Corporate social responsibility (CSR) is an important component of business operations in India. With effect from April 1, 2014, CSR is a mandatory requirement for certain companies under section 135 of the Companies Act, 2013, which compels them to engage in activities that contribute to the social, environmental, and economic development of the country.
This article provides an overview of CSR in India, detailing its legal framework, the process of implementing CSR initiatives, and the reporting requirements that companies must adhere to.
Understanding how CSR works in India
The Companies Act, 2013, marked a paradigm shift by making CSR mandatory for companies meeting specific financial thresholds.
CSR provisions apply to companies meeting any of the following criteria in the preceding financial year:
- Net worth: More than INR 5 billion.
- Turnover: More than INR 10 billion.
- Net profit: More than INR 50 million.
Such companies must spend a minimum of 2 percent of their net profit over the last three years on CSR activities.
For newly incorporated companies with less than three years of operations, the average net profit of available years is considered. For example, Company A was incorporated in FY 2018-19 and meets the eligibility criteria under Section 135(1) for FY 2020-21. Consequently, Company A’s CSR spending obligation under Section 135(5) would amount to at least two percent of the average net profits generated during FY 2018-19 and FY 2019-20.
The average net profit for determining CSR expenditure is calculated as per the provisions of Section 198 of the Companies Act, 2013, excluding the items specified under Rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. Section 198 outlines specific adjustments to be made when calculating a company’s net profit, excluding elements such as capital payments or receipts, income tax, and the set-off of previous losses. Profit Before Tax (PBT) is used for the computation of net profit under section 135 of the Act.
Excess CSR spending can be set off against the mandated 2 percent CSR expenditure for up to the immediately succeeding three financial years, provided that the conditions outlined in Rule 7(3) of the Companies (CSR Policy) Rules, 2014 are met. However, it is important to note that excess amounts spent on CSR activities can only be carried forward from January 22, 2021, onwards.
Surplus in CSR activities
This refers to the income generated from CSR activities, such as revenue received from CSR projects, interest income earned by the implementing agency on CSR funds, proceeds from the disposal or sale of materials used in CSR initiatives, and other similar income sources. Any surplus resulting from CSR activities must be utilized exclusively for CSR purposes.
Mechanisms for monitoring the CSR process: CSR is primarily driven by the company’s Board, which is responsible for planning, deciding, executing, and monitoring CSR activities based on recommendations from its CSR Committee. The CSR framework is disclosure-based, requiring CSR-mandated companies to file annual details of their CSR activities in the MCA21 registry. Additionally, companies must include necessary disclosures regarding CSR in their financial statements, including any instances of non-compliance. Existing legal provisions, such as mandatory disclosures, accountability of the CSR Committee and the Board, and audit requirements for the company’s accounts, provide robust mechanisms for effective monitoring.
The role of CSR in business strategy
CSR in India is not just a legal obligation but also a strategic business tool. Companies integrating CSR into their core strategies can build a positive brand image, foster community goodwill, and attract socially conscious investors and customers. Successful CSR initiatives can enhance employee engagement, reduce business risks, and create long-term value.
CSR methodology and practice
- Comprehensive impact assessment:
Effective CSR involves assessing the impact of business activities on customers, suppliers, the environment, communities, and employees.
Integration and sustainability: Organizations are encouraged to integrate CSR initiatives into their core business strategies, ensuring sustainable contributions that do not compromise business goals.
- Dedicated CSR departments
Many companies have established specific teams to develop policies and allocate budgets for CSR activities, often aligning them with the company’s social beliefs or business domain.
Permitted CSR activities under Schedule VII
CSR activities are defined in Schedule VII of the Act and can include a wide range of projects, such as promoting education, healthcare, environmental sustainability, and rural development.
Companies can include the following activities in their CSR policies, as specified in Schedule VII:
1) Poverty, health, and sanitation:
Eradication of poverty, hunger, and malnutrition.
Promotion of healthcare, including sanitation and preventive healthcare.
Contributions to the Swachh Bharat Kosh and ensuring access to safe drinking water.
2) Education and employment:
Improvement of education, special education, and vocational skills for children, women, the elderly, and the differently abled.
Livelihood enhancement projects.
3) Gender equality and support for vulnerable groups:
Promoting gender equality and setting up homes and hostels for women and orphans.
Empowering women and establishing facilities for senior citizens and disadvantaged groups.
4) Environmental sustainability:
Initiatives for environmental sustainability, ecological balance, and conservation of natural resources.
Support for projects like river Ganga rejuvenation and agroforestry.
5) National heritage and culture:
Protection of national heritage, art, and culture, including restoring historical buildings and promoting traditional arts.
6) Support for armed forces and their families:
Welfare measures for armed forces veterans, war widows, and dependents.
7) Promotion of sports:
Training and promotion of rural, nationally recognized, Paralympic, and Olympic sports.
8) Contributions to government funds:
Contributions to funds like the Prime Minister’s National Relief Fund, PM CARES Fund, and others aimed at socioeconomic development.
9) Support for research and development:
Contributions to R&D projects in science, technology, engineering, and medicine funded by government bodies or public institutions.
