This article is written by Diksha Paliwal. The article aims to provide a complete analysis of Section 135 of the Companies Act 2013 along with the rules made for the better implementation of this Section, namely,  the Companies (Corporate Social Responsibility Policy) Rules, 2014, and the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021. The article before providing the overview of Section 135 and the Rules, explains the concept of corporate social responsibility (also referred to as CSR), the concept that has been statutorily mandated through the aforesaid provision. Further, it provides the historical background of CSR, the need for incorporation of CSR along with fundamental responsibilities that come with the implementation of CSR. 

Introduction

Since ancient times, the people of India have been true supporters of social welfare and have always come forward for the well-being of each other. This long-standing tradition needs no stretching. In today’s world of technology and advancement where unfortunately every other person is being victimised by fraud and other crimes, we must not forget the fundamental principle of welfare and social well-being. 

It might look like such principles have lost relevance in this modern world, but they still exist in different forms. Efforts are being made continuously to bring such principles even through various rules, guidelines, and laws. 

One such Act that enunciates the provision pertaining to the duty of the companies and businesses contributing to the well-being and welfare of its community including its employees, customers etc., is the Companies Act, 2013 (hereinafter referred to as the 2013 Act). Section 135 of the 2013 Act lays down the provision for the aforesaid. This concept is termed ‘corporate social responsibility’ (also referred to as CSR). 

Corporate Social Responsibility, which is philanthropic in nature, is nothing but an idea to contribute to society, thus promoting social welfare and well-being. By the term philanthropy what we mean is an initiative by an individual or association coming together and working for the benefit of society. Owing to the various human, natural and manmade resources that corporations utilise for their profit-making, it becomes their moral obligation to contribute towards environmental, social, and governance (ESG) issues, enhance employee welfare, practise ethical governance, etc. 

As discussed in the above paragraphs, Section 135 of the 2013 Act lays down the provisions for corporate social responsibility. It states that a company having a net worth of five hundred crores or more and generating a turnover of one thousand crores or more, or a net profit of five crores or more, is obligated or we may say duty bound to spend two percent of its income for various activities of social welfare and wellbeing incorporated in Schedule VII of the 2013 Act. This shall be done by a committee appointed by the company which will formulate policies for corporate social responsibility as envisaged under Section 135. 

Let’s discuss in detail the legal framework for corporate social responsibility laid down in Section 135 of the 2013 Act along with the implications this provision has and other significant legal points pertaining to this provision. However, before coming to the provision of Section 135 let’s understand the concept of corporate social responsibility. 

Corporate Social Responsibility (CSR) : all you need to know 

In simple words, corporate social responsibility or CSR is the responsibility of a company and the work done by it on environmental, ethical, social and economic issues. CSR basically increases the social accountability and responsibility of companies and or businesses. It has made corporate entities obligated to cater for the interests of their employees, stakeholders, customers, shareholders, communities, and environment, that too, not in just particular sects but in all facets of their business operations. It is a means through which the government has bound the corporate entities to the sustainable development goals of the nation. 

The term CSR can be legally understood as the duty or the obligation of corporate entities to act ethically and responsibly, simultaneously working for the betterment of its employees, their families, the local community or society at large along with economic growth. Ultimately, the goal is to facilitate corporate entities voluntarily incorporating social and environmental considerations into their business functioning, in all their operational activities and in their interactions with their employees, stakeholders and society at large. 

The United Nations Industrial Development Organization explains the concept of CSR as the business management strategy whereby corporate entities incorporate various activities of social welfare and well-being into their regular day-to-day operational activities and other interactions. It is a way of balancing between social, environmental, and economic necessities. This particular method of striking a balance between the aforementioned three necessities is termed as “Triple-Bottom-Line-Approach”. The aim is to meet multiple expectations simultaneously, be that of stakeholders, or shareholders, or employees or society at large. It must be noted that CSR goes beyond just boosting one’s brand and profit making; it is a way of contributing to activities of good cause. 

CSR is defined in Rule 2(f) of the Companies (Corporate Social Responsibility Policy) Rules, 2014  (hereinafter also referred to as 2014 Rules). as below:-

“Corporate Social Responsibility means and includes but is not limited to: 

(i) projects or programs relating to activities specified in Schedule VII of the Act; or 

(ii) projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per the declared CSR Policy of the company subject to the condition that such policy will cover the subjects enumerated in Schedule VII of the Act.”

Amended definition as per the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (hereinafter also referred to as 2021 Rules). 

