CSR APPLICABILITY IN INDIA WITH LEGAL IMPLICATIONS

CORPORATE SOCIAL RESPONSIBILITY: A STEP TO BRIDGE THE WELFARE

GAP IN INDIA UNDER THE COMPANIES ACT 2013

The Ministry of Corporate Affairs released the Corporate Social Responsibility Voluntary
Guidelines in 2009.The National Voluntary Guidelines of Social, Environmental and Economic
Responsibilities of Business, released by the MCA, were followed in 2011, following the
Guidelines of 2009. The transition from a conscious CSR management to a regulated
management occurred when the Securities Exchange Board of India (SEBI) mandated the top
100 listed companies, as part of Clause 55 of the Listing Agreement, to disclose their CSR
activities in the Business. The primary objective of mandated CSR activities for corporations was
outlined in section 135 of the Companies Act 2013.1

Amendments to Section 135 of the Companies Act

Significant modifications to Section 135 of the Companies Act were made in 2019 by the
Companies (Amendment) Act in an effort to improve corporate accountability and guarantee the
efficient use of monies allotted for CSR initiatives 2. The change permits businesses to compute
their CSR expenditure commitments by taking into account the time that they haven’t completed
three fiscal years since their establishment. Additionally, it requires businesses to transfer any
unused funds to one of the funds listed in Schedule VII within six months of the end of the fiscal
year, unless they are part of an ongoing project. After the fiscal year ends, the corporation must
transfer any unused funds from an ongoing initiative to a unique account known as the “Unspent
CSRAccount” and use the funds in accordance with CSR policy within three fiscal years
following the date of transfer. Businesses that violate sub-sections (5) or (6) risk fines of up to
twenty-five lakh rupees, with a minimum of fifty thousand rupees and a maximum of twenty-five
lakh rupees. Officers of these companies who fail to comply may also face up to three years in
prison and fines of up to five lakh rupees, or both.

1
MCA, 2013, Companies Act, 2013, Ministry of Corporate Affairs, Government of India, New Delhi.
http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf.
2
Mohd. Ahmed (Minor) supra note 85.
 MILESTONE IN EVOLUTION OF CSR IN INDIA

SOURCE: COMPILED BY THE AUTHOR

2013 2014 2015 HLC on CSR (2015) under

Chairman Anil Baijal recommend
Enactment of Section 135 of CA, 2013 on
on CSR framework
Companies Act, 2013 CSR comes into force

2016 2016 2017

Company Law Committee Companies (Amendment) bill Companies (Amendment) Act,
reviews the recommendation 2016 2017
of HLC 2015 for adoption

2018 Second HLC on CSR
consitutted under
Chairmanship of Injeti
Srinivas to review CSR
framwork
2018 Zero Draft of National 2018 Companies (Amendment)
Action Plan on Business and Act, 2017 was made effective
Human rights released by MCA

