Regulatory Mandates for CSR

Corporate Social Responsibility (CSR) has evolved from being a voluntary initiative to a legal obligation in many countries. Recognizing the growing importance of business contributions to social development and sustainable practices, several governments have introduced regulatory mandates to formalize CSR activities. These legal frameworks are designed to ensure businesses not only focus on profits but also contribute meaningfully to societal and environmental causes. In India, the CSR mandate is among the most comprehensive in the world, laying down clear guidelines for corporate involvement in social development.

CSR Mandate Under the Companies Act, 2013 (India):

India became the first country to legally mandate CSR through Section 135 of the Companies Act, 2013, which came into effect on April 1, 2014. This law made it compulsory for certain companies to spend a portion of their profits on CSR activities. The provision applies to companies meeting any one of the following criteria in a financial year:

• Net worth of ₹500 crore or more

• Turnover of ₹1,000 crore or more

• Net profit of ₹5 crore or more

These companies are required to spend at least 2% of their average net profits (from the preceding three financial years) on CSR activities listed under Schedule VII of the Act.

Formation of CSR Committee and Policy:

As per the mandate, eligible companies must constitute a CSR Committee of the Board, consisting of at least three directors (with at least one being an independent director). This committee is responsible for:

• Formulating and recommending a CSR policy

• Recommending the amount of expenditure to be incurred

• Monitoring the implementation of CSR projects and programs

The CSR policy must outline the areas of intervention, project execution strategies, monitoring tools, and timelines.

Permissible CSR Activities (Schedule VII):

The law outlines a wide range of activities eligible under CSR, including:

• Eradicating hunger, poverty, and malnutrition

• Promoting education, especially among women and children

• Environmental sustainability and ecological balance

• Promoting gender equality and women’s empowerment

• Rural development and slum area improvement

• Health care, sanitation, and safe drinking water

• Contributions to the Prime Minister’s National Relief Fund

• Supporting differently-abled people and senior citizens

CSR funds must be used for developmental activities and not for the benefit of employees or political contributions.

Recent Amendments and Developments:

Several amendments have been made since 2013 to strengthen CSR compliance. The most notable ones:

• Penalty for non-compliance: Initially, the CSR provision was “comply or explain.” However, under the Companies (Amendment) Act, 2020, non-compliance now attracts penalties. Companies failing to spend the prescribed amount must transfer the unspent amount to a specified fund (e.g., PM CARES) within a stipulated time.

• Mandatory impact assessment: Large companies with CSR budgets exceeding ₹10 crore must conduct independent impact assessments of their CSR projects.

• CSR registration requirement: Implementing agencies must be registered with the Ministry of Corporate Affairs (MCA) to ensure better governance and transparency.

Global CSR Mandates:

Apart from India, other countries have also introduced CSR-related regulations, though not as strictly as India:

• United Kingdom: The UK’s Companies Act 2006 requires companies to report non-financial information, including social and environmental matters.

• European Union: The EU mandates large public-interest companies with over 500 employees to disclose environmental, social, and governance (ESG) data under the Non-Financial Reporting Directive (NFRD).

• France: French law mandates sustainability disclosures and human rights due diligence for large multinational corporations.

• South Africa: The King IV Report on Corporate Governance encourages integrated reporting and CSR practices, particularly focusing on stakeholder inclusivity.

Significance of CSR Regulations:

Regulatory mandates have elevated CSR from peripheral philanthropy to a strategic business requirement. These laws ensure that companies act as responsible corporate citizens, contributing to national and global development goals. Mandated CSR:

• Enhances corporate accountability and transparency

• Aligns business interests with sustainable development

• Builds stakeholder trust and improves brand reputation

• Encourages long-term value creation rather than short-term profit-making