As per the amended Rule 2(f), CSR pertains to those activities which are carried out by the company pursuant to the statutory mandate created by Section 135 of the 2013 Act, in accordance with the  amended 2021 Rules. However, as per this rule, CSR activities shall not include the following below-mentioned activities under its purview, namely;

1. The activities that the company carries out pursuant to its normal course of business. However, the companies which are engaged in research and development activity pertaining to making new vaccines, drugs and medical devices in their regular course, may carry out such research and development for the purposes of COVID-19 (for financial years 2020-21, 2021-22, 2022-23). Further, the rule provides certain conditions for carrying out the aforesaid activities, namely; 

1. These activities must be in collaboration with the institutions or organisations enumerated in item (ix) of Schedule VII to the 2013 Act.
2. Disclosure of such activity is mandatory by the board in its annual report on corporate social responsibility, separately.

2. The activities carried out by the company outside India except the training of sports personnel representing any part of India (state or union territory or the country) at the international level. 
3. Contribution by any company, directly or indirectly to any political party under Section 182 of the 2013 Act.
4. Activities done for the benefit of the employees as defined under Section 2(k) of the Code on Wages, 2019.
5. Activities that the company supports on the basis of sponsorship in order to secure marketing benefits. 
6. All the other activities that have been done in pursuance of any other statutory mandates as laid down by the prevalent laws of the country. 

Let us have a look at some important definitions to develop an understanding of how the term has evolved, the particular social context in which it is interpreted and how this is factored into the development of business strategies.

S.No.	Source	Definition	Important points and dimensions which shaped the definition
2	Commission of European Communities, 2001	“a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis”.	Voluntariness of the companies,Stakeholder,Social, environmental, and economic considerations.
	World Business Council for Sustainable Development, 1999	“The commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life.”	StakeholdersSustainable economic development
	World Business Council for Sustainable Development, 2000	“Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large.”	VoluntarinessSocial and economic development
	Business for Social Responsibility, 2000	“Operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of business. Social responsibility is a guiding principle for every decision made and in every area of a business.”	VoluntarinessSocial and economic developmentStakeholders
	European Union	“A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.”	VoluntarinessSocial and economic developmentStakeholders

Source: LSPR Communication and Business Institute

It is the concept of making the company responsible to the society where it functions and carries its business. It in a way is a kind of self-regulatory mechanism of the companies through which they take necessary initiatives for good cause, allowing to balance the aims and aspirations of the company. In a general sense, it must be noted that the connotation of the phrase “socially responsible” may be different for every company and so there is no hard and fast rule or guideline that has been laid down which tells that a company or business is specifically supposed to carry out these activities to be socially responsible. The ultimate result must be “profit, people, planet”. These are the three pillars of a business and this approach is also referred to as “triple-bottom-line”.  

Need for incorporating the concept of Corporate Social Responsibility 

Incorporating the principle of corporate social responsibility will act as a helpful hand to the government’s aims and endeavours to distribute growth benefits equitably and to include the corporate entities in the wholesome development of the nation, thereby, supporting the philosophy of giving back to society. Further, it will help boost the societal reputation of companies that are voluntarily and actively implementing the principles of corporate social responsibility in their business operations. We must understand and inculcate that it is not just a random attempt of giving but rather a systematic structural endeavour to spread the message to every individual of the nation to contribute in doing their part and make the change they desire, thus, supporting the very famous quote, “be the change you wish to see in others”. 

From the above discussions, a few important aspects that make the incorporation of CSR advantageous and a necessity are;

1. The companies will get long-term benefits after incorporating CSR activities into their regular business operations. For instance, using and investing in sustainable methods will ultimately lead to cost savings.
2. The employer-employee relationships ultimately strengthen, due to an environment that fosters inclusiveness. Additionally, it will boost the morale of its workers and the persons associated with the company, to work more and thus increase productivity. 
3. People are now much aware of their rights and entitlements, and thus the companies that ignore CSR activities might be at higher risk of facing outrage from the public at large, especially, its customers, shareholders, and employees. 
4. Further, incorporating such positive aspects in business operations will surely have a positive impact on society. 
5. Furthermore, the incorporation of CSR activities will also enhance the brand image of the company. 

History of CSR 

The concept of CSR is nothing new to India. Our Vedas are the solid proof of its existence. While delivering deeper into our glorious history, we may find the existence of this concept in different forms. It has been written in our Vedas, that a man may live individually, but to survive he must live collectively. Thus, it cannot be emphasised enough that for a progressive community, it is very crucial to balance the needs of an individual and that of a society. For this, it is imperative that people accept and show their willingness to sacrifice smaller things for the common and greater good. 

The concept of collective survival and progress has been embedded in our societies since time immemorial. Even our great Indian Philosophers like Kautilya had time and again emphasised working ethically and through following principles especially while operating their businesses. Back then, even the kings had a moral duty towards the merchants and society as a whole. They used to develop places of worship, establish educational institutions, and do charity for the needy. Our Indian rulers have always supported and worked on the idea of “Sarva loka hitam” (well-being of all). 

The bare reading of our Vedas suggests a heavy reliance of the state on peace, order, justice, and security. The supreme duty of the one ruling was the ‘welfare of the public’.