2019 Companies 2019 2020 Companies (Amendment)

(Amendment) Bill, 2019 Act, 2020
Companies (Amendment) Act,
was introduced
2019

CORPORATE SOCIAL RESPONSIBILITY- RULE

CSR RULE HAS BEEN FRAMED IN 2014 STATING AS:-

Rule (3) 1) All companies, including their holding or subsidiary companies, and
foreign companies defined under section (42) of section 2 of the Act that
have branch offices or project offices in India and meet subsection (1) of
section 135 must comply with section 135 and these rules: The balance sheet
and profit and loss account will indicate a foreign firm's net worth, turnover,
and net profit under clause (a) of sub-section (1) of section 381 and section
 198.
2) A firm that is not covered by subsection (1) of section 135 of the Act for
three consecutive financial years is not required to create a CSR Committee
or follow sub-sections (2) to (5) until it meets subsection (1).
Rule (4) (1) Except for ordinary business operations, the company shall conduct CSR
projects, programs, or activities (new or existing) according to its CSR
Policy.
(2) The business's Board may choose to carry out its CSR activities, which
the CSR Committee has authorized, through a registered trust, society, or
company established by the company, its holding company, subsidiary, or
associate company under section 8 of the Act, or by other means. 3 A trust,
society, or firm that is not created by the corporation or its holding,
subsidiary, or associate company must have three years of experience with
such programs or projects.
(3) A company can also partner with other companies to carry out projects
or CSR activities so their CSR Committees can report independently,
following these requirements.
(4) Under paragraph (5) of section 135 of the Act, only Indian CSR projects,
programs, or activities comprise CSR spending.
(5) CSR projects, programs, and activities that benefit only firm employees
and their families are exempt from Section 135 of the Act. Institutions with
at least three financial years of experience can help companies strengthen
their personnel and implement agencies' CSR.
(6) The Companies (Corporate Social Responsibility Policy) Amendment
Rules, 2014, effective 12-9-2014, restrict such charges, including
administrative overheads 5% of annual corporate CSR spending.
(7) Section 182 political party donations are not CSR activities 129.4
Rule (5) (1) Rule 3 companies will form the CSR Committee: A foreign company
covered by these rules must have at least two CSR Committee members,
while a public company that is not listed or a private company covered by
3
Id at 380.
4
Mohd. Ahmed (Minor) supra note 85.
 section 135(1) of the Act that is not required to appoint an independent
director under section 149(4) must have its CSR Committee without such
director.
(2) The CSR Committee shall provide a clear monitoring structure for firm
CSR projects, programs, and activities.
Rule (6) (1) The company's CSR Policy will specify Schedule VII-covered CSR
initiatives or programs, their implementation timeframes, and a monitoring
methodology. The Board of Directors must ensure that the Corporate Social
Responsibility Policy's actions comply with Schedule VII of the Act for non-
routine CSR activities.
(2) Business revenues will not include extra income from CSR projects,
programs, and activities.5

Rule (7) CSR expenditures cannot contain items that do not comply with Schedule
VII of the Act. CSR expenditures include corpus donations for Board-
approved CSR projects or programs recommended by the CSR Committee.

Rule (8) (1) CSR reports will be in Annexure for fiscal years beginning after April 1,
20146.
(2) A foreign corporation's financial sheet under paragraph (b) of sub-
section (1) of section 381 should include and CSR report7
Rule (9) The Board of Directors will approve CSR Policy proposals from the CSR
Committee. The company's website will post the policy if relevant, as per
Annexure 145.
CSR policy Corporate Social Responsibility disclosures shall follow the
Companies (Corporate Social Responsibility Policy) Rules, 2014 annexure,
under Rule 9 of the Companies (Accounts) Rules, 2014.

FORCASTING IMPACT: EMBRACING A GLOBAL CSR POLICY

5
Mohd. Ahmed (Minor) supra note 85.
6
SINGH supra note 1.
7
SINGH supra note 1.
USA

Due to variations in leadership, viewpoint, financial incentives, governmental restrictions, and

community pressures, CSR practices in the US are developing at varying rates within industries.
In the US, CSR was traditionally believed to mean philanthropy. However, more recent
definitions of CSR have expanded to include corporate citizenship and recognize the significance
of other stakeholders, such as the government and civil society. The US government takes a back
seat when it comes to rules governing US corporations and CSR initiatives, which encourages
companies to engage in society on a voluntary basis. Beyond the requirements of financial
reporting, corporate social responsibility encompasses philanthropic and charity contributions as
well as cause-related marketing.8

Through rules governing certain outcomes and procedures of business activity, US law offers
business Social Responsibility (CSR) a number of legislative protection mechanisms. Concerns
regarding corporate actions that negatively impact society, such as environmental degradation
and product safety, are growing among Americans. American regulatory bodies have started
requiring pertinent restrictions in order to safeguard constituents against unfavourable outcomes.
There are several examples of CSR laws, including the Toxic Substances Control Act, Safe
Drinking Water Act, Clean Air Act, Clean Water Act, and National Environmental Protection
Act.

