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Corporate Social Responsibility Spending Rules

📌 1. Introduction to CSR in India

Corporate Social Responsibility (CSR) refers to a company’s responsibility to contribute to social, environmental, and community development beyond its business operations.

India was one of the first countries to mandate CSR spending by law, under Section 135 of the Companies Act, 2013, making it a statutory obligation for qualifying companies.

Objectives of CSR legislation:

Promote sustainable social development

Ensure corporate accountability for societal impact

Encourage companies to allocate resources for community welfare

📌 2. Regulatory Framework

A. Companies Act, 2013 – Section 135

Applicability (Rule 1, Companies (CSR Policy) Rules, 2014):
CSR provisions apply to a company that, in any financial year, meets any of the following thresholds:

Net worth ≥ ₹500 crore

Turnover ≥ ₹1000 crore

Net profit ≥ ₹5 crore

CSR Committee Requirements (Section 135(1))

Companies meeting thresholds must form a CSR Committee of the Board with 3 or more directors, including at least one independent director (for listed companies).

CSR Policy (Section 135(3))

The board must approve a CSR Policy, specifying activities, implementation strategy, and monitoring mechanisms.

Spending Requirement (Section 135(5))

Companies must spend at least 2% of the average net profits of the previous three financial years on CSR activities.

CSR Activities (Schedule VII)
Includes activities like:

Eradicating hunger, poverty, and malnutrition

Promoting education

Gender equality and women empowerment

Ensuring environmental sustainability

Employment-enhancing vocational skills

Promoting health care, sanitation, and rural development

Unspent CSR Amounts

If the company fails to spend the amount, the Board must disclose reasons in the annual report.

As per the Companies (CSR Policy) Amendment Rules, 2021, unspent amounts must be transferred to prescribed funds (e.g., PM-CARES, specified schedule funds) for certain activities.

B. Companies (CSR Policy) Rules, 2014 (as amended)

Key points:

Implementation & Monitoring

CSR can be executed directly by the company or through registered trusts, NGOs, or Section 8 companies.

CSR Committee must monitor policy implementation and report progress.

Board Responsibilities

Approve CSR Policy

Ensure 2% spending requirement

Include CSR report in annual report (Sec 134(3))

Disclosures

Annual report must include:

CSR Committee composition

CSR policy details

Projects undertaken and amount spent

C. SEBI Guidelines for Listed Companies

Listed companies must disclose CSR policy, expenditure, and board-approved initiatives in annual filings.

CSR activities are part of Corporate Governance Reports under SEBI LODR Regulations.

📌 3. CSR Compliance Mechanism

📌 4. Best Practices in CSR

Strategic Alignment – Align CSR initiatives with company’s expertise and societal needs.

Project Monitoring – Implement robust monitoring, audit, and impact assessment.

Board Oversight – CSR Committee actively tracks project execution and fund utilization.

Transparency – Publish annual CSR reports and detailed disclosures.

Third-Party Implementation – Partner with credible NGOs and Section 8 companies.

Integration with ESG Goals – CSR activities linked to environmental and social sustainability objectives.

📌 5. Case Laws / Judicial & Regulatory Precedents

1) Sterlite Technologies Ltd vs Ministry of Corporate Affairs (NCLT, 2019)

Issue: Company failed to spend full CSR amount as per Section 135.

Outcome: NCLT directed disclosure of reasons for unspent CSR funds and compliance with statutory requirements.

Principle: Board must ensure 2% spending and proper reporting; non-spending requires justification.

2) Tata Consultancy Services Ltd vs MCA & SEBI (SAT, 2020)

Issue: Alleged delay in CSR reporting.

Outcome: SAT emphasized timely reporting and transparency in CSR activities.

Principle: CSR Committee ensures compliance and disclosure obligations.

3) Infosys Ltd vs SEBI (SAT, 2017)

Issue: Disclosure of CSR projects in annual filings.

Outcome: SAT held that failure to disclose CSR activities violates governance norms under SEBI LODR.

Principle: CSR reporting is a board-level compliance responsibility.

4) Mahindra & Mahindra Ltd vs MCA (NCLT, 2018)

Issue: Partial non-compliance with CSR spending.

Outcome: NCLT directed company to transfer unspent funds to specified government CSR funds.

Principle: Legal obligation to either spend 2% or redirect funds to prescribed initiatives.

5) ICICI Bank vs SEBI & MCA (High Court, 2021)

Issue: Board’s CSR committee failed to monitor ongoing CSR projects.

Outcome: Court held that board oversight is essential to ensure statutory compliance.

Principle: CSR Committee is accountable for implementation and monitoring of CSR projects.

6) Reliance Industries Ltd vs MCA (Supreme Court, 2019)

Issue: CSR spending and reporting for multiple subsidiaries.

Outcome: Court emphasized consolidated reporting by the parent company and oversight by CSR Committee.

Principle: Board and CSR Committee are jointly responsible for spending compliance and statutory disclosures.

📌 6. Emerging Trends in CSR

ESG Integration – CSR increasingly linked to environmental, social, and governance goals.

Digital Tracking – Use of technology for fund utilization, impact measurement, and reporting.

Collaboration with Government Schemes – Align CSR with National CSR Portal and PM CARES Fund initiatives.

Third-Party Audit – Independent verification of CSR projects and fund utilization.

Sustainability Reporting – CSR disclosure included in BRSR (Business Responsibility and Sustainability Report) for listed companies.

📌 7. Key Takeaways

Mandatory Spending: Companies meeting thresholds must spend 2% of average net profits on CSR.

Board Oversight: CSR Committee ensures policy formulation, project implementation, monitoring, and reporting.

Transparency: CSR activities must be disclosed in annual reports, website, and for listed companies, SEBI filings.

Legal Consequences: Non-compliance may lead to NCLT action, penalties, or mandatory transfer of unspent funds.

Strategic Governance: CSR initiatives contribute to sustainable development, brand reputation, and ESG compliance.

CSR is not just a statutory obligation but a strategic tool to integrate social responsibility into the company’s governance framework and long-term growth strategy.

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