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CSR under the Companies Act 2013

Under the Companies Act, 2013, every company (including a foreign company which has its branch or project office in India) which has i) net worth of at least Rs. 500 crores, or ii) turnover of at least Rs. 1000 crores, or iii) a net profit of at least Rs. 5 crores during any financial year, is required to mandatorily allocate at least 2 percent of its profits (calculated as per the average net profits for the past three financial years) to CSR initiatives. 

Which initiatives qualify as CSR initiatives? 
The activities enumerated in Schedule VII of the 2013 Act qualify as CSR initiatives and are listed below:
  1. eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water:
  2. promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
  3. promoting gender equality, empowering women, setting up homes and hostels for women and orphans;
  4. setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
  5. ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water;
  6. protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts:
  7. measures for the benefit of armed forces veterans, war widows and their dependents;
  8. training to promote rural sports, nationally recognised sports, para-olympics sports and Olympic sports;
  9. contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Caste, the Scheduled Tribes, other backward classes, minorities and women; contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
  10. rural development projects
  11. slum area development
Salaries paid to the company’s regular CSR staff and volunteers will be considered as part of CSR expenditure.

The scope of the above listed initiatives must be interpreted liberally, taking into account the broad essence of the above enlisted initiatives.

What initiatives do not count as CSR contributions?
  • Any contribution made to a political party, either directly or indirectly will not be considered as CSR contribution.
  • CSR contributions cannot be made in respect of activities which are undertaken by the company in the normal course of its business.
  • Any contribution made only for the benefit of the employees of the company or their family will not be considered as CSR contribution.
  • Any one-off event like marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes, which is not part of the CSR project/programme will not be considered as CSR contribution.
  • Expenses incurred by the company for the fulfilment of any Act/Statute or regulations (such as labour laws, land acquisition laws) will not be considered as CSR contribution.
How should a company which is required to make CSR contributions comply with its obligations under the law?

Step 1: The Company should establish a CSR Committee of the Board of directors.. The Committee must recommend the amount to be spent on CSR amount. 

Step 2: The Company should create a CSR Policy specifying the following:
  1. List of activities (from amongst those specified in Schedule VII of the Companies Act) which can be undertaken)
  2. A monitoring process for such activities.
The above two requirements are mandatorily required under a CSR Policy as per the rules. In addition, further details may also be required. It is suggested that detailed criteria for identification and evaluation of prospective CSR projects are identified. The company may also consider only such CSR activities which are strategically aligned with its business.

Note that any activities benefiting the employees of the company or their family members exclusively will not qualify as valid CSR activities under the act. However, ancillary or incidental benefits of a CSR activity can always ensue to the employees or their families.

For example, consider that a company has spent INR 2 crores of its CSR corpus towards establishment or maintenance of a park in a city where its corporate office is situated. This park may also benefit the employees or their families by giving them an opportunity for recreation in the park, but it can be considered a CSR activity (since it benefits the environment, which can also be enjoyed by other residents of the city). 

Step 3: Preparation of Annual Report on CSR activities and inclusion of the CSR policy

An annual report should be prepared by the Board explaining the CSR activities undertaken from 1st April to 31st March (i.e. a financial year) and presented as part of the Board’s report as per the format provided in the annexure. The CSR policy of the company should also be disclosed in the report.

Foreign companies operating in India should include the CSR report as an annex to their balance sheet.

Step 4: In case the company has a website, the CSR policy (and activities) of the company should be disclosed on the website.

Who is responsible for identification of specific CSR initiatives for allocation of funds and subsequent allocation of the funds? 

The profits must be spent on CSR initiatives as per a CSR Policy framed by a special committee of the board (called the Corporate Social Responsibility Committee) comprising of at least 3 directors, of which at least 1 must be an independent director. A private or an unlisted public company which is not required to appoint an independent director is exempted from appointing an independent director, or if it is a private company having only two directors, they are allowed to appoint only two such directors to the Committee. Hence, it is possible for different companies to have different CSR policies. As per the 2013 Act, a company should give preference to the local area and areas around it where it operates for spending the amount earmarked for Corporate Social Responsibility activities.

The CSR Policy must be approved by the Board. The CSR Committee of the Board must monitor implementation of the policy, which must be executed by the Board.


Note that as per the Companies Act, it is not necessary for a company to actively participate in CSR initiatives by itself – it is only required to make a financial contribution of 2 percent profits to CSR initiatives. The initiatives could have been started by other entities as well. It can even collaborate  with other companies while running its initiatives. 

A project will be considered a CSR project only when it is undertaken through a registered society, a registered trust or a section 8 company (non-profit company). Such entities can be created by the company itself or its parent / sister companies or along with other companies or their sister companies. The entity must exclusively be created for the purpose of undertaking CSR activities or a special corpus has been created for executing a CSR initiative (as mentioned earlier).

In case the vehicle is not established by the company or its parent / sister concerns but is an unrelated entity, it must have an established track record of undertaking similar projects for at least three years. Can a company channelize profits from the CSR activity into its own business activities? As per the rules, the surplus from any CSR activities cannot be part of business profits of the company – therefore, they must be kept separate.

Transparency about CSR Policies

The annual report of the Board of Directors (presented to the shareholders at the AGM of the company alongwith other financial statements) must disclose the composition of the Corporate Social Responsibility Committee, CSR Policy, activities undertaken and expenditure made on such activities in a specified format. The CSR Policy must also be placed on the company’s website.

What are the consequences of non-compliance?

The Companies Act, 2013 imposes an obligation on the Board, that it should disclose the reasons for not spending the amount in case of any non-compliance in the report of directors presented to the shareholders of the company at an AGM. However, in case of failure to provide details of CSR policies developed and implemented by the company (or in case of mis-statements) in the report of the Board of Directors, the company and its officers who are responsible for the omission will also be liable to pay fine ranging from INR 50,000 to INR 25,00,000. In addition, they may face imprisonment of upto 3 years.

Though there is no specific penalty provided for non-compliance with the spending requirement on CSR under Companies Act, 2013. However, Section 450 of the Companies Act, 2013 which is an overarching provision for punishing a company or its officers in case no specific punishment is provided for a particular offence in the Act states, any company or the every officer of the company who are responsible for the omission will be liable to pay a fine of INR 10,000 along with INR 1,000 per day after the first day of non-compliance. This provision can be applicable for not spending the mandatory contribution to be made for CSR under Companies Act, 2013. Though the applicable penalty is quite low in comparison with the liability under the Act; non-spending of mandatory contribution might lead to reputational risks for an organisation. 

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