Corporate Social Responsibility

What Entrepreneurs should know:

“Corporate Social Responsibility (CSR)”

This content helps entrepreneurs to understand the concept and significance of Corporate Social Responsibility (CSR) in modern business. It explains the legal provisions, spending requirements, and eligible activities in simple terms. By following this, entrepreneurs can ensure compliance while building a positive social image. The insights provided will help them choose meaningful CSR projects that align with their business goals and community needs. Overall, the content encourages entrepreneurs to combine profitability with social responsibility for inclusive development.

Overview of CSR:

Corporate Social Responsibility (CSR) refers to a company’s commitment to operate in an ethical and sustainable manner while contributing to the social, economic, and environmental well-being of society. Through CSR, businesses integrate social and environmental concerns into their operations, focusing on activities such as education, healthcare, environmental conservation, skill development, and poverty alleviation to promote inclusive and sustainable growth.

Companies Covered Under CSR:

A company satisfying any of the following criteria during the immediately preceding financial year is required to comply with CSR provisions specified under section 135(1) of the Companies Act, 2013:

(i) Net worth of rupees five hundred crore or more, or 

(ii) Turnover of rupees one thousand crore or more, or 

(iii) Net profit of rupees five crore or more.

Mandatory CSR contribution:

As per the provisions of the Companies Act, 2013, it is mandatory for companies to spend at least 2% annually of their average net profits made during the three immediately preceding financial years towards Corporate Social Responsibility (CSR) activities. For example, if a company’s average net profit over the past three years amounts to ₹100 crore, it must spend a minimum of ₹2 crore (2%) on CSR activities in the current financial year. Thus, CSR expenditure is a recurring obligation for each year for all eligible companies, and the basis of computation shall be the average net profit of the preceding three financial years.

Formation of CSR Committee:

A CSR Committee is formed to ensure that a company’s Corporate Social Responsibility (CSR) activities are planned, approved, and monitored in a structured and transparent manner. Two or more directors constitute a CSR Committee for a Private Limited company. In the case of listed or unlisted public Limited companies, the CSR Committee must comprise a minimum of three directors, including one being an independent director.  Where the amount required to be spent by a company on CSR, does not exceed fifty lakh rupees, the constitution of the CSR Committee is not mandatory and the functions are discharged by the Board of Directors of the company.

Area of CSR Operations:

The provision of the Act provides that the company shall give preference to local areas and the areas around where it operates. However, the preference to local area in the Act is only directory and not mandatory in nature and companies need to balance local area preference with national priorities.

Eligible CSR Activities:

The CSR expenditure cannot be incurred on activities beyond Schedule VII of the Companies Act, 2013. The entries in the said Schedule VII must be interpreted liberally to capture the essence of the subjects enumerated in the said Schedule.

https://upload.indiacode.nic.in/schedulefile?aid=AC_CEN_22_29_00008_201318_1517807327856&rid=79 

Non-Eligible CSR Activities:

Rule 2(1) (d) defines CSR and excludes the following activities from being considered as eligible CSR activity: 

• Activities undertaken in pursuance of the normal course of business of the company. 
• Activities undertaken outside India, except for training of Indian sports personnel representing any state/UT at the national level or India at the international level 
• Contribution of any amount, indirectly or directly, to any political party under Section 182 of the Act
• Activities benefiting employees of the company 
• Sponsorship activities for deriving marketing benefits for products/services 
• Activities for fulfilling statutory obligations under any law in force in India

In addition to the above activities, events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of programmes/ Contribution of any amount, directly or indirectly, to any political party shall not qualify as CSR activities.  The spirit of CSR is to benefit the public at large and nondiscriminatory to any class of beneficiaries. It emphasizes that any project designed exclusively for a single individual or a small Non-Public group would not qualify for CSR activity. 

CSR activities for Employees: 

Any activity benefitting employees of the company or their family members shall not be considered as eligible CSR activity. However, any activity which is not designed to benefit employees solely, but the public at large, and if the employees and their family members are incidental beneficiaries, then, such activity would not be considered as “activity benefitting employees” and will qualify as eligible CSR activity.

