Corporate Social Responsibility

Corporate Social Responsibility: The Statutory Obligation to Give Back

The traditional view of the company held that its purpose was the pursuit of profit for its shareholders, and that social welfare was the domain of the state. The modern view recognises that companies, as creations of law and beneficiaries of social infrastructure, owe a measure of responsibility to the societies in which they operate. India's response to this recognition is distinctive: rather than leaving CSR to voluntary discretion, the Companies Act, 2013 makes CSR spending mandatory for companies above specified thresholds — a legal first globally, and a notable experiment in aligning corporate activity with social objectives.

The Statutory Trigger

Section 135 of the Companies Act, 2013 applies to every company having (a) a net worth of ₹500 crore or more, or (b) a turnover of ₹1,000 crore or more, or (c) a net profit of ₹5 crore or more, during the immediately preceding financial year. A company meeting any one of these thresholds must constitute a Corporate Social Responsibility Committee of the Board, composed of three or more directors, with at least one independent director. The committee formulates and recommends to the board a CSR policy, indicates the activities to be undertaken, and monitors the policy's implementation. The board, in turn, must approve the policy, disclose its contents, ensure that the activities listed are undertaken, and disclose the composition of the CSR committee.

The Spending Obligation and Schedule VII Activities

The heart of Section 135 is the spending obligation: the board must ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR policy. Where the company fails to spend the required amount, the board must specify the reasons for not spending in its report — a disclosure obligation that, combined with the Companies (CSR Policy) Rules and subsequent amendments, has hardened the obligation from one of 'comply or explain' towards 'comply or be penalised'. The activities on which CSR funds may be spent are specified in Schedule VII to the Act, which enumerates a broad range of eligible activities: eradicating hunger, poverty and malnutrition; promoting education and skill development; healthcare; environmental sustainability; rural development; slum area development; promotion of sports; contribution to the Prime Minister's National Relief Fund; and such other matters as may be prescribed. The framework, administered by the Ministry of Corporate Affairs and enforced through the Companies Act's penal provisions, has generated a substantial flow of funds from profitable Indian companies into social-welfare activities, and the jurisprudence on the scope, transferability, and consequences of non-compliance continues to develop.

“India made CSR not a matter of conscience but of law — two per cent of profits, directed to the welfare of the society from which those profits were drawn. The experiment is watched closely, for it asks whether corporate wealth can be channelled, by statute, to social ends. The answer is still unfolding; but the principle is set: the company, in India, owes something back.”