Corporate Social Responsibility (CSR) under the Companies Act, 2013: Legal Framework, Evolution, and Jurisprudence in India | Research Work
- Legitimate Scrutiny
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Abstract
Corporate Social Responsibility (CSR) has emerged as a significant intersection between corporate governance, social justice, and sustainable development. Section 135 of the Companies Act, 2013 represents the first legislative framework in the world to mandate that eligible companies allocate at least two percent of their average net profits towards specified social causes. This statutory mandate transformed corporate philanthropy from a voluntary practice into a legally enforceable obligation aimed at promoting national development. The binding character of CSR obligations has been highlighted in Technicolor India Pvt. Ltd. v. Registrar of Companies, while Keshav Mills Ltd. v. CIT demonstrates that philanthropic engagement has historically been part of corporate practice in India. Despite these developments, several challenges continue to persist. In many instances, companies adopt a tokenistic approach by merely meeting the minimum statutory requirement. Regional and sectoral disparities remain evident, monitoring mechanisms are often inadequate, and CSR expenditure is sometimes perceived by corporations as an additional tax rather than a genuine social responsibility.
This paper critically examines the evolution of CSR in India, the legal framework governing it, the judicial interpretation of CSR obligations, and the challenges affecting its effective implementation under Indian law. The study also evaluates recent developments, including the role of CSR initiatives during the COVID-19 pandemic and their alignment with the United Nations Sustainable Development Goals (SDGs). The paper argues that while the mandatory CSR framework in India has mobilized substantial resources for social development, further reforms are necessary to ensure greater impact, accountability, and equitable distribution of benefits. In this regard, CSR should be viewed not merely as a compliance mechanism but as an effective instrument of governance and sustainable development.
Keywords: Corporate Social Responsibility, Companies Act 2013, Section 135, Corporate Governance, Sustainable Development Goals.
Introduction
Corporate Social Responsibility (CSR) is founded on the principle that large corporations owe certain non-profit obligations to society. Globally, CSR initially developed as a voluntary practice influenced by philanthropy, ethical considerations, and market pressures. However, India adopted a significant legislative approach by incorporating CSR within Section 135 of the Companies Act, 2013.
This development represents a substantial shift in corporate governance. It transforms social responsibility from a voluntary act of goodwill into a statutory obligation. Companies that meet the prescribed financial thresholds are required to allocate at least two percent of their average net profits towards CSR activities. This paper examines the historical evolution of CSR in India, the statutory framework governing it, judicial interpretations, the challenges associated with its implementation, and a comparative analysis with international practices.
Historical Evolution of CSR
Following independence, Public Sector Undertakings were expected to contribute not only to economic growth but also to the broader social development of the country. During this period, CSR was perceived as both a moral and political responsibility of corporations. In the late twentieth and early twenty-first centuries, voluntary regulatory instruments such as the Corporate Social Responsibility Voluntary Guidelines (2009) issued by the Ministry of Corporate Affairs and the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (2011) were introduced to encourage responsible corporate conduct. However, compliance with these guidelines remained inconsistent and often symbolic in nature. The limitations of voluntary compliance ultimately led to the establishment of a mandatory legal framework under the Companies Act, 2013.
Statutory Framework in India
Section 135 of the Companies Act, 2013
Section 135 of the Companies Act, 2013 establishes the statutory framework governing Corporate Social Responsibility (CSR) in India. The principal provisions include the following:
Applicability: The provisions apply to companies having a net worth of ₹500 crore or more, a turnover of ₹1000 crore or more, or a net profit of ₹5 crore or more during any financial year.
CSR Committee: Companies falling within the prescribed thresholds must constitute a CSR Committee at the board level comprising at least three directors, including at least one independent director.
CSR Policy: The committee is required to formulate a CSR policy specifying the activities to be undertaken by the company, in accordance with the activities listed in Schedule VII of the Act.