In the year 1953, this concept was formally recognized in a book titled “Social Responsibilities of the Businessman” by Howard Bowen. Thus, the concept of CSR which existed in India since time immemorial evolved with the changing needs of the society.  

From the above discussion, we came to know about the existence of the concept of CSR in India. However, even though the fundamental concept of CSR always existed in our country, it was an activity that was carried out but was not deliberated. The concept did not even find a place, even indirectly, in the old Companies Act, i.e., the Companies Act, 1956. The concept gained statutory recognition only in 2013 by the Companies Act, 2013. 

Fundamental responsibilities that come with the implementation of CSR

From the above discussion, it is clear that the concept of corporate social responsibility holds a wide interpretation and has different connotations for different companies. Also, the implementation of this concept by different companies differs widely. However, to sum up, the three fundamental principles of this doctrine are that the companies operate in a way that is economically, socially and ecologically sustainable.

Broadly, the initiatives taken in pursuance of Corporate Social Responsibility can be categorised into the following;

1. Environmental responsibility:- The companies or businesses should operate in a way that is economically sustainable. Such activities are basically meant to reduce pollution, and emission of greenhouse gases and to work in a way that aligns with sustainable development. If not reduced, it should not be such that it further creates a negative impact on the environmental conditions.
2. Ethical responsibility:- This connotes the responsibilities of the companies that it has in pursuance to the concept of CSR of working ethically and fairly. For instance, livable wages for its workers, banning of exploitation of labour, etc. 
3. Philanthropic responsibility:- Through incorporating such responsibilities in the regular day-to-day business operations, the aim is to make the world a better place to live in. The companies are actively involved in activities and make such efforts for humanity and upliftment of the society as a whole. 
4. Economical responsibility:- It implies the responsibility of companies and businesses to grow economically while practising sustainable ways for the company’s growth. The ultimate aim is to not just make a profit but simultaneously have a good social effect as businesses take resources from the society itself. 
5. Till now, we are clear with the concept of corporate social responsibility, the historical background of this concept along with its fundamental principles and the need for the incorporation of this concept in the day-to-day regime of the companies. Now, let us understand its legal framework in India, the provision that incorporates this concept making it a statutory mandate, i.e., Section 135 of the 2013 Act. 

Section 135 of Companies Act, 2013 : an overview

Very few legal systems around the world mandate corporate entities to engage or comply with the CSR norms. Section 135 of the 2013 Act is among one such provision which mandates incorporated companies in India to undertake initiatives for social, environmental and economic causes. 

Section 135(1) of the 2013 Act provides that the board of any company having a net worth of Rs. 500 Crore or more, or turnover of 1000 Crore or more, or net profit of Rs. 5 crore or more, (in the preceding financial year), has to mandatorily formulate a Corporate Social Responsibility Committee. Further, the committee shall be composed of at least three directors. More importantly, it is pertinent to note that at least one of these directors must mandatorily be an independent director. 

The proviso clause of the aforesaid sub-section states that for a company which is exempted from having an independent director (as per Section 149(4)), the Corporate Social Responsibility Committee of such a company shall mandatorily have at least two directors.

Section 135(2) obligates the disclosure of the composition of the committee constituted as per Section 135(1) in the report formulated by the board in consonance with Section 134(3). 

Functions of the CSR committee

The various functions or tasks that the committee formed for incorporating Corporate social responsibility into its business’s day-to-day operations are laid down under Section 135(3) of the 2013 Act. The following are the functions assigned to the CSR Committee: 

1. Draft policy relating to CSR [Section 135(3)(a)]:– It has to draft a corporate social responsibility policy and thereafter, forward it to the board. The policy that will be formulated will specify anything and everything related to the CSR activities that the company will engage in its day-to-day operations and otherwise. It is pertinent to note that the areas or subjects to which the activities will be related are the ones specified in Schedule VII of the 2013 Act.  
2. CSR committee to recommend the amount of expenditure [Section 135(3)(b)]:- It shall further recommend and advise the board on the financial outlay (expenditure) that will be required to carry out the activities as formulated in the corporate social responsibility policy. 
3. Surveil the CSR policy [Section 135(3)(c)]:- It is also required to monitor and amend if needed, the CSR policy of the company, from time to time. 

Functions of the board in relation to CSR

Under Section 135(4) of the 2013 Act, the functions and duties of the board (in respect of Section 135(1) as discussed in the above paragraphs) are pursuant to the mandatory compliance of CSR. The following are the functions of the board;

1. Approval of the CSR policy and its disclosure (Section 135(4)(a)):- It has to approve the CSR policy drafted by the CSR committee after taking into account and considering the committee’s recommendations. Further, once the policy is approved, it has to disclose the same in its report and also provide it on its company’s website, if any, in the manner as may be prescribed. 
2. Compliance with CSR policy by the company (Section 135(4)(b)):- It has to ensure that the activities enumerated in the CSR policy are being carried out by the company. 

