India's Corporate Social Responsibility (CSR) Compliance: Recent Legal Amendments and Their Impact

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This article has been written by Akshay Iyer, a 3rd year student pursuing BA. LLB(Hons) from SRM University.

Table of Contents

ABSTRACT:

According to the Companies Act of 2013, corporate social responsibility in India has gone many levels up and is at its peak. At one level, it included a requirement that specific businesses set aside a portion of their profits for charitable causes. This gave rise to a new situation that aims to make the business sector more receptive to social objectives. “Over the years, the same law has seen some changes to focus on increasing the transparency, duty, and its impact of CSR activities so as to motivate firms”[1] not only to be charitable but also connect meaningfully and positively with the very communities they serve.”[2][3]

Recent changes have introduced new reporting requirements, refined budgeting practices for assessing the effectiveness of CSR efforts, and tightened compliance measures. These improvements are designed to strengthen the CSR framework, ensuring that corporate contributions towards social welfare are not only more effective but also closely aligned with the nation’s priorities.

This Article delves into these legal updates and what they mean for businesses in India. It highlights both the exciting opportunities and the challenges that come with navigating the new CSR compliance landscape, showing how companies can effectively contribute to societal progress while meeting regulatory expectations.

INTRODUCTION:

Introduction to CSR According to the International Business Society, Corporate Social Responsibility (hereinafter referred to as CSR) may be defined as both, “the way companies, active from the economic point of view, acknowledge and fulfil their responsibilities to the environment and society. Recently, India has witnessed a notable change in the way”[4] companies approach CSR, reflecting the growing expectations of people regarding business practices.”[5] What started out as businesses’ voluntary acts of kindness have evolved into legal requirements for certain businesses, drastically changing their contribution to societal progress.

Historically, CSR in India has been influenced by visionaries like Jamshedji Tata and M.K. Gandhi, who championed the idea that businesses should contribute positively to society. As time has gone on, the focus has moved beyond simple donations to more organized and accountable efforts that tackle significant challenges, including education, healthcare, and environmental issues.

“The most notable for Indian CSR was, of course, the Companies Act of 2013, enacted last year.”[6] This legislation was a game-changer, positioning India as one of the first countries “to make businesses invest a small portion of their income for CSR programmes.”[7] This shift from voluntary participation to a legal obligation signified a new era where corporate engagement in social initiatives became not just encouraged but expected. Since then, the law has evolved, leading to updates that refine compliance and enhance the impact of corporate contributions to society.

OVERVIEW OF CSR IN INDIA:

“CSR, for some organizations, goes beyond the legal requirement for CSR and represents an actual interest in creating the type of social good they would like to see in the world. “Article 135 of the Companies Act 2013 states, “Certain trade organizations are empowered to undertake any such action, as may be deemed necessary for the promotion of social, environmental “”and the economic growth of the community.” In other respects, this policy demonstrates unequivocally that the participating companies are working toward a bright future for everybody, not simply the ‘advantage of profit’. This means that all corporations shall for a period of three years preceding the current year actually ‘spend’ or ‘incur’ two percent of their net profits or the average of last three years net profits on the CSR projects. Response Expenditure Construct also places businesses under an action as it encourages the spending requirement position that businesses represent a vital element in human’s quest for progress and general societal well-being.”[8] those criteria are –

The total value is expected to be ₹500 crore or any amount over and above this.[9][10][11]

It signifies possessing considerable wealth, which can open doors to various opportunities and lifestyle choices. You can think of it as someone who has built a significant financial foundation, likely through investments, assets, or successful businesses.

Businesses with a total revenue of at least ₹1000 crores.[12][13][14]

we’re looking at companies that are quite impressive in terms of revenue. This level of turnover showcases how well a company is performing in the market over a certain period.” This means that not just only big in terms of size, but also an important competitor in its industry, probably playing a significant role in the economy.”[15]

Any profit that a business may have earned in the course of the year or net profit of rupees 5 crores or more during any financial year:

This indicates that the company has, at any point in time, been profitable. If a company earns a net profit of ₹5 crores or more during a financial year, it shows that the business is not just surviving but thriving, successfully generating more income than it spends.

Presently, the common practice is that Companies must have a CSR-oriented board committee.” The committee would need to develop and monitor the entire process of CSR, ensuring that the company acts responsibly and contributes positively to society.”[16] “The Policy ought to outline areas of focus on CSR, which includes education, health care, gender equality, environment sustainability, and rural development, outlined in Schedule VII of the Companies Act.”[17]

CSR COMMITTEE AND ITS MAIN ROLE:

The CSR Committee of the Board will be constituted by at least three directors with at least one qualifying as an independent director to ensure a multidimensional perspective.

Foreign companies are required to have at least two representatives serving on the CSR Committee. One of these members must be a resident who is authorized to receive official notices and documents on behalf of the foreign company, while the other member will be nominated by the foreign company itself.

Unlisted public companies and private companies that aren’t required to have an independent director on their board don’t need to include one in their CSR Committee either.

When a private company has just two directors, those same directors will also take on roles in the Corporate Social Responsibility (CSR) Committee. Such arrangement facilitates the inevitable participation of all the companies in embracing and managing their corporate social responsibility policies.

The contributions of the CSR Committee are invaluable in ensuring that the company’s work in this regard is not just on paper but effective in practice. Here are some the responsibilities of the CSR committee which contribute to social responsibility becoming ingrained in the operations of the company:

Crafting and Suggesting CSR Policies:

A key duty of the committee consists in formulating the Corporate Social Responsibility (CSR) policy for the company. This policy will detail the social initiatives the company aims to pursue, adhering to the guidelines set out in Schedule VII of the Companies Act, 2013. After the committee has carefully crafted this important document, they will present it to the board for approval, ensuring that everyone is on board with the company’s commitment to social responsibility.

Determining CSR Budgets:

The committee also plays a crucial role in recommending how much money should be allocated for CSR activities. They make sure that the projected spending meets legal requirements, which state that at least 2% of our average annual net profit must be allocated accordingly is contributed towards corporate social responsibility activities. is accounted for.”[18][19]

Overseeing CSR Activities:

Once the policies and budgets are in place, the CSR committee steps up to oversee how these initiatives are put into action. Their role is crucial—they keep an eye on everything to make sure it aligns with the approved guidelines and actively track progress. This helps ensure that all activities meet the regulations set forth in the Companies Act, fostering accountability and transparency in their efforts.

Reporting Back to the Board:

The CSR committee regularly shares updates that highlight the company’s efforts in social responsibility. These reports not only outline the initiatives we’ve undertaken and the funds we’ve invested, but also showcase the positive changes we’re making in the community. By being transparent about our actions and their outcomes, we help the board see the real impact of our commitment to making a difference in society.

RECENT TRENDS IN CSR:

In recent years, the landscape of Corporate Social Responsibility (CSR) has seen significant shifts aimed at enhancing the effectiveness and compliance of CSR initiatives. These changes, primarily introduced through the Companies (Amendment) Acts of 2019 and 2020, were designed to ensure that CSR efforts genuinely contribute to social progress. Here’s a more relatable breakdown of what these legal modifications entail:

New Penalties for Non-Compliance:

Previously, companies could simply explain why they did not meet their CSR spending requirements. However, following the 2019 amendments, stricter penalties were implemented for those failing to meet the mandatory CSR thresholds. Now, companies face fines ranging from ₹50,000 to ₹25 lakhs, while individual officers can be penalized between ₹50,000 and ₹5 lakhs for non-compliance.

Handling Unspent CSR Funds:

The 2019 amendment introduced a system for managing leftover CSR budgets for ongoing projects. Companies must now transfer any unspent CSR funds to a designated “Unspent Corporate Social Responsibility Account” within 30 days of the financial year’s end. These unspent funds must be utilized within three years, or they will be redirected to government initiatives, such as the Prime Minister’s National Relief Fund.

Broader Range of CSR Activities:

The 2020 Amendment Act expanded the types of activities eligible for CSR funding. Companies can now allocate resources towards research and development in technology and medicine, as well as disaster relief and recovery efforts. This change aims to encourage businesses to invest in initiatives that address national challenges and foster innovation.

Improved Reporting and Transparency:

Companies are now required to provide clearer reports on their CSR activities, detailing the projects they undertake, the funds spent, and the impact of these initiatives on communities. Increased transparency is crucial for holding companies accountable and ensuring that the objectives of CSR projects are met. Additionally, companies must disclose their CSR committee’s composition and make their CSR policies accessible online.

Temporary Relief for New Companies:

Newly incorporated companies have been given a break from the CSR expenditure requirements for their first three years. This means they are not obligated to allocate 2% of their average net profits to CSR activities until they have been in operation for three fiscal years.

Carrying Over Excess CSR Spending:

The 2020 amendments also addressed concerns about spending limits. If a company spends more on its corporate social responsibility (CSR) efforts than it planned for in a given year, it has the option to apply that extra spending to the next three years. This flexibility allows businesses to pursue larger social initiatives without being restricted by annual spending caps.

These legal changes aim to ensure that corporate efforts in social responsibility are not only compliant but are also meaningful and impactful in fostering social progress and development.

IMPACT OF CSR LEGISLATION:

The CSR (Corporate Social Responsibility) changes that were effected in India recently have stimulated growth for enterprises and made differences in the social structure of the country.

Expanded penalties for noncompliance:

Organizations are now being penalized for noncompliance with these rules, which stresses the essence of careful and efficient corporate social responsibility procedures. Furthermore, the need for additional reporting has been mandated so as to ensure the proper accountability of the costs incurred and the activities performed in the name of csr by the organizations.

Problem for Small Enterprises:

however, for small and medium-sized enterprises these burdens may be especially daunting. Continuing operations CSR and the remaining unspent funds become too much of a work for these businesses especially with their limited scale of operation.

Silver linings:

On a bright side, new scope for CSR activities geaves space for new wrappings for companies to fuse this with business strategies. For example equip funds can now be used to engage in engaging in research and development or risk mitigation as a way of achieving csr. Moreover, the possibility of carrying forward any surplus expenditure on csr for the following years enables corporations to plan for more and better csr activities.

In conclusive terms, even though the new policies have hit up some obstacles, they have also availed them ways in which they can impact society, whilst also achieving their goals.

CONCLUSION:

The alteration of Corporate Social Responsibility (CSR) laws in India has brought about significant progress in how business is related to society. The amendment however does not stop at making compliance more stringent to companies’ social responsibilities but encourages the objectives of such companies to develop harmoniously with the course of enhancing social development.

[1] https://www.sciencedirect.com/science/article/pii/S0165410117300757

[2] https://givingforgood.org/goodness-journal/decade-after-csr-law-implementation-in-india-whats-changed

[3] https://www.sciencedirect.com/science/article/pii/S0165410117300757

[4] https://www.treehugger.com/corporate-social-responsibility-and-the-environment-5186904

[5] https://www.india-briefing.com/news/corporate-social-responsibility-india-5511.html

[6] https://givingforgood.org/goodness-journal/decade-after-csr-law-implementation-in-india-whats-changed

[7] https://cleartax.in/s/corporate-social-responsibility

[8] https://www.businessnewsdaily.com/4679-corporate-social-responsibility.html

[9] https://cleartax.in/s/marginal-relief-surcharge

[10] https://cleartax.in/s/corporate-social-responsibility

[11] https://ksrandco.in/publications/note-on-compliance-with-the-provisions-pertaining-to-corporate-social-responsibility-csr-in-pursuance-to-companies-amendment-act-2020-and-companies-csr-policy-amendment-rules

[12] https://www.india-briefing.com/news/corporate-social-responsibility-india-5511.html