Corporate Social Responsibility (CSR)

What is “Corporate Social Responsibility (CSR)”?

CSR is a concept whereby companies not only consider their profitability and growth, but also the interests of society and the environment by taking responsibility for the impact of their activities on stakeholders, environment, consumers, employees, communities, and all other members in the public sphere.

“Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple- Bottom-Line Approach”), while at the same time addressing the expectations of shareholders and stakeholders.”

Triple- Bottom-Line Approach

People, planet, and profit", known as the triple bottom line, is one measure of evaluation of CSR. "People" is concerned with fair labor practice, the community, and the region where the business is being done. "Planet" is sustainable environmental practice. "Profit" refers to the monetary value the organization generates after deducting the costs of all inputs, which includes the cost of capital-which is not the case for accounting definitions of profit.

History of CSR

CSR in India has evolved from voluntary guidelines in 2009 to mandatory provisions under Section 135 of the Companies Act, 2013, effective from April 1, 2014. The National Voluntary Guidelines (2011), later updated as National Guidelines on Responsible Business Conduct (2019), align Indian CSR with global standards like the UN Sustainable Development Goals. The Parliamentary Standing Committee's 21st Report helped formalize CSR within corporate law. Today, CSR emphasizes ethical governance, sustainability, and inclusive growth, ensuring businesses contribute to social development.

2007: Adoption of Inclusive Growth-11th Five Year Plan

The 11th Five Year Plan emphasized inclusive growth, recognizing CSR as a key component in achieving equitable development.

2009: Voluntary Guidelines On Corporate Social Responsibility

The Ministry of Corporate Affairs issued the ‘Voluntary Guidelines on Corporate Social Responsibility, 2009’ to encourage businesses to adopt responsible practices.

2010: Parliamentary Standing Committee on Finance-21st Report on Companies Bill, 2009

The 21st Report of the Parliamentary Standing Committee on Finance was instrumental in introducing CSR provisions into the Companies Act.  

2011: National Voluntary Guidelines(NVGs) on Social, Environmental & Economic Responsibilities of Business, 2011

In 2011, the Ministry of Corporate Affairs released the National Voluntary Guidelines (NVGs) on Social, Environmental, and Economic Responsibilities of Business, outlining nine principles to guide companies toward responsible business conduct.

2012 : Business Responsibilities Reporting (BRR)

Following the NVGs, the Securities and Exchange Board of India (SEBI) mandated Business Responsibility Reporting for listed companies to disclose their CSR activities.  

2014 : Mandatory Provision Of CSR Under Section 135 of The Companies Act, 2013 coming into effect from 01/04/2014

The Companies Act, 2013, which came into effect on April 1, 2014, made it mandatory for certain companies to spend at least 2% of their average net profits on CSR activities.  

Official Definition under Legislation

As Defined in Companies Act, 2013, Section 135 (1), Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

As defined under Schedule VII of the Companies Act, Corporate Social Responsibility (CSR) includes, but is not limited to:

1. Projects or programs related to activities specified in Schedule VII of the Act.
2. Projects or programs undertaken by the Board of Directors, based on the recommendations of the CSR Committee, as per the company's declared CSR Policy, provided that such policy aligns with the subjects listed in Schedule VII of the Act.

Legal Provisions Relating to Corporate Social Responsibility

CSR Activities

Every company will undertake CSR activities as per its CSR Policy, based on projects that are not part of its regular business operations. Such activities can be undertaken through a Section 8 company, a registered trust, or society, provided the chosen entity has at least three years of relevant experience. The company must define the projects, fund usage, and monitoring process.

CSR expenditure is allowed only for projects in India and does not include activities that benefit only employees and their families. CSR initiatives can be collaborated with other companies, and each company will report separately.

A company may invest in building CSR capacity through institutions with at least three years of experience, and such expenditures, including administrative costs, are limited to 5% of the total CSR expenditure. Contributions to political parties are not CSR activities.

CSR Committee

“CSR Committee” means the Corporate Social Responsibility Committee of the Board referred to in section 135 of the Act;

Composition of CSR Committee

• The Composition of CSR Committee is stated under Section 135(1).
• 3 or more directors, out of which one director shall be an Independent Director.
• 2 or more directors for an unlisted public company or a private company as they are not required to appoint an independent director.
• A private company having only 2 directors on its Board shall constitute its CSR Committee with two such directors.
• With respect of foreign companies, the CSR Committee shall comprise of at least 2 persons of which one-person resident in India and another person shall be nominated by the foreign company.

Responsibilities of CSR Committee

The responsibilities of a CSR Committee are stated under Section 135(3).

• The committee shall indicate the activities to be undertaken by the company  as specified in Schedule VII of the Act.
• The Committee shall initiate a CSR Policy,  which shall stipulate how, where, and when they want to invest their funds.
• The Committee shall recommend the amount of expenditure to be incurred on the activities.