Calculation of money spent on CSR

Section 135(5) mandates that the board shall ensure that at least 2% of the average net profit (that the company has earned in the preceding three financial years) of the company is spent on CSR activities as per the company’s CSR policy. As regards the companies that have not completed three fiscal years since their incorporation, the immediately preceding years will be taken into consideration for the calculation of the net amount required to be spent on CSR.  

Further, the proviso of the aforesaid Section states that the companies should give priority to the local area and areas where they conduct their business operations while spending the allocated budget of CSR. 

The second proviso mentions that in the event that a company fails to spend the proposed amount as mentioned above, the board shall without any fail, reflect the same in its report as made under Section 134(3)(o) along with mentioning the clarification for such failure. Also, if the amount has not been spent as per the mandate set up by Section 135, and unless that amount relates to any ongoing project as enumerated under Section 135(6), it has to be transferred to a fund specified in Schedule VII of the 2013 Act (within 6 months of expiry of that financial year). 

Additionally, the third proviso to sub-section 5 states that if the company spends more than the specified amount for CSR, then, the company may use this extra expenditure against the requirement to spend in the coming financial year, in such a manner as has been prescribed in the rules. 

For the purposes of this Section, ‘net profit’ shall not include such sums as may be prescribed from time to time under the law and shall be calculated in pursuance to Section 198 of the 2013 Act. 

Other important points

As per Section 135(6), if some percent of the money from the allotted budget of CSR is left, after the completion of all the CSR activities as per its policies, such left amount has to be put in a special bank account (to be called Unspent Corporate Social Responsibility Account) within 30 days after the financial year ends. This amount has to be further utilised for CSR activities within three financial years from the date it has been transferred. In case of failure to do so, the same amount shall be transferred to a fund specified in Schedule VII of the 2013 Act (within 30 days after the completion of the third financial year).

Section 135(7) of the 2013 Act, provides for the penalty in case of non-compliance with the Sub Sections 5 and 6 of Section 135. It provides for the following below-mentioned penalties;

1. In case of non-compliance with Section 135(5), the company has to pay a fine of double the amount that was to be deposited in the fund as specified in Schedule VII of the 2013 Act, or one crore rupees, whichever is less. 
2. In case of non-compliance with 135(6), the company has to pay a fine of the double amount that was to be deposited in the Unspent Corporate Social Responsibility Account, or one crore rupees, whichever is less. 
3. Also, even the officer is imposed with a fine for non-compliance. The officer in the event of non-compliance is required to either pay a fine amounting to 1/10th of the amount that was supposed to be given to the fund or 1/10th of the unspent CSR Account, or 2 lakhs, whichever is less. 

Section 135(8) provides that the Central Government may from time to time if the need be, give instructions or provide guidelines to companies for ensuring the compliance of this Section. 

As enumerated in Section 135(9) of the 2013 Act, if the company spends less than 50 lakh rupees, provided that is in accordance with Section 135(5), on CSR activities, there is no need to formulate a special CSR committee. The desired work may be carried out by the directors of the company. 

Let us briefly have a look at the tabular representation of the aforesaid Section (pertaining to applicability and committee constitution) to have a better understanding of the same. 

Companies on which the Section is applicable 

Companies on which the Section is applicable (Either of the three conditions have to be fulfilled)
Networth	Rs. 500 crore or more
Turnover	Rs. 1000 crore or more
Net profit	Rs. 5 crores or more

Constitution of CSR Committee (mentioned in Rule 5 of 2014 Rules)
With independent director	3 or more directors, including one independent directorListed companies Unlisted public companies
Exemption from having an independent director	If as per Section 149(4) company is exempted from having an independent director, then the company shall have a CSR committee comprising at least 2 or more directors. Private companies Foreign company (Out of two one member shall be as specified in Section 380(1)(d) and another as nominated by the foreign company.)

Applicability to different types of companies 

As discussed above, Section 135 of the 2013 Act applies to every company having the stipulated net worth, turnover or net profit. Further, let us understand its applicability to different types of companies like foreign companies, holding or subsidiary companies, etc. 

Holding and subsidiary companies 

Rule 3(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 provides that provision pertaining to CSR, i.e., Section 135 applies to every company along with holding and subsidiary, provided it fulfils the criterion enumerated under Section 135(1). Further, it is pertinent to note that in accordance with this rule, the net worth, turnover or net profit of a foreign company will be calculated and prepared in pursuance to the relevant provisions of the 2013 Act. 

Foreign companies 

The term ‘foreign company’ has been defined under Section 2(42) of the 2013 Act. As per the relevant provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014, Section 135 shall apply to foreign companies as well. Further, the company’s net worth, turnover, or net profit shall be calculated according to the Indian company law only, so as to determine whether the companies have to follow the aforesaid provision or not. 