These instances of CSR laws support Greenfield’s argument that a number of laws demand or
promote “certain results” for CSR. Nonetheless, it is crucial to recognise that because corporate
law focuses on internal issues like securities, responsibility, and financial and disclosure laws,
these examples do not belong in its purview. All of these legal strategies for averting social
damages brought about by business operations are included in CSR law.9

With an emphasis on business decisions, disclosures, and accountability inside a standard

corporate legal framework, a plethora of laws and regulations set limits intended to enhance the
efficacy of corporate social responsibility. The Securities and Exchange Commission Acts,
Securities Laws, and the Sarbanes-Oxley Act are a few examples. This chapter looks at situations
8
Chen, S. And Bouvain, P. (2009). Is Corporate Responsibility Converging? A Comparison of corporate
responsibility reporting in the USA, UK, Australia andGermany. Journal of Business Ethics. 87, pp. 299-317.
9
Krishnamurthy, V. (2014). Mandatory Social and Financial Reporting: Coming Soon to the European Union.
https://www.csrandthelaw.com/2014/03/03/Mandatory-social-and-financial-reporting-coming-soon-to-the-european-
union/
where US laws promote or mandate businesses to follow particular procedures or actions that are
advantageous to constituency wealth.

This strategy is rejected by proponents of American corporate social responsibility (CSR), who
contend that US laws should provide other stakeholders in addition to shareholders the ability to
modify the internal structure of their companies and receive protection in relevant areas.

UNITED KINGDOM

Corporate responsibility is defined by the UK government as the voluntarily undertaken by

businesses to improve and manage their effects on the economy, the environment, and society.
The 2014 study from the Department for Business Innovation & Skills does, however, recognize
that different firms may choose different strategies when it comes to putting CSR into practice.
Thirty organizations demanded in 2021 that corporate accountability rules be introduced,
requiring companies to examine and report on how they are safeguarding the environment and
human rights across their supply chains.

Directors must take into account the interests of workers, customers, suppliers, the community,
and the environment when pursuing the interests of shareholders, as per Section 135 of the UK
Companies Act 2006.10 But this does not mean that CSR becomes a duty or obligation under the
law. The law provides no concrete standards or benchmarks, nor does it provide effective
methods.

CSR needs to become ingrained in an organization’s culture. The earlier problem with CSR
stemmed from the perception that it was a fragmented idea that applied to separate aspects of an
organization’s management and the local community in which it functions. Since the revised
definition of ESG expressly targets the environment and provides companies with a route to a
more comprehensive form of sustainability, many organisations have been shifting towards an
ESG compliant manner of doing things. A concept of holistic value related to the environment
and society has superseded profit-driven enterprise.11

10
Idowu, S. O. (2009). “The United Kingdom of Great Britain and Northern Ireland.” In S. O. Idowu and W. L.
Filho. Global Practices of Corporate SocialResponsibility, 11–36, Springer.
11
Davies, S. (2014). CSR- more than the financialBottom line.
http://www.mondaq.com/australia/x/349792/Corporate+Governance/corporate+social+responsibility+CSR+more+th
an+the+financial+bottom+line
The interdependence of environmental and social dimensions has been exemplified by the
climate emergency and social events such as COVID-19. 12 Governments now understand that the
prior strategy of passing laws that only target one aspect of sustainability is limited. In order to
combat global social injustice and climate change, a new strategy calls for the principled
application of long-standing ideas of accountability and duty towards both the environment and
other people.

GERMANY

Commercial and corporate law now incorporates the German CSR Directive, with new sections
289b to 289e and 315b to 315d HGB essentially representing a “identical” transposition.
Regardless of their attitude towards the capital market, corporations, cooperatives, limited
liability commercial partnerships, big credit institutions, and insurance companies are all covered
by these regulations.13 More than half of the 522 German organisations that were required to
register at the beginning of 2018 were banks and insurance companies.