CSR Policy

CSR Policy relates to the activities to be undertaken by the company as specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of a company.

A Companies CSR Policy should include:

1. A list of CSR projects or programs the company plans to undertake, covering the areas mentioned in Schedule VII of the Companies Act. It should also detail how these projects will be executed and their timelines.
2. A process for monitoring these projects or programs.

CSR  Expenditure

CSR expenditure includes all money spent on approved CSR projects or programs as recommended by the CSR Committee and approved by the Board. However, any spending on activities that do not match the areas listed in Schedule VII of the Companies Act will not be considered CSR expenditure.

CSR Reporting

• Indian Companies: Every company that falls under the CSR rules must include a detailed CSR report in its annual Board’s Report. This report should provide information about the company's CSR activities for the financial year.
• Foreign Companies: If a foreign company operates in India, it must attach a CSR report as part of its balance sheet when filing financial statements.

Impact Assessment

Impact Assessment is typically performed for projects sponsored by CSR departments and foundations. Many CSR departments and foundations focused on evaluating the impact on the community due to various initiatives undertaken by them either hire an external agency or perform Impact Assessment on their own. In 2021, the CSR law in India has made it mandatory to perform Impact Assessment for CSR projects.

Every Company with an average CSR commitment of at least Rs. 10 crore over the three fiscal years prior must have an independent agency evaluate the impact of their CSR initiatives with expenditures of at least Rs. 1 crore that were finished at least a year prior to the impact study.

The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR.

The expenditure incurred on impact assessment is over and above the specified administrative overheads of 5%. Expenditure up to a maximum of 5% of the total CSR expenditure for that financial year or 50 lakh rupees (whichever is lower) can be incurred separately for impact assessment.

Official Database

CSR Portal

The National Corporate Social Responsibility Data Portal is an initiative by the MCA, Government of India to establish a platform to disseminate Corporate Social Responsibility related data and information filed by the companies registered with it. The CSR ambit is getting bigger and for upcoming years it would turn as a unique knowledge base for analyzing and achieving sustainability goals as among various large economies India is a country which has assured by mandating CSR through its legislative action.

The CSR portal provides comprehensive, easy-to-access information on CSR initiatives in India. An interactive dashboard shows key statistics in the areas of CSR spending, sector-wise distribution, and compliance with CSR regulations. Users can see the total CSR expenditure undertaken by companies and watch whether eligible business concerns achieve the minimum mandatory spending level of 2% of net-profits.

The portal also gives annual CSR reports submitted by companies, including information on spending, initiatives, and results. The portal includes graphical analyses of the trends of CSR expenditure over time and offers insights into performance. The portal will improve CSR transparency and accountability as comprehensive information will be readily available to companies and stakeholders.

The portal also features a comprehensive database of CSR activities across different sectors such as environmental sustainability, health, and education. Companies share information on their CSR projects including location, amount committed, and results. The activities can be easily followed through search options that include sector, region, and company size.

Furthermore, the portal offers several types of reports: the Dynamic CSR Report, which allows users to search and filter CSR reports by company size, region, and sector; the MIS Report, which provides a detailed overview of CSR performance by state, PSU vs. non-PSU, and development sectors like education, healthcare, and the environment, helping users track trends and regional contributions; and the Company-wise CSR Data, which enables users to examine CSR data for specific companies, assessing their expenditures, projects, impacts, and compliance with CSR regulations.

Cases on CSR

M/s. Hira Power and Steels Limited NCLT, Mumbai.2018

Hira Power & Steels Limited, promoted by the Agrawal family, is a leading player in the steel segment in Central India. The company, involved in Ferro Alloys, Power, and Mining, operates manufacturing facilities in Chhattisgarh. The company filed a compounding application before the Registrar of Companies (ROC), Chhattisgarh, which was forwarded to the NCLT, Mumbai, along with the ROC report.

ROC reported that the company violated Section 134(3)(o) of the Companies Act, 2013, as it failed to explain the non-spending of the CSR amount for FY 2014-15 in the Director’s Report. Hira Power & Steels Limited acknowledged the mistake and explained that ambiguity due to multiple circulars issued by the Ministry of Corporate Affairs led to confusion in implementing CSR provisions. The company rectified the default by forming a CSR committee in August 2015 and submitting the necessary declarations in the FY 2015-16 Director’s Report.

The NCLT   held that CSR provisions were newly introduced, and numerous circulars had been issued, causing confusion regarding their proper implementation. It acknowledged that the company rectified the default by forming the CSR committee and filing the declarations. It also stated that the quantum of CSR responsibility could only be determined after the finalization of the accounts for the financial year. Consequently, a compounding fee of Rs. 10,000/- per defaulter (Rs. 50,000/- in total) was levied on the company.