Rules framed in accordance with Section 135 of Companies Act, 2013 

The Ministry of Corporate Affairs in order to ease down and facilitate the smooth implementation of the provisions for incorporating corporate social responsibility activities in day-to-day business operations of corporate enterprises, enacted the Companies (Corporate Social Responsibility Policy) Rules, 2014, which came into effect on 1.04.2014. Further, these rules were amended in the year 2021 by the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, which came into effect on 22.01.2021. 

Let us have a look at the important provisions of the aforementioned rules. 

Companies (Corporate Social Responsibility Policy) Rules, 2014

The aforesaid rules were enacted by the Central Government pursuant to the power conferred upon it by virtue of Section 469(1) and (2) along with Section 135. 

Note:- The addition or amendment in the concerned provision of the 2014 Rules have been discussed in the later part. The older version of the 2014 Rules (i.e., before the 2021 amendment) has been provided just for reference and comparison with the new rules. 

Definitions 

Rule 2 provides various definitions which are significant for the implementation and understanding of corporate social responsibility.  Some of these definitions are; Corporate social responsibility (definition provided in the above paragraphs), annexure, CSR policy, net profit, etc. Let’s have a look at the important definitions. 

• ‘CSR committee’ is defined as the committee board referred to in Section 135.
• ‘CSR policy’ refers to the activities carried out by the company as mentioned in Schedule VII of the 2013 Act and the expenditure thereupon. It is noteworthy that these activities do not include those which are carried out by the company in its normal course. 

Please note that the new definition as per the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 is-  “‘CSR Policy’ means a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan”.

• ‘Net profit’ has been defined as the profit that the company has made in a financial year as per its financial statement which is prepared as per the concerned and applicable provisions of the 2013 Act. However, as per the definition laid down in the rule, this net profit should not include the following;

1. Profit that has been procured from any overseas branch or branches of the company, and 
2. Any dividend that the company receives from other companies in India ( the ones which are covered under the category specified in Section 135 and the ones that comply with the provisions laid down in Section 135). 

The net profit for a foreign company means the profit and loss of the company as prepared in accordance with Section 381 (1)(a) and Section 198 of the 2013 Act. 

Applicability 

As discussed in the above paragraphs, Rule 3 of the 2014 Rules provides for the applicability of Section 135 to different companies. 

Thus, as per the rule, it shall apply to holding and subsidiary companies, and foreign companies which have a net worth, turnover or net profit of Rs. 500 Crore or more, 1000 Crore or more or Rs. 5 crore or more (specified criteria under Section 135 (1)), respectively. Further Rule 3(2) provides that every company which in future as soon ceases to fall under the aforesaid category is not obligated to constitute a CSR committee and follow the rest of the subsections of Section 135 until it meets the criteria specified in Section 135(1). 

CSR activities 

The activities are to be undertaken as per the CSR policy of the company framed in pursuance to Section 135(3)(a), in the form of projects or activities or projects. However, these activities shall be different from the ones carried out by the company in its normal course. 

Rule 4(2) provides that the board CSR committee may carry out its CSR activities through a society or trust (registered) or a company established by it under Section 8 of the 2013 Act. Rule 4(3) also provides that various companies can also collaborate to perform CSR activities, however, these companies shall separately be in a position to report the parts that they have carried out. Further, as per Rule 4(4) only the expenditure of CSR activities that are done in India will be calculated as per the expenditure referred to in Section 135(5) of the 2013 Act. 

Furthermore, Rules 4(5) and 4(7) state the activities that will not amount to CSR activities as per the concerned provisions; 

• Activities done only for the benefit of the company’s employees. 
• Contribution of the company directly or indirectly to any political party under Section 182 of the 2013 Act. 

Rule 4(6) states that companies can choose their own personnel or hire from institutions staff for doing CSR activities, however, the companies must note that if they are hiring from any other institution, they must have experience of at least three years. Also, the expenditure on this should not exceed 5 percent of their total CSR money in one financial year. 

CSR committee

As per Rule 5 of the 2014 Rules, the CSR committee for listed and unlisted companies (public or private) which falls under the category of Section 135(1) which is not required to have an independent director as per Section 149 of the 2013 Act, shall have a CSR committee comprising at least 2 or more directors. For a foreign company which is not required to have an independent director, out of two, one member shall be as specified in Section 380(1)(d) and another as nominated by the foreign company.

Rule 5(2) makes it necessary for the companies to constitute the committees and undertake CSR activities in a transparent monitoring manner. 

CSR policy 

Rule 6 of the 2014 Rules, provides that the company’s CSR policy, among other things, shall include the below-mentioned things, namely; 

1. List of all the projects, programmes or activities that the company seeks to achieve as per the areas enumerated in Schedule VII.
2. Monitoring mechanisms of the suggested programmes and projects. 