To save small and medium-sized businesses the extra administrative and financial strains
imposed by the reporting requirement, the German lawmakers chose not to expand the reporting
duty’s application beyond the CSR Directive to organisations below these levels. Only a
corporation’s individual management report is subject to Sections 289b HGB; duties pertaining
to group management reports of parent businesses are transferred to Sections 315b HGB.14

The management report, which is a distinct reporting document from the yearly financial
statements, is formally related to non-financial reporting both within the regulatory framework
and outside of it. Businesses impacted by the CSR-RUG have two options: they can either
include their “nonfinancial statement” in a discrete part or disperse information over the
management report, categorised by topic. If the “non-financial report” is published in the Federal
Gazette or on the company’s website within four months of the balance sheet date and is
mentioned in the management report, it can be included as a distinct document.

12
UNDP, (2007). Baseline Study on CSR Practices in the New E.U. Member States And Candidate Countries.
Pp.20–25.
13
Auger, P. , Devinney, T. M. , Louviere, J.J. Burek, P. F.,Do social product features have value to
consumers?,International Journal of Research in Marketing, Vol. 25, No. 3, pp. 183-191
14
Jonker, J., Stark, W., Tewes, S., Corporate Social Responsibility und nachhaltige Entwicklung. Einführung,
Strategie und Glossar, 1th Edition, Springer Verlag, Heidelberg, Germany
Information on at least five themes must be included in the non-financial statement:
environmental, employee and social issues, respect for human rights, and anti-corruption issues.
The list of possible environmental goals is further expanded by the CSR Guidelines, which
include material disclosures on energy use and its effects on the environment, direct and indirect
atmospheric emissions, waste management, the use and protection of natural resources,
transportation-related environmental impacts, environmental impacts from the use and disposal
of goods and services, and the development of green goods and services.

Section 289c para. 3 HGB establishes what information must be included in the non-financial
declaration. This information includes a list of non-exhaustive details that are required to
comprehend the company's status, business outcomes, and non-financial aspects. The list
contains information about the policies the company has pursued, the due diligence procedures
that have been put in place, the results of those procedures, the main operational risks that could
have a negative impact on non-financial aspects of the company, the main operational risks, the
most important non-financial performance indicators that are pertinent to the company's business
activities, and references to and explanations of amounts reported in the annual financial
statements.15

When creating their non-financial statement, corporations are permitted by Section 289d HGB
to utilise the voluntary self-commitment structures that are already in place. The OECD
Guidelines for Multinational Enterprises, the GRI G4 Sustainability Reporting Guidelines,
EMAS, and the UN Global Compact are a few examples of these frameworks. Companies,
however, have to disclose whether or not they used these frameworks and if not, why not. 16
Beyond the framework, the non-financial statement needs to include information on
environmentally relevant performance indicators, like overall energy performance, energy
consumption from non-renewable sources, greenhouse gas emissions, resource extraction,
impacts on biodiversity and natural capital, and waste management.

The non-financial statement’s required content demonstrates a hybrid nature that is already
specified in the CSR Directive. Under commercial law, it is not entirely separate from the
15
Rommelspacher, M., Corporate Social Responsibility aus Konsumentensicht. Entstehung der CSR-Beurteilung
und Ausgewählte Erfolgswirkungen, 1th Edition, Gabler Verlag, Heidelberg, Germany,
16
Öberseder, M., Schlegelmichl, B. B., Gruber, V., „Why Don`t Consumers Care About CSR?“: A Qualitative
Study Exploring the Role of CSR in Consumption Decisions, Journal of Business Ethics, Vol. 194, No. 4, pp. 449-
460,
accounting and business information functions of the reporting system. 17 The effects on items
other than the firm mentioned in section 289c para. 2 HGB are merely a prerequisite; they do
not, by themselves, establish a need for reporting.

CANADA

Regarding the actions of multinational firms that could have a negative impact on human rights,
there is a gap in global governance. Numerous multinational firms have the impunity to either
directly violate human rights or to cooperate in such violations. This issue is not new to Canada,
which is home to 103 medium- to large-sized oil and gas corporations, many of which operate in
developing nations, and 75% of the major exploration and mining businesses in the world. 18 The
contentious involvement of Talisman Energy Ltd. In Sudan between 1998 and 2003 elevated this
matter to the fore of Canadian public discourse.

