Corporate Social Responsibility under the Companies Act: Legal and Business Implications of CSR
Corporate Social Responsibility under the Companies Act, 2013
Corporate Social Responsibility (CSR) has become an integral aspect of corporate governance, emphasizing ethical and sustainable practices by businesses. CSR obligates companies to undertake initiatives that may not yield immediate financial returns but contribute to social and environmental welfare. Effective from April 1, 2014, Section 135 of the Companies Act, 2013, herein after referred to as Act, mandates specific categories of companies to undertake CSR activities, thereby embedding social accountability within the corporate framework.
Statutory Framework of CSR under the Companies Act, 2013
Section 135 of the Companies Act, 2013, along with the Companies (Corporate Social Responsibility Policy) Rules, 2014, establishes the legal framework for CSR in India. The provision aims to institutionalize the responsibility of companies toward societal welfare and sustainable development. Key elements of the statutory framework include:
Applicability of CSR Provisions
CSR obligations are applicable to companies that satisfy any of the following criteria during a financial year:
- Annual turnover of ₹1,000 crore or more.
- Net worth of ₹500 crore or more.
- Net profit of ₹5 crore or more.
These provisions are enforceable from the financial year 2014-15, thereby making CSR compliance a statutory requirement for eligible companies.
Formation of CSR Committee
Pursuant to Section 135(1), companies meeting the above criteria must constitute a Corporate Social Responsibility Committee of the Board. The Committee is required to comprise:
- Board members, including at least one independent director (in cases where independent directors are mandatory).
The functions of the CSR Committee, as per Section 135(3), include:
- Formulation and recommendation of a CSR Policy specifying activities to be undertaken by the company, in accordance with Schedule VII of the Act. These activities include initiatives related to eradicating poverty, promoting education, gender equality, healthcare, and environmental sustainability.
- Recommendation of the expenditure to be incurred on CSR activities.
- Monitoring the implementation of the CSR Policy.
Financial Commitment to CSR
Under Section 135(5), eligible companies are required to allocate at least 2% of their average net profit from the preceding three financial years toward CSR activities. Non-compliance with this requirement obligates the Board to provide detailed reasons in its annual report.
Exemptions
Section 135(9), introduced by the Companies (Amendment) Act, 2020, provides exemptions for companies where the CSR expenditure does not exceed ₹50 lakh during a financial year. In such cases, the Board of Directors assumes the responsibilities of the CSR Committee.
Case Studies on Non-Compliance: Smith N Smith Chemicals Limited
Smith N Smith Chemicals Limited was penalized for failing to fulfill its CSR obligations under the Companies Act, 2013, during FY 2020-21. Despite the statutory requirement to allocate 2% of its average net profits for CSR activities, the company defaulted. The Ministry of Corporate Affairs (MCA) imposed penalties totaling ₹13,72,960.42 on the company, and an additional fine of ₹68,648.02 was levied on each of its directors. This case highlights the importance of adhering to CSR obligations and the legal consequences of non-compliance.
Recent Legislative Amendments and Developments
- COVID-19-Related CSR Amendments (2020): The MCA permitted companies engaged in the R&D of vaccines, drugs, and medical devices to undertake CSR activities related to COVID-19 during FY 2020-21, 2021-22, and 2022-23, subject to specified conditions.
- CSR Reporting Obligations (2024): The Companies (Accounts) Amendment Rules, 2024, mandate the filing of Form CSR-2 for the financial year 2023-2024 by December 31, 2024. This ensures enhanced transparency and accountability in CSR disclosures.
Penalties for Non-Compliance
Failure to comply with CSR provisions entails stringent penalties under the Act:
- Companies may be fined between ₹50,000 and ₹25 lakh.
- Defaulting officers are subject to fines up to ₹5 lakh and/or imprisonment for up to three years.
Implications
CSR initiatives are not only a legal obligation but also a strategic investment in societal and environmental welfare. Companies adhering to CSR norms often experience enhanced brand reputation, stakeholder trust, and employee satisfaction. Conversely, non-compliance may result in legal sanctions, reputational damage, and financial penalties, underscoring the importance of aligning corporate objectives with statutory requirements.
Conclusion
The statutory framework for Corporate Social Responsibility under the Companies Act, 2013, signifies a paradigm shift in corporate governance. By mandating CSR, the Act ensures that companies integrate societal welfare into their core operations. While compliance fosters goodwill and sustainable growth, non-compliance invites legal consequences, making it imperative for businesses to align their strategies with the letter and spirit of the law.