Expenditure on CSR activities

Rule 7 lays down that the expenditure on CSR activities will include the following, namely;

• All activities as recommended by the CSR committee, including contribution to the corpus.

However, it shall not include any expenditure that is not in consonance with the activities mentioned in Schedule VII. 

Reporting

Rule 8 states that the Board report for a financial year shall also include an annual report relating to the CSR activities conducted as per the particulars specified in the Annexure to these Rules. 

Disclosure

Rule 9 provides for the disclosure of CSR policy on the company’s website if any, mandatory. 

Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 

The Ministry of Corporate Affairs issued a notification on January 22, 2021, to amend the Companies (Corporate Social Responsibility Policy) Rules, 2014, thereby implementing the amendments made to the Companies Act 2013, in the years 2019 and 2020. These amendments were made in order to meet the present needs and development in the corporate world and for the holistic growth of the country. 

Definitions 

The amendment of 2021 inserted a few new definitions in Rule 2 of the 2014 Rules, namely; international organisations, ongoing projects, and public authority. Further, the definition of CSR policy (please see the above heading of the 2014 Rules for the amended definition) was amended by the 2021 Rules. 

International organisations:- It means the organisation that has been notified by the Central Government as an ‘international organisation’ as per Section 3 of the United Nations (Privileges and Immunities) Act, 1947. 

Ongoing project:- It refers to a pending ‘multi-year’ project pursuant to a company’s duty of undertaking CSR activities with a maximum duration of three years excluding the financial year it started. It is pertinent to note that, this definition also includes any project which was initially not approved as such a multi-year project, however, it expanded beyond one year by the board, provided that the reason for the extension is valid. 

Public authority:- It refers to the authority as defined under Section 2(h) of the Right to Information Act, 2005. 

Policy implementation of CSR: amendment in Rule 4 

The amendment in Rule 4 has made it mandatory for the companies (from 01.04.2021) to carry out CSR activities through implementing agencies which are registered with the Central Government. The registration shall be done by submitting an application form (which is an electronic form) known as CSR-1. After submitting, a unique number will be generated, the CSR Registration Number. It is to be noted that the Ministry of Corporate Affairs maintains a list of all such registered implementing agencies, and these agencies ensure the timely implementation of proposed CSR activities.  

CSR committee- substitution in Rule 5(2)

As per the aforesaid, the committee shall formulate and recommend to the board of the company an annual action plan which shall cover all the CSR activities as laid out in the company policy. This plan shall include the following;

1. List of all the CSR projects and programmes.
2. The manner in which the aforesaid shall be executed.
3. The specific details in which the sanctioned funds shall be utilised.
4. Monitoring mechanism of the proposed activities. 
5. If there is any need for details of the impact assessment for any projects that have been carried out by the company, then the same shall also be present in the report. 

CSR expenditure- amendment in Rule 7 

The Rule now mandates that the board of the company has to make sure that the cost of managing CSR activities does not exceed 5 percent of the company’s total budget for CSR. Further, the rule provides that any surplus gained from any CSR project or programme cannot be counted as business profit and the same shall be used in any other CSR project only. Also, the companies are required to explain a valid reason if they do not use 2 percent of their profit for CSR activities. If such an unspent amount of funds does not relate to any ongoing project then the company has to transfer it to the government. 

CSR reporting- substitution of the complete Rule 8

The aforesaid amended rule provides that any company which has the obligation to fulfil CSR activities worth Rs. 10 crores or more, then in such a case the company is obligated to hire an independent agency to carry out an impact assessment of all the projects with outlays of Rs 1 crore or more. The expenditure on impact assessment shall not increase 5 percent of the total sanctioned budget for CSR in a financial year or Rs. 50 lakhs, whichever, is less (Rule 8(3)(c)). 

Disclosure- amendment in Rule 9

The amendment has made the disclosure by the board of the composition of the CSR committee, CSR policy, projects, and programmes on the website (if any), mandatory. 

Transfer of unspent amount- amendment in Rule 10

As these rules were enforced on 22.01.2021, the unspent amount pertaining to any ongoing project in the financial year 2021-2022, shall be transferred to a separate account as mentioned in Schedule VII, till a separate ‘fund’ as per Section 135(5) and Section 135(6) is created or specified. 

Audit of CSR activities done in pursuance of Section 135 of Companies Act, 2013

It is pertinent to note that Section 135 of the 2013 Act does nowhere explicitly state or provide for the mandate of audit of the activities done for corporate social responsibility. However, it must be noted that the committee established for CSR, i.e., the CSR committee is required to maintain and must ensure a clear and accountable tracking of the progress and outcomes of the CSR activities undertaken by the company, as per  Rule 5(2) of the 2014 Rules. Further, Rule 6(1)(B) of the 2014 Rules provides that the policies formulated by the companies for CSR must include the details of complete activities undertaken by the company in the name of CSR. 