Individuals, associations, and non-governmental organisations have filed complaints in legal

proceedings and other forums, accusing big and minor participants in Canada’s extractive
industry of detrimental behaviour, including violations of human rights. 171 high-profile
incidents between 1999 and 2009 in which international mining and exploration companies were
involved in community conflict, human rights abuses, unlawful or unethical practices, or
environmental degradation in a developing country were identified in a report commissioned by
the Prospectors and Developers Association of Canada in 2009 that was leaked in 2010.
According to the report, there were four times as many mining mishaps involving Canadian
businesses than there were involving companies in India, Australia, the United States, or the
United Kingdom (33%).19

States have chosen to focus on policy and soft norms rather than taking a legal approach to this
issue, both locally and internationally. The Norms on the Responsibilities of Transnational

17
Singh, J. J., Iglesias, O., Batista-Foguet, J. M., Does Having an Ethical Brand Matter? The Influence of Consumer
Perceived Ethicality on Trust, Affect and
Loyalty, Journal of Business Ethics, online version:
http://www.springerlink.com/content/85764272x8262163/fulltext.pdf
18
“Backgrounder: Extractive Industries: The Canadian Advantage at Home and Abroad” Natural Resources Canada
(18 November 2014), online: Government of Canada <http://news.gc.ca/web/article-En.do?nid=905719>.
19
Office of the Extractive Sector Corporate Social Responsibility Counsellor, “Registry of Request for Review,”
October 28, 2013, Foreign Affairs, Trade and Development Canada, online
http://www.international.gc.ca/csr_counsellor-conseiller_rse/Registry-web-based enregistrement.aspx?lang=eng.
Corporations and other Business Enterprises with Regard to Human Rights, a document that
proposed a treaty that, had it been adopted, would have directly imposed binding human rights
obligations on corporate actors, was rejected in 2004 by the UN Commission on Human Rights,
which was the forerunner to the UN Human Rights Council.20

Canada has chosen a policy stance on business behaviour overseas that is detrimental to human
rights. The administration has continuously rebuffed requests for legislation to address this issue.
The House of Commons Standing Committee on Foreign Affairs and International Trade
expressed concern in a 2005 report that Canada lacked legislation to guarantee that Canadian
mining firms’ operations in developing nations adhered to human rights norms. The Committee
demanded that the Canadian government create monitoring systems, incentives to encourage
mining companies to operate in “a socially and environmentally responsible manner and in
conformity with international human rights standards,” and “establish clear legal norms in
Canada to ensure that Canadian companies and residents are held accountable for their actions.”

Two initiatives have been released by Canada to address the actions of its extractive industries
that operate overseas. A long-awaited response to the Roundtables Advisory Group Report was
issued by the government in 2009 under the title Building the Canadian Advantage: A CSR
Strategy for the Canadian International Extractive Sector. 21 The CSR Counsellor, a toothless
dispute resolution system, was established by the policy, which mainly pushed extractive
corporations to accept or sign on to particular intergovernmental and multistakeholder projects.
In October 2010, the bill was narrowly defeated at its third reading.

CSR VIOLATIONS

In India, the Companies Act, 2013 and its implementing rules serve as the foundation for
violations of CSR. These consist of quantitative non-compliance with obligatory CSR spending
standards, improper funding distribution, non-formation of CSR committees, and insufficient and
non-disclosing reporting. The most obvious criterion is quantitative non-compliance, where
businesses don’t spend the minimal amount of 2% of their average net income for the three years
prior to the current year. A more complex criterion is misallocation of funds, since businesses
20
Astrid Sanders, “The Impact of the “Ruggie Framework” and the United Nations Guiding Principles on Business
and Human Rights on Transnational human Rights Litigation” (2014) LSE Legal Studies Working Paper No
18/2014, at 13.
21
“Background: The Canadian Advantage in the Extractive Industries at Home and Abroad” Natural Resources
Canada, http://news.gc.ca/web/article-en.do?nid=905719, is available online: Government of Canada.
must coordinate their CSR initiatives with the industries specified in Schedule VII of the
Companies Act.22 It is improper to form or give sufficient authority to CSR committees; this is a
procedural infraction that suggests there are insufficient internal oversight systems. Inadequate
reporting or the non-disclosure of CSR operations is illegal, and businesses are required to
release thorough CSR reports so that interested parties can obtain complete data.