Modes of implementation of CSR activities:

CSR expenditure can be incurred in multiple modes as per Schedule VII of the Act:

(i) ‘Activities route’, which is a direct mode wherein a company undertakes the CSR projects or programmes, either by itself or by engaging implementing agencies as prescribed in Rules, 2014.

(ii) ‘Contribution to funds route’, which allows the contributions to various funds as specified in the Schedule VII of the Act.

(iii) Contribution to incubators and R&D projects, and contribution to institutes/organisations, engaged in research and development activity, as specified in the Schedule VII of the Act.

Funds specified for CSR contribution:

Contributions to the following funds shall be admissible for CSR expenditure as per Schedule VII of the Act. The Act does not recognise any contribution to any other fund:

(i) Swachh Bharat Kosh

(ii) Clean Ganga Fund

(iii) Prime Minister’s National Relief Fund (PMNRF)

(iv) Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)

(v) Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.

CSR Implementing Agencies:

The following entities, apart from the company itself, may also function as implementing agencies, either independently or in collaboration with the company:

1. A company established under section 8 of the Act, or 
2. A registered Public Trust or 

iii. A registered society or

1. A Statutory body established under an Act of Parliament or a State legislature.

The companies or entities that undertake CSR activities have to mandatorily register with the Ministry of Corporate Affairs (MCA) portal by filing the e-form for CSR-1 and, upon successful submission, automatically generates a unique CSR registration number.

The above entities are also required to have income-tax registration u/s 12A as well as 80G of the Income Tax Act, 1961 to act as implementing agency (except for any entities established by Central or State Government).

Eligibility of entities for CSR Support:

As per the new Companies (Corporate Social Responsibility Policy) Amendments Rules, 2021, all form of Non-profit Organisations-Section 8 Company, Public registered Trust or a registered Society needs to fulfil the following three conditions in order to obtain CSR funds and implement CSR activities: 

• Have a valid registration under section 12A and 80G of the Income Tax Act, 1961. 
• Engaged in activities specified under Schedule VII of the Companies Act.
• Typically have an established track record of at least three years in undertaking similar activities. (However, a newly created entity can receive CSR funds indirectly by collaborating with an existing registered implementing agency that has a minimum of three years’ experience or when the entity is established independently by the parent company). 
• Have a unique CSR registration number, received after successfully filing Form CSR-1 on the Ministry of Corporate Affairs (MCA) portal.

CSR Reporting & Disclosure:

1. a. The Board’s Report pertaining to any financial year, for a CSR-eligible company, shall include an annual report on CSR. This provision also holds good for foreign companies to give reports on CSR activities.

1. b. The Board of Directors of the company shall mandatorily disclose the followings on their website, if any, for public access: 

(i) Composition of the CSR Committee; 

(ii) CSR Policy; and 

(iii) Projects approved by the Board.

Advantages of CSR:

CSR enhances a company’s brand image, builds customer trust, and improves employee engagement. It contributes to community development through initiatives in education, health, and environment. CSR also promotes sustainable growth, ensures regulatory compliance, and attracts socially responsible investors. Overall, it helps businesses balance profitability with social and environmental responsibility, leading to long-term success.

Role of the Government: 

The Government has no direct role in the approval and implementation of the CSR programmes /projects of a company. However, the Government monitors the CSR provisions compliance through the disclosures made by the companies on the Ministry of Corporate Affairs (MCA) portal. The government can initiate action for any violation of CSR provisions against the non-compliant companies after due examination of records. 

In conclusion: 

Corporate Social Responsibility (CSR) reflects a company’s commitment to ethical practices and community welfare. It encourages businesses to balance profitability with social and environmental responsibility. By supporting education, health, and sustainability initiatives, CSR builds trust, enhances reputation, and promotes long-term inclusive growth – proving that profitability and social progress can successfully coexist for both business and society.