CSR in India

As discussed earlier, India has been practising CSR activities way before it was made a statutory mandate by Section 135 of the Companies Act, 2013. In the old times, CSR mainly involved charitable and philanthropic activities. Religion, customs, traditions, family values and industrialization had a deep impact on CSR. Till 1850 (pre-industrialization period), a lot of then-wealthy merchants shared their wealth for making temples, some in medical facilities, etc. Companies like Tata, Godrej, Bajaj, Modi, Birla, and Singhania in the 19th century were seen contributing to economic as well as social considerations. 

Thereafter, in a phase when we were fighting for independence, Indian industrialists were under pressure to show their dedication towards the upliftment of our society. Mahatma Gandhi urged the Indian industrialists to manage and use their wealth in a way that also benefits the society at large. ‘Temple of Modern India’ is what he termed the Indian companies, and this was also his vision for the companies. His influence made the companies establish various scientific institutions and trusts for schools. 

In the third face, that is when a mixed economy kicked in (during the 1960s-1980s), an increase in cases of corporate malpractices was witnessed and this led to the development of the concept of corporate governance. Along with this, legislations pertaining to labour and environmental issues were also enacted. Public Sector Undertakings were established so as to ensure equitable distribution of resources to the needy. However, this concept did not benefit much and hence the expectation shifted to the private sector. After the 1980s, it was seen that the companies were willingly shifting towards sustainable business strategies. Since then, a lot has changed and improved, thus, leading India to a place where such philanthropic activities are being practised efficiently and actively. 

Let us take a look at the contribution of a few companies working in India in CSR activities. 

TATA groups 

The TATA group has undoubtedly outshined itself by working for the social cause since its inception. The company is the leader in the field of corporate social responsibility. A trust named Tata Trust receives 63 percent of the profit shares from its parent company that is the TATA group for such social welfare activities. CSR is a key business process of the TATA group. Not only this, approximately seven thousand villages situated near Jamshedpur and Orrisa benefit from different programmes in areas like handicrafts and rehabilitation of handicapped persons, education, afforestation, irrigation, adult literacy, vocational training, etc. run by the TATA Steel Rural Development Society (TSRDS). The Department of Community Development and Social Welfare at TATA Steel also conducts various social welfare activities and programmes to promote health and well-being, such as medical and health programmes, blood donation drives, mass screening of Tuberculosis patients immunization camps and drug de-addiction.

Coca-Cola India

The company received the Golden Peacock Global Award 2008 for its initiatives for corporate social responsibility. It mainly worked in water conservation along with management and community development activities and initiatives. Further, Coca-Cola India’s ‘Elixir of Life’ initiative is currently providing around thirty thousand (around 100 primary and panchayat schools) children with drinking water in Chennai. Furthermore, it has around 300+ rainwater conservation systems established in India. 

Hindustan-Unilever India (HUL)

The company started an initiative to help and encourage young entrepreneurs in rural India under the initiative named ‘Shakti Unilever’. By training around 13,000 underprivileged women to distribute the products made by the company to 70 million rural consumers, it has achieved a remarkable milestone. Since its establishment in 2000, the company has increased its approach to rural consumers by 30% with the help of these women.

PM care fund and its consideration as CSR activity 

After the harsh and severe impact the COVID pandemic had on the people, our Prime Minister Shri Narendra Modi founded a public charitable trust, namely, the PM Cares Fund (Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund), to help the people affected by the pandemic. The establishment of the PM Care fund was mainly done to address the risks and challenges posed by any kind of emergency, distressing situation or pandemic like COVID-19. As per Schedule VII of the 2013 Act, the contributions made by companies in PM Care Fund, pursuant to Section 135 of the 2013, shall be considered as CSR activity. Notification dated 26.05.2020 for the same was issued by the Ministry of Corporate Affairs, thereby amending Schedule VII of the 2013 Act, which retrospectively came into force on 28.03. 2020. 

Conclusion 

To sum up, corporate social responsibility is a management concept by which corporate enterprises or companies integrate concerns relating to social and environmental aspects in their day-to-day business operations and interactions with stakeholders, shareholders, and employees. Simultaneously, CSR requires the companies to address the concerns of their employees and other office bearers and stakeholders. After the statutory mandate, it has now become a business necessity rather than just the task of a company to do social good. In recent years, CSR in India has witnessed a dynamic change and now it is not just limited to a philanthropic activity. 

However, the present drawback of the prevalent laws for corporate social responsibility is that these provisions provide for the mechanism that the companies can escape through the loophole of the ‘comply or explain’ approach. This approach connotes that the companies either spend two percent of their profits on CSR or else they explain the rationale behind the non-compliance and in the event of none of the above-mentioned, face a penalty. Even though the penalty provision of the 2013 Act somehow manages to make the companies comply with the CSR mandate seriously, if this approach is changed and the Section is mandated in a much more stringent manner, then we may see much better implementation of CSR. 