PENALTIES

Penalties for failing to transfer unspent CSR monies are outlined in the corporations Act and
include fines for both corporations and officers in default. Even if unused money are
subsequently moved to Schedule VII funds or Unspent CSR Accounts, post-transfer penalties
still apply. The only provision that addresses penalties for failing to transfer unspent CSR funds
is Section 135(7). Non-adherence to additional clauses, including Sections 134(8), 450, and
454(8), pertains to violations of the Companies Act/Rules or terms and limits that do not carry
particular penalties.23 If adjudicating officers or regional directors fail to pay fines within ninety
days, there may be jail time, corporate fines, fines ranging from INR 25,000 to INR 1 lakh, or
both.

ROLES AND LIABILITIES OF DIRECTORS

An organization’s CSR policy, which is authorised by the business and has to be compliant with
regulatory requirements and company values, is heavily influenced by the Board. Directors are
required to make the policy available to stakeholders and declare it in the business report. To
ensure that at least 2% of average net earnings over the previous three years is allocated to CSR,
the Board supervises the implementation of CSR activities. Penalties may result from
deficiencies, which must be explained in the annual report. The Board, in particular the directors,
is responsible for overseeing CSR money and assessing the results of programmes. In order to
ensure openness for stakeholders, the Board shall include an explanation in the annual report if
the company is unable to meet the standards for CSR spending.24

CONCLUSION
22
Neetha Rose C D and Aparna Radhakrishnan, “Evolution and Current Status of CSRRegulation in India”, 1
SSRNEJ 8996 (2020).
CSRunder Section 135 of Companies Act 2013, available at: https://cleartax.in/s/corporate-social-responsibility
23
Penalising Companies for CSR Non-Compliance Is like Killing a Fly with a Sledgehammer, available at:
https://thewire.in/business/csr-noncompliance-companies-act
24
Krina Majithiya, “CSRin 2021: Comply or Pay Penalty”, 1 IRCCL 1–10 (2021).
The concept of economic responsibility, which refers to the major role that corporations play in
modern society, serves as the basis of the CSR pyramid. Producing goods and services that meet
the requirements and desires of customers while maintaining a satisfactory profit margin is the
task at hand here. Due to the fact that corporations are required to “comply with the laws and
regulations imposed by federal, state, and municipal governments,” the next level of
accountability is legal responsibility.

The third and final degree of accountability is known as ethical responsibility, and it is described
as “those behaviours and actions that, despite not being codified in law, are expected or
disapproved of by members of society.” At the very pinnacle sits philanthropic responsibility,
which can be understood as “corporate actions that are a reaction to society’s expectation that
corporations be decent corporate citizens.” Visser (2008) offered a revised CSR pyramid for
developing nations, with economic obligation at the base, followed by philanthropic, legal, and
ethical responsibilities in ascending order. This was done in acknowledgement of the
significance of CSRin the context of emerging nations. Others in the academic community
distinguish environmental responsibility as a distinct layer of CSRin less developed countries.
According to the findings of a content study of CSR definitions, the five aspects of stakeholder,
social, economic, voluntary, and environmental responsibility make up the concept of corporate
social responsibility.

The participation of all stakeholders is essential to CSR. Without the aid of its stakeholders, a
company would not be able to function, as these individuals have a significant interest in the
firm’s operations and the success of the company. According to Freeman, a group or individual
is considered a stakeholder if it is “any group or person that can affect or is affected by the
achievement of the organization’s objectives.” It is generally accepted that stakeholders will
either benefit or suffer as a result of corporate actions, and businesses have the ability to either
respect or violate the rights of their stakeholders. A company could consider its customers,
employees, management, shareholders, governments, and nongovernmental organisations to be
its stakeholders.

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