Corporate Social Responsibility
Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013 mandates eligible Indian companies to spend at least 2% of their average net profit of the preceding three financial years on specified CSR activities through a structured board-level governance framework.
India became one of the first countries in the world to make Corporate Social Responsibility (CSR) expenditure a statutory obligation when the Companