Corporate Social Responsibility (CSR), Objectives, Framework and Contribution

Corporate Social Responsibility (CSR) has become an integral part of corporate governance in India. The enactment of CSR rules under the Companies Act, 2013, marked a significant milestone, making India the first country to legislate CSR spending by companies. CSR in India is not merely a voluntary practice but is mandated by law for certain categories of companies. This article explores the CSR contribution rules in India, their significance, challenges, and impact, which are essential topics for the UPSC Governance syllabus (GS II) and will help aspirants in understanding this aspect of governance and business ethics.

What is CSR?

Corporate Social Responsibility (CSR) is a self-regulating business practice where companies integrate social, environmental, and ethical concerns into their operations and decision-making processes. It reflects a company’s commitment to contribute positively to society, going beyond profit-making to promote sustainable development, support communities, and minimize environmental impacts. CSR often includes initiatives in areas like education, healthcare, environmental sustainability, gender equality, poverty alleviation, and disaster relief, aimed at benefiting society while enhancing a company’s image and stakeholder relations.

In India, CSR has a unique mandate due to Section 135 of the Companies Act, 2013, which makes it legally obligatory for certain companies to spend a specified portion of their profits on CSR activities. This law sets India apart, as most countries treat CSR as voluntary, while India is the first to implement mandatory spending requirements for eligible companies.

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Key Objectives of CSR

1. Social Impact: Addressing societal needs, such as education, health, and gender equality.
2. Environmental Responsibility: Encouraging sustainable practices and reducing environmental footprints.
3. Community Development: Engaging with local communities to promote development and welfare.
4. Ethical Practices: Ensuring fair labor practices, diversity, and inclusivity.

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The Legal Framework: The Companies Act, 2013

The Companies Act, 2013, is the primary legislation governing CSR in India. Section 135 of the Act deals with CSR obligations for certain companies based on their financial thresholds. It was introduced to encourage businesses to contribute to the nation’s social, economic, and environmental well-being.

Key Provisions under Section 135 of the Companies Act, 2013:

1. Applicability: CSR provisions are applicable to companies that meet one or more of the following criteria:
   • Net worth of ₹500 crore or more.
   • Turnover of ₹1000 crore or more.
   • Net profit of ₹5 crore or more during the immediately preceding financial year.

   If a company satisfies any of these conditions, it is required to set up a CSR committee and spend on CSR activities as per the specified rules.

2. CSR Committee: Companies falling under the CSR criteria are required to constitute a CSR committee of the board of directors. The committee is responsible for formulating and recommending a CSR policy to the board, overseeing the implementation of CSR activities, and ensuring compliance with the law.
3. CSR Spending:
   • The companies are required to spend at least 2% of their average net profit during the three immediately preceding financial years on CSR activities.
   • If a company fails to meet the CSR spending target, it must disclose the reasons for the shortfall in its annual report.
4. CSR Activities: The CSR activities should align with the 17 categories mentioned in Schedule VII of the Companies Act, 2013. These activities encompass a wide range of initiatives, such as:
   • Eradicating hunger, poverty, and malnutrition.
   • Promoting education, employment, and healthcare.
   • Environmental sustainability and conservation.
   • Gender equality and women empowerment.
   • Ensuring environmental sustainability and support for the armed forces, war veterans, and their families.

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Recent Amendments to CSR Rules

The Companies (Amendment) Act, 2019 made significant changes to CSR rules. Some of the major amendments include:

• Inclusion of Unspent CSR Amount: If a company fails to utilize its CSR funds, the unspent amount must be transferred to a separate bank account to be used within three years. After this period, the amount is transferred to a fund specified under Schedule VII.
• Mandatory Impact Assessment: Large companies are now required to undertake an impact assessment of their CSR activities, especially those that involve significant expenditure. This aims to ensure that the CSR initiatives are effective and lead to meaningful changes in the community.
• Online Portal for CSR: A dedicated online portal has been established to provide transparency and ensure better tracking and management of CSR funds.

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CSR Contribution and Its Implementation

1. Strategic Role in National Development: CSR in India serves a critical role in contributing to national priorities, such as sustainable development, poverty alleviation, and education for all. It is a strategic mechanism where private companies collaborate with the government to promote social welfare in line with the nation’s development goals. It aids in inclusive growth by bridging the gaps in infrastructure, healthcare, education, and environment.
2. Reporting and Disclosures: Under the CSR rules, companies are required to disclose the following information in their annual report:
   • The CSR policy, including the activities undertaken.
   • The composition of the CSR committee.
   • Total CSR expenditure and the areas where it has been spent.
   • If the target expenditure is not met, the reasons for the same must be explicitly mentioned.

   These disclosures ensure accountability and transparency in the use of CSR funds. Failure to meet CSR requirements or disclose adequately can attract penalties, including fines and imprisonment for the company’s officers.

3. Role of NGOs and Third-Party Implementation: Companies are allowed to implement CSR projects through Non-Governmental Organizations (NGOs) or Non-Profit Organizations (NPOs). Collaborating with credible organizations helps in leveraging their expertise in various social development areas. However, the companies are still required to maintain oversight and ensure that the funds are utilized for the intended purposes.
4. Regional and Sectoral Disparities in CSR Spending: CSR spending in India is not uniform across regions. States with developed infrastructure and business hubs like Maharashtra, Gujarat, Karnataka, and Tamil Nadu attract more CSR investments due to better access to NGOs, governmental support, and a developed business ecosystem. In contrast, backward states like Uttar Pradesh, Bihar, Chhattisgarh, and Madhya Pradesh often lag behind in receiving CSR funding.

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Challenges in CSR Contributions and Implementation

Despite its noble intentions, CSR in India faces several challenges:

1. Lack of Effective Monitoring and Impact Assessment: Many companies fail to monitor the long-term impact of their CSR activities. The absence of clear impact assessments and tracking mechanisms means that the funds may not achieve their desired outcomes. There is also a lack of a unified framework for assessing the effectiveness of CSR initiatives across different sectors.
2. Misuse of CSR Funds: In some cases, companies misinterpret the rules and channel CSR funds into activities that are technically eligible but do not align with the spirit of CSR. For instance, spending on infrastructure projects that primarily benefit the company or its employees may not constitute valid CSR.
3. Limited Participation of SMEs: Smaller companies with limited resources may not be able to participate in CSR as effectively as larger firms. The cost of implementation, lack of expertise, and unclear regulations may discourage SMEs from fully embracing CSR.
4. Geographical Imbalance: CSR spending is often concentrated in developed regions, leaving out underdeveloped and rural areas. This exacerbates regional disparities in the distribution of social welfare and development.
5. Public Perception: While CSR initiatives may help improve the public image of a company, they are often seen as an avenue for brand building rather than a genuine effort to address social issues. This perception undermines the credibility of CSR activities.

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Conclusion

CSR in India, while still evolving, has made significant strides since its introduction under the Companies Act, 2013. The government’s move to mandate CSR spending has encouraged companies to integrate social responsibility into their business models. However, challenges such as monitoring impact, regional disparities, and the lack of a comprehensive assessment framework remain.

For the effective implementation of CSR and to ensure it aligns with national development goals, it is crucial for companies, government agencies, and NGOs to work together. As India moves towards a more sustainable and inclusive future, CSR will play an essential role in bridging the gaps between economic growth and social development.

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