Corporate Social Responsibility (CSR) is no longer a choice—it’s a mandate for many Indian companies. With the implementation of Section 135 of the Companies Act, 2013, India became the first country in the world to legally mandate CSR. For corporates, ensuring compliance with CSR regulations is essential not only to avoid penalties but also to align business practices with societal and environmental goals.

This guide delves into the importance of legal compliance in CSR initiatives, the applicable laws, and how companies can effectively meet their obligations.

What is CSR?

Corporate Social Responsibility (CSR) refers to initiatives and practices that companies undertake to positively impact society and the environment. It involves more than just philanthropy—it’s about integrating ethical and sustainable practices into business operations.

Examples of CSR activities include:

• Supporting education and skill development.
• Promoting healthcare and sanitation.
• Addressing environmental sustainability through renewable energy and conservation.

Legal Framework for CSR in India

The Companies Act, 2013, outlines the mandatory requirements for CSR under Section 135. Here’s what companies need to know:

1. Applicability of CSR Provisions
   CSR compliance is mandatory for companies meeting the following criteria:
   • Net worth: ₹500 crore or more.
   • Turnover: ₹1,000 crore or more.
   • Net profit: ₹5 crore or more during the immediately preceding financial year.
2. CSR Committee
   • Companies must form a CSR Committee comprising at least three directors, including one independent director (in applicable cases).
   • The committee is responsible for formulating and recommending a CSR policy and budget.
3. CSR Spending
   • Companies are required to spend at least 2% of their average net profit over the last three years on CSR activities.
   • If the allocated amount is not spent, the company must disclose reasons in its annual report and, in some cases, transfer the unspent funds to specific government-prescribed accounts.
4. Permitted CSR Activities
   Schedule VII of the Companies Act provides a list of eligible activities, including:
   • Eradicating hunger and poverty.
   • Promoting education and gender equality.
   • Combating environmental degradation.
   • Contributions to government funds (e.g., PM Relief Fund).
5. Reporting and Disclosure
   Companies must include a CSR report as part of their annual board report, detailing CSR initiatives, expenditures, and outcomes.

Why Legal Compliance is Crucial for CSR Initiatives

1. Avoiding Penalties
   Non-compliance with CSR regulations can result in penalties under the Companies Act. Companies can face fines, and officers in default may also be penalized.
2. Enhancing Reputation
   Companies that comply with CSR laws build trust among stakeholders, including investors, customers, and employees.
3. Stakeholder Expectations
   With increasing awareness, stakeholders expect businesses to contribute positively to society while staying legally compliant.
4. Tax Benefits
   Some CSR activities offer tax exemptions under Indian tax laws, ensuring that compliance also leads to financial advantages.

Key Steps to Ensure CSR Compliance

1. Understand Applicability
   Assess if your company qualifies under Section 135 of the Companies Act.
2. Set Up a CSR Committee
   Appoint qualified directors to form a CSR committee.
3. Develop a CSR Policy
   Define the company’s goals, areas of focus, and specific CSR activities.
   Ensure the policy aligns with Schedule VII activities and is approved by the board.
4. Allocate Budget
   Calculate 2% of the company’s average net profit over the last three years to determine the CSR budget.
5. Implement CSR Projects
   Partner with NGOs, government agencies, or execute in-house projects to meet CSR objectives.
6. Monitor and Audit CSR Activities
   Regularly track the progress of CSR initiatives to ensure alignment with goals.
   Conduct internal or external audits of CSR spending and outcomes.
7. File CSR Reports
   Prepare detailed CSR reports for inclusion in the annual board report.

Common Challenges in CSR Compliance

1. Unspent CSR Funds
   Companies often struggle to fully utilize the allocated CSR budget within the financial year.
   Solution: Collaborate with experienced CSR implementation partners for efficient project execution.
2. Misalignment with Schedule VII
   Spending on activities not covered under Schedule VII may not qualify as CSR.
   Solution: Seek legal advice to ensure all initiatives are eligible.
3. Lack of Monitoring Mechanisms
   Without proper monitoring, companies may fail to meet reporting requirements.
   Solution: Establish clear tracking systems for CSR activities.

CSR in Action: Ahmedabad Businesses Leading the Way

Ahmedabad, with its diverse industries, has seen several corporates take impactful CSR initiatives. From textile companies supporting education to pharmaceutical firms addressing healthcare gaps, businesses in Ahmedabad set examples of compliance and responsibility. Ensuring CSR compliance not only enhances their reputation but also strengthens their connection with the community.

Conclusion

Legal compliance in CSR initiatives is not just about meeting regulatory requirements; it’s about driving meaningful change in society. By aligning their activities with the Companies Act, 2013, Indian businesses can contribute to societal growth while protecting their interests.

If your business needs assistance with CSR compliance, policy drafting, or implementation, AK Legal Consultants is here to help. Based in Ahmedabad, we specialize in guiding companies through the legal and practical aspects of CSR, ensuring you meet all requirements efficiently.