Precision Automation and Robotics India Private Limited (Petitioner) v. Registrar of Companies, Maharashtra, Pune. 2022

Every company having a net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more, or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more Directors, out of which at least one director shall be an independent director.

XYZ Industries Limited, based in Maharashtra, faced a non-compliance issue regarding CSR disclosure for FY 2017-18. The company filed a compounding application with the ROC, which was forwarded to the NCLT in Mumbai.

The company has been crossing the threshold limit with regard to Net profit as per Financial Statements since 2014-15, thus has failed to constitute the Corporate Social Responsibility Committee as per Section 135 of the Act, 2013.

It was held that the Company and its officers have defaulted the provisions of the Act as no CSR Committee was constituted. Therefore, they are liable for penalties under the Companies Act, 2013. Total Penalty of Rs. 8,50,000/- imposed on the company.

As defined in Official Reports

Report of The Companies Law Committee, 2016

The Committee, during discussion, suggested improving Corporate Social Responsibility (CSR) regulations as outlined in Section 135 of the Companies Act. One of its main recommendations was that companies not required to have Independent Directors should have had at least two directors on their CSR Committees. The high level CSR Committee recommended that the words “any financial year” be replaced by the words ‘preceding financial year’.

The Committee confirmed that foreign companies also had CSR obligations and recommended explicitly including them under Section 384. Additionally, it suggested changing Section 135(3)(a) to refer to broader topics in Schedule VII instead of specific activities. To reduce confusion, it supported replacing "average net profit" with "net profit" and recommended specific guidelines for calculating the net profits of foreign companies.

While the Committee recognized the idea of allowing unspent CSR funds to be carried forward, it rejected the requirement for mandatory transfers after five years to preserve corporate flexibility. Similarly, the suggestion to allow CSR contributions in kind was not supported due to concerns about how to value those contributions.

Finally, the Committee turned down proposals that would let government companies transfer CSR funds to state authorities, emphasizing the importance of maintaining corporate independence. It also decided against exempting Section 8 (non-profit) companies from CSR requirements, arguing that they should adhere to the same rules as other companies.

Research that engages with CSR

A Case Study on Corporate Social Responsibility in Nestle, Tata, ITC Ltd., Gagan Deep Sharma, Sanjeet Singh & Jagmet Bawa.

This study analyzes how Nestlé, TATA, and ITC integrate Corporate Social Responsibility (CSR) into their business models, noting that while CSR aims for genuine social responsibility, many companies primarily use it for brand enhancements.

• Nestlé focuses on nutrition and rural development, but has faced controversies like labor issues and food safety violations. The company promotes sustainable practices through initiatives like providing clean water, supporting local farmers, and community development. Despite its efforts, Nestlé still struggles with labor rights and product quality issues.
• TATA Group is known for its corporate social responsibility in India, investing over 2% of profits in education and healthcare projects. However, it has faced ethical concerns regarding land acquisition. The group has a long history of supporting social welfare through contributions to education, healthcare, and community development. But, it has been criticized for its involvement in controversial land acquisition projects.
• ITC Ltd. integrates CSR with business through initiatives like e-Choupal for rural empowerment, and is praised for sustainability efforts. However, its dependence on tobacco sales raises ethical questions. The company's innovative CSR approach aligns with its business strategies, empowering rural communities through technology and market access. Despite being recognized for its sustainability efforts, debates arise over its connection to tobacco products and its ethical responsibilities.

While these companies engage in CSR, it often serves marketing purposes rather than true commitment. TATA stands out for its ethical approach, but all three need improvements in transparency and governance.

The Myths of CSR, Deborah Doane.

The article challenges the notion that corporations can simultaneously achieve financial success and generate social impact through Corporate Social Responsibility (CSR). Doane posits that market forces typically prioritize profit over ethical considerations, thereby rendering genuine CSR initiatives largely ineffective. She highlights how businesses frequently compromise on ethical standards in favor of maximizing financial performance, ultimately hindering the potential for substantial social change. Doane outlines four prevalent myths surrounding CSR: Market

Balance, suggesting that companies can balance profitability with societal good but often sacrifice ethics in reality; Ethical Consumers, positing that buyers can drive ethical transformation, although in practice, most prioritize affordability and convenience over ethical considerations; Competitive Ethics, which theorizes that businesses will compete based on ethics but often resort to greenwashing instead; and Global CSR, which assumes the enhancement of standards but often facilitates companies in exploiting lax regulations.

In conclusion, Doane argues that CSR is commonly utilized as a mere public relations tool as opposed to a genuine commitment to transformative progress. She advocates for more stringent government regulations and structural reforms to enforce accountability among corporations and ensure their contributions lead to lasting social impact.