CSR projects. Eligible CSR activities are listed in Schedule VII of the Companies Act and include areas such as eradication of hunger and poverty, promotion of education, gender equality, environmental sustainability, healthcare, rural development, and contribution to technology incubators and national relief funds. Companies cannot undertake CSR activities that benefit only their employees and their families.

Since the 2021 amendments, unspent CSR amounts must be transferred to a designated Unspent CSR Account within 30 days of the end of the financial year, and the funds must be spent within three subsequent financial years. If the amount remains unspent even after this period, it must be transferred to a Fund specified under Schedule VII (such as the Prime Minister's National Relief Fund). Companies must report CSR activities in their Annual Report using the prescribed format, and the details are also disclosed in the Annual Return filed with the MCA. Non-compliance with CSR provisions can result in penalties of up to Rs. 1 crore on the company and Rs. 25 lakh on every officer in default, along with imprisonment of up to three years.

Key Points

• Applies to companies with net worth of Rs. 500 crore+, turnover of Rs. 1,000 crore+, or net profit of Rs. 5 crore+ in the preceding financial year.
• Requires spending at least 2% of average net profits (over 3 preceding years) on activities listed in Schedule VII of the Companies Act.
• A CSR Committee of three or more directors (including one independent director) must be formed to oversee policy and implementation.
• Unspent CSR amounts must be transferred to an Unspent CSR Account and utilized within three financial years, failing which they must go to a Schedule VII fund.
• CSR reporting is mandatory in the Annual Report and Annual Return, with penalties of up to Rs. 1 crore for non-compliance.