Two Percent Requirement: Companies are mandated to spend at least two percent of their average net profits of the preceding three financial years on CSR activities.
Disclosure: The CSR policy and details of the expenditure incurred must be disclosed in the Board’s Report and also published on the company’s official website.
Schedule VII Activities
Schedule VII of the Companies Act identifies the areas in which CSR activities may be undertaken. These include:
Eradication of hunger and poverty
Promotion of education and gender equality
Healthcare and sanitation initiatives
Environmental sustainability
Rural development projects
Protection of national heritage and culture
Disaster relief activities
Contributions to government funds for socio-economic development
Amendments and Rules
Several regulatory developments have strengthened the CSR framework:
The Companies (Corporate Social Responsibility Policy) Rules, 2014, issued by the Ministry of Corporate Affairs, clarified the constitution and functioning of CSR Committees and the formulation of CSR policies.
The Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020 introduced stricter compliance mechanisms. These amendments imposed penalties for non-compliance and required unspent CSR funds to be transferred either to a specified government account or to a designated account for ongoing CSR projects.
Case Laws and Judicial Approach
Judicial decisions have reinforced the mandatory character of CSR obligations.
In Technicolor India Pvt. Ltd. v. Registrar of Companies, the tribunal held that failure to constitute a CSR Committee amounted to a violation of statutory obligations, thereby affirming that CSR compliance is mandatory for eligible companies.
In Keshav Mills Ltd. v. CIT, although decided prior to the statutory CSR regime, the Supreme Court recognized charitable contributions as legitimate business expenditures, thereby reflecting the long-standing relationship between corporate philanthropy and business interests.
Through these decisions, the judiciary has clarified that CSR compliance is not merely a symbolic gesture but an integral component of modern corporate governance in India.
Problems with CSR Implementation
Despite the existence of a comprehensive legal framework, the implementation of Corporate Social Responsibility (CSR) in India continues to face several challenges. Although the statutory mandate under Section 135 of the Companies Act, 2013 provides legal support, practical difficulties persist in ensuring effective compliance and meaningful impact. The effective implementation of Corporate Social Responsibility (CSR) in India continues to face several challenges.
Tokenism: In many instances, CSR has become a mere compliance or “tick-box” exercise. Several corporations treat CSR expenditure as a strategic or reputational measure rather than a genuine commitment to social development.
Misappropriation of Funds: There have been concerns that CSR funds are occasionally diverted to cover routine business expenses or are channelled to affiliated organisations, thereby undermining the intended purpose of CSR initiatives.
Limited Board Engagement: CSR Committees within companies are often insufficiently active or engaged in their oversight functions. This lack of proactive governance reduces the effectiveness and impact of CSR programmes.
Comparative Perspectives
A comparative analysis of international practices reveals that India’s mandatory CSR framework is relatively unique.
United Kingdom: Under the Companies Act 2006, directors are not legally required to spend on CSR activities. However, they must consider the interests of stakeholders and the broader impact of corporate decisions on society.
European Union: The Non-Financial Reporting Directive requires companies to disclose information regarding their social and environmental performance. Nevertheless, it does not mandate compulsory CSR expenditure.
South Africa: The Broad-Based Black Economic Empowerment Act promotes economic participation of historically disadvantaged groups and encourages corporate contributions toward social equity and inclusive development.
India’s statutory requirement for CSR expenditure therefore represents a distinctive legal experiment in corporate regulation, as it remains one of the few jurisdictions globally that mandates corporate spending on social responsibility initiatives. This approach contrasts with the model followed in the United States, where Environmental, Social, and Governance (ESG) standards operate largely through voluntary corporate disclosures rather than statutory obligations.
Although ESG compliance in the United States is not legally mandated, institutional investors increasingly demand measurable disclosures regarding environmental, social, and governance practices before making investment decisions. In many cases, investor-driven ESG accountability mechanisms have proven more influential than statutory frameworks, as market pressures can impose direct financial consequences on corporations and thereby shape responsible corporate conduct.