Frequently Asked Questions (FAQs)

What are the activities that can be termed as or regarded as Corporate Social Responsibility?

As per Section 135 of the 2013 Act, and the Companies (Corporate Social Responsibility Policy) Rules, 2014, which were further amended in the year 2021 by the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, the following below-mentioned activities related to below-mentioned areas and causes can be included in CSR, namely;

1. Eradication of extreme hunger and poverty by the companies,
2. Promoting education,
3. Reducing child mortality rate and improving maternal health,
4. Combating various diseases including but not limited to human immunodeficiency virus, acquired immune deficiency syndrome, malaria,
5. Working on environmental sustainability, 
6. Employment enhancing vocational skills,
7. Contribution to PM Care Fund or any other such fund by the state or centre for socio-economic development and relief and funds for SC/ST/OBC or any other deprived or vulnerable sect of the society,
8. Business projects relating to social matters, and
9. Promoting gender equality and empowering women. 

Are there any companies exempted from any of the obligations of the CSR committee as per Section 135 of the Companies Act 2013?

According to Rule 5(1) of the CSR Rules 2014, unlisted public companies and private companies, which are not obligated to have an independent director, are not required to include an independent director in their CSR Committee.

What is the mechanism or process that has been laid down for checking up on the implementation of the concept of corporate social responsibility?

The board of the company usually monitors the implementation of CSR activities in its business operations. It must be noted that CSR is basically a board-driven process, and the board has the power to plan, execute and monitor the CSR activities that are being carried out by the company, based on the recommendations made by the CSR committee established in accordance with the provisions of the 2013 Act. The 2013 Act presently accommodates provisions such as mandatory disclosures, reporting, and CSR committee’s and the board’s accountability, which ultimately helps in monitoring the implementation of CSR. 

Further, it must be noted that the disclosure of the activities undertaken by the companies for CSR is mandated by the statute itself. The details are to be annually provided to the MCA21 portal or registry, for instance, the details like disclosure in financial statements pertaining to CSR (including non-compliance). 

What say does the Central Government have in designing the CSR initiatives and policies in a company?

The CSR policies of the company as formulated by the board after the recommendations of the CSR committee are made in pursuance to the Schedule VII of the 2013 Act and the 2014 Rules. Thus, the broad framework under which the companies shall work for the implementation of CSR in their business operations is set up by the Central Government. 

Will the contribution to the corpus of an entity be calculated as CSR expenditure?

As per the amendment to Rule 7 of the 2014 Rules, which came into effect on 22.01.2021, contribution to the corpus of an entity will not be calculated as CSR expenditure. 

Whether ‘profit before tax’ or ‘profit after tax’ is used for the computation of the average net profit for the purposes of Section 135 of the 2013 Act?

Profit before tax is used for the calculation of net profit under Section 135. The computation of the average net pursuant to Section 135 (so as to determine spending on corporate social responsibility activities) of the 2013 Act will be done in accordance with Section 198 of the 2013 Act. Further, such computation will also be specific and exclusive of the items laid down under Rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. Please note that Section 198 of the 2013 Act lays down certain additions or deletions that are to be done while calculating the net profit of a company. A few major things that the aforesaid Section provides for exclusion are; capital payments/receipts, income tax, and set-off of past losses. 

Are the companies obligated to carry out certain activities in the nearby local areas where they work? 

Section 135(1) of the 2013 Act provides that the companies should give preference to the local areas and other areas around which they operate while performing CSR activities. However, this is directory in nature and not mandatory. 

Is the provision pertaining to CSR applicable to the companies that fall under the category of Section 8 of the 2013 Act?

From the bare reading of Section 135, it can be seen that there is no specific point that states that Section 8 companies are exempted from mandatory compliance with the provision pertaining to CSR. 

References 

• https://taxguru.in/company-law/section-135-companies-act-2013-csr-initiative-betterment-society.html 
• https://www.csr.gov.in/content/csr/global/master/home/aboutcsr/history.html
• https://www.sirc-icai.org/images/cabf/Corporate%20Social%20Responsibility.pdf
• https://cleartax.in/s/csr-amendment-rules-2021 
• https://www.sirc-icai.org/images/cabf/Corporate%20Governance%20in%20India.pdf
• https://www.csr.gov.in/content/csr/global/master/home/home.html
• https://seamlessglobal.co/csr-in-india-what-is-corporate-social-responsibility-and-why-is-it-important/ 
• https://www.taxmann.com/post/blog/opinion-non-compliance-of-csr-provisions-under-the-companies-act-2013/ 
• Company Law by Avtar Singh – 5th edition