10) Support for educational institutions:
Contributions to public-funded universities, IITs, and national research bodies like DRDO, ICAR, and CSIR.
11) Rural development projects:
Initiatives focused on the development of rural areas.
12) Slum area development:
Development of slum areas as declared by the government.
13) Disaster management:
Activities related to disaster relief, rehabilitation, and reconstruction.
CSR compliance: Forms CSR-1 and CSR-2
Form CSR-1
From April 1, 2021, entities undertaking CSR activities need to file Form CSR-1 with the Ministry of Corporate Affairs (MCA). This form is mandatory for NGOs and other organizations to receive CSR funding from companies. The registration helps in effective monitoring of CSR spending and ensures compliance.
Applicability
The filing of Form CSR-1 is mandatory for companies undertaking CSR activities. Companies must ensure that CSR activities are conducted either directly or through registered entities such as:
Registered societies, public trusts, or Section 8 companies incorporated by the company.
Section 8 companies, registered societies, or trusts established by the Central or State Government.
Entities established under a State Legislature or Act of Parliament.
Section 8 companies, registered societies, or public trusts registered under Section 12A and 80G of the Income Tax Act with a minimum three-year track record in similar activities.
All these entities, along with companies planning to undertake CSR activities, must register by filing Form CSR-1 electronically.
Contents of Form CSR-1
Entities need to provide the following details:
- Nature of the entity (type of organization).
- CIN (Corporate Identification Number) or registration number.
- Date of incorporation, address, and email ID.
- PAN (Permanent Account Number) of the entity.
- Details of directors, trustees, or authorized representatives.
- DIN (Director Identification Number) and DSC (Digital Signature Certificate) of the signing director.
- Certification by a practicing professional.
Filing process for Form CSR-1
Access the Form:
Visit the MCA portal and navigate to ‘MCA Services’ > ‘e-Filing’ > ‘Company Forms Download.’
Download Form CSR-1 from the ‘Incorporation services’ section.
Fill and verify:
Extract and fill the Form CSR-1 PDF.
Get the form digitally verified by a Chartered Accountant (CA), Company Secretary (CS), or Cost Accountant (CA) in practice.
Submit:
Submit the digitally verified form on the MCA portal.
A unique CSR Registration Number will be generated upon submission.
Documents required for filing Form CSR-1
Entity documents:
- PAN card.
- Registration certificate.
- 12A and 80G exemption certificate, if applicable.
- NGO Darpan ID, if applicable.
- Authorized person documents:
- PAN and DSC of the authorized person signing the form.
- Company-specific documents:
- Company CSR policy
- Company CSR report
- Details of the subsidiary and other entities involved.
Form CSR-2: Annual CSR reporting
Introduced through the Companies (Accounts) Amendment Rules, 2022, Form CSR-2 is mandatory for companies to report their CSR activities from the financial year 2020-21 onwards. It serves as an addendum to the annual financial statements filed through Form AOC-4 or its variants.
Applicability:
All companies covered under Section 135 of the Companies Act, 2013, which deals with CSR provisions.
Companies must file Form CSR-2 as an addendum to their annual financial statement filings.
Effective date:
For FY 2023-24, Form CSR-2 should be furnished separately on or before December 31, 2024, independent of filing the respective AOC-4 forms (see official notification here dated September 24, 2024). For FY 2022-23, companies were allowed to file the CSR-2 by March 31, 2024.
Key information required in Form CSR-2:
Net worth, turnover, and net profit of the company.
Details of the CSR committee, including meetings held and attended by directors.
Project details, including funds allocated and spent, locations, and modes of implementation.
Unspent CSR amounts and transfers to specified funds under Schedule VII.
Reasons for any shortfall in CSR spending and corrective measures taken.
Penalties for non-compliance
Failure to comply with CSR provisions can result in significant penalties. Companies not meeting the required CSR spend or failing to transfer the unspent amount to a specified fund, may be fined up to INR 10 million. Officers responsible for the default can also face penalties up to INR 200,000.
Company penalties: Up to INR 10 million or twice the unspent CSR amount required to be transferred, whichever is less.
Officer penalties: Up to INR 200,000 or one-tenth of the unspent CSR amount required to be transferred, whichever is less.
Some of the top companies in India for CSR and sustainability in 2023 according to The CSR Journal are: Reliance Industries Limited, SBI Limited, ITC Limited, Hero Motocorp, JSW Steel, Godrej Consumer Products, Dabur, Hindustan Zinc, Mahindra & Mahindra, Marico, Wipro, Infosys, Tata Consumer Products, L&T, HUL, Adani Ports & SEZ, Bosch, Tata Power, HDFC Ltd., Vedanta, among others.
Conclusion
Corporate social responsibility in India, as mandated by the Companies Act, 2013, is a testament to the evolving role of businesses in society. By aligning business goals with societal needs, companies can contribute meaningfully to the country’s development while building sustainable and responsible business practices. Adhering to the prescribed regulations and effectively reporting CSR activities through Form CSR-1 and CSR-2 ensures transparency, accountability, and compliance, paving the way for a better, more inclusive future.