Another example is the Broad-Based Black Economic Empowerment (BBBEE) regime in South Africa, established under the Broad-Based Black Economic Empowerment Act. Unlike India, where companies have the flexibility to select CSR activities within the broad categories listed under the Companies Act, 2013, the South African framework specifically requires firms to contribute towards equity participation and empowerment initiatives for historically disadvantaged groups. This approach places a stronger emphasis on structural socio-economic transformation and the upliftment of marginalized communities.
Recent Developments and Reforms
In recent years, the Government of India has undertaken several initiatives to strengthen transparency and accountability in the implementation of Corporate Social Responsibility (CSR). One significant development is the digitization of CSR reporting through the MCA21 Portal. Companies are now required to submit detailed reports regarding the CSR projects they undertake, including information on implementing agencies, project locations, and measurable outcomes. This initiative aims to enhance transparency and enable regulators, non-governmental organizations, and civil society to effectively monitor CSR activities.
Furthermore, corporations are increasingly encouraged to invest in sustainability-oriented initiatives such as renewable energy projects, afforestation programs, and carbon reduction strategies. These initiatives are closely aligned with India’s international commitments under the Paris Agreement adopted under the United Nations Framework Convention on Climate Change. By encouraging such initiatives, India has expanded the scope of CSR beyond traditional philanthropy and positioned it as a mechanism that supports broader climate governance and sustainable development goals.
At the same time, an ongoing debate persists regarding the characterization of CSR as a form of quasi-taxation. Critics argue that mandatory CSR obligations impose additional regulatory burdens on corporations by effectively redirecting corporate profits toward state-prioritized social initiatives. However, proponents contend that in a developing economy such as India—where poverty and socio-economic inequality remain significant challenges—mandatory CSR ensures meaningful participation of the private sector in nation-building and social development.
Conclusion and Recommendations
The enactment of Section 135 of the Companies Act, 2013 represents a paradigm shift in corporate governance by transforming CSR from a voluntary initiative into a statutory obligation. This framework has successfully mobilized substantial financial resources for social development. Nevertheless, several structural challenges—including tokenistic compliance, uneven sectoral distribution of CSR expenditure, and inadequate monitoring mechanisms—continue to limit the overall effectiveness of CSR initiatives.
To address these concerns, the following reforms may be considered:
Independent CSR Audits: Major CSR projects should be subject to independent third-party audits to ensure transparency, accountability, and measurable social impact.
Central CSR Database: The Ministry of Corporate Affairs should establish a comprehensive monitoring platform that consolidates CSR data and enables effective oversight of corporate initiatives across sectors and regions.
Regional Incentives: Policy incentives or tax benefits may be introduced to encourage companies to undertake CSR projects in economically underdeveloped or geographically disadvantaged regions.
Board-Level Training: Members of corporate boards and CSR committees should receive structured training on social development issues and impact assessment in order to enhance the effectiveness of CSR governance.
References
Companies Act, 2013, §135 and Schedule VII.
Companies (Corporate Social Responsibility Policy) Rules, 2014, Gazette of India.
Companies (Amendment) Act, 2019.
Companies (Amendment) Act, 2020.
Technicolor India Pvt. Ltd. v. Registrar of Companies.
Keshav Mills Ltd. v. CIT.
Ministry of Corporate Affairs, General Circular No. 21/2014 (Clarifications regarding CSR under Section 135).
Ministry of Corporate Affairs, General Circular No. 15/2020 (COVID-19 related spending as CSR).
Organisation for Economic Co-operation and Development, Guidelines for Multinational Enterprises (2011).
United Nations Global Compact, The Ten Principles (2000).
Directive 2014/95/EU.
Broad-Based Black Economic Empowerment Act.
State-Owned Assets Supervision and Administration Commission (SASAC), CSR Guidelines (2008), China.
Author: DRISHTI SHUKLA Student of Law at Indore Institute of Law.
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