Unit 3:- Corporate Liability

3.1 Corporate Social Responsibility

3.1 Corporate Social Responsibility (CSR)

Introduction & Definition

Corporate Social Responsibility (CSR) is the concept that a company has a duty to manage its business processes to produce an overall positive impact on society. Legally, it implies that companies must allocate a portion of their profits toward social, economic, and environmental development. India became the first country in the world to make CSR mandatory through legislation.

Statutory Provisions

  • Section 135 of the Companies Act, 2013: The primary provision governing CSR.
  • Schedule VII: Lists the activities that qualify as CSR (e.g., eradicating hunger, promoting education, environmental sustainability).
  • Companies (CSR Policy) Rules, 2014: Provides the operational framework.

Essential Ingredients (The 2% Rule)

Under Section 135(1), CSR provisions apply to every company (including its holding/subsidiary) that meets any of the following criteria during the immediately preceding financial year:

  • Net Worth of ₹500 crore or more; OR
  • Turnover of ₹1000 crore or more; OR
  • Net Profit of ₹5 crore or more.

Compliance Requirements:

  • Constitution of CSR Committee: At least 3 directors, including 1 independent director.
  • Spending Requirement: At least 2% of the average net profits made during the three immediately preceding financial years.
  • Board Report: Disclosure of the CSR policy and its implementation in the annual report.

Landmark Case Laws

  1. Technicolor India Pvt. Ltd. v. Registrar of Companies (2020):
    • Facts: The company failed to spend the required CSR amount and also failed to explain the reasons for the unspent amount in its Board Report.
    • Issue: Is the non-disclosure of unspent CSR funds a compoundable offense?
    • Judgment: The NCLAT held that failure to state the reasons for not spending CSR funds is a violation of Section 135. However, it allowed the compounding of the offense upon payment of a fine, emphasizing that transparency in reporting is mandatory.
  2. Mohini Jain v. State of Karnataka (1992) (Pre-Act Context):
    • Judgment: While not a direct CSR case, the Supreme Court established that the “Right to Life” (Article 21) includes the right to education. This judicial philosophy paved the way for the inclusion of “Promotion of Education” in Schedule VII as a primary CSR activity.

Legal Exceptions/Provisos

  • Profit Exemption: If a company does not meet the financial thresholds mentioned in Section 135(1) for three consecutive years, it is not required to comply until it meets the criteria again.
  • Administrative Overheads: Expenditure on “General Management and Administration” of CSR functions cannot exceed 5% of the total CSR expenditure for that year.
  • Surplus: Any surplus arising out of CSR activities cannot form part of the business profit; it must be reinvested into CSR.

Comparison Table: Voluntary CSR vs. Mandatory CSR

Feature

Voluntary CSR (Pre-2013)

Mandatory CSR (Section 135)

Legal Status

Ethical/Moral obligation.

Statutory/Legal mandate.

Spending

Discretionary (Based on whim).

Fixed at 2% of average net profits.

Reporting

Not required/Ad-hoc.

Mandatory disclosure in Board Report.

Accountability

None (No legal penalty).

Penalties for non-disclosure and non-transfer of unspent funds.

Exam-Style Conclusion

CSR in India has evolved from a philanthropic gesture into a structured legal responsibility under Section 135. For the exam, remember that the law follows a “Comply or Explain” (and now increasingly a “Comply or be Penalized”) model to ensure corporate contribution to national development goals.

 

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