Knowledge Nugget | Corporate Social Responsibility (CSR): All you need to know for the UPSC exam

Why in the news?

Aided by a surge in profits, funds spent by listed companies on Corporate Social Responsibility (CSR) rose by 16 per cent to Rs 17,967 crore during the year ended March 2024 as compared to Rs 15,524 crore spent in 2022-23, says a PRIME Database report. HDFC Bank topped the list with a CSR spend of Rs 945.31 crore, followed by Reliance Industries at Rs 900 crore, TCS at Rs 827 crore and ONGC at Rs 634.57 crore. In this context, let’s know about the CSR and provisions associated with it.

Key Takeaways :

1. CSR is a management framework through which companies incorporate social and environmental considerations into their business operations and interactions with stakeholders. It represents a long-term, structured commitment to societal development and welfare.

2. Inclusive growth is a crucial component of India’s development strategy. It focuses on bringing those segments of society into the growth process that have hitherto been excluded from the mainstream of development. In conjunction with this national effort, CSR was developed as a tool for integrating social, environmental, and human development concerns throughout the entire value chain of corporate businesses.

History of CSR Policy in India

1. According to the National CSR Portal, “Ministry of Corporate Affairs had issued ‘Voluntary Guidelines on Corporate Social Responsibility, 2009′ as a first step towards mainstreaming the concept of Business Responsibilities. This was further refined subsequently, as ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011‘.”

2. One of the main forces behind the inclusion of the CSR provisions in the statute was the 21st Report of the Parliamentary Standing Committee on Finance. The Standing Committee observed that annual statutory disclosures on CSR required to be made by the companies under the Act would be a sufficient check on non-compliance.

3. Later, the Companies Act, 2013, made it mandatory for listed and unlisted organisations of a certain size and net worth to spend at least 2 per cent of their average net profit towards CSR.

Criteria for CSR Eligibility

1. According to the section 135(1) of the Companies Act, 2013 read with the Companies (CSR Policy) Rules, 2014, companies with net worth of Rs 500 crore and above or turnover of Rs 1,000 crore and above or net profit of Rs 5 crore and above have to spend two per cent of average net profits of last three years.

2. Notably, a holding or subsidiary of a company is not required to comply with the CSR provisions unless the holding or subsidiary itself fulfils the eligibility criteria prescribed under section 135(1) stated above.

Mandatory Financial Commitment

The mandatory provisions of CSR under section 135 became effective from 01.04.2014. The mandatory financial commitment for companies eligible for CSR are:

(i) It is mandatory for companies to allocate every financial year at least 2% of their average net profits from the last three financial years.

(ii) For companies that have been operating for less than three years, they may allocate every financial year at least 2% of their average net profits since their inception.

Activities Permitted under CSR

The Schedule VII of the Companies Act lists out a set of activities that firms can include within their CSR activity. These include:

• Eradicating hunger, poverty, malnutrition,

• Promoting health care including preventive health and sanitation,

• Promoting education,

• Promoting gender equality, empowering women,

• Ensuring environmental sustainability, ecological balance,

• Protection of national heritage, art and culture,

• Measures for the benefit of armed forces veterans, war widows and their dependents

• Project on rural development and ensuring environmental sustainability etc.

• They can also contribute to the Prime Minister’s National Relief Fund or any other fund set up by the Central government for socio-economic development.

CSR Disclosure

According to Rule 9 of the Companies (CSR Policy) Rules, 2014 the company’s Board of Directors is mandated to publicly disclose the following on the company’s website:

(i) The composition of the CSR Committee,

(ii) The CSR Policy, and

(iii) The projects approved by the Board.

BEYOND THE NUGGET: What happens if a company does not meet its mandatory CSR financial commitment?

In case of an unspent CSR amount by the company, the concerned company has to go through the following treatment as provided in Section 135 (5) of the Companies Act, 2013:

In the case of ongoing projects

• Within 30 days from the end of the financial year, the company must open a special account in any scheduled Bank under the name “Unspent CSR Account” and transfer the entire unspent CSR amount to the said
account.

• The company should spend the unspent CSR amount within three financial years with effect from the date of such transfer in the scheduled bank.

• At the end of three financial years, in case the unspent CSR amount remains unspent in the account, the remaining unspent amount shall be transferred to a fund specified in Schedule VII of the Companies Act, 2013, to be executed within 30 days from the end of the third financial year.

In the case of other than Ongoing projects

• Within 6 months from the end of the financial year, companies eligible for CSR must transfer the unspent CSR amount to the fund specified in Schedule VII of the Companies Act, 2013.

Post Read Question

With reference to Corporate Social Responsibility (CSR) rules in India, consider the following statements: (UPSC CSE 2024)

1. CSR rules specify that expenditures that benefit the company directly or its employees will not be considered as CSR activities.

2. CSR rules do not specify minimum spending on CSR activities.

Which of the statements given above is/are correct?

a) 1 only

b) 2 only

c) Both 1 and 2

d) Neither 1 nor 2

(Sources: csr.gov.in, CSR spend: Listed firms record 16% rise to Rs 17,967 crore in previous fiscal, planning.mizoram.gov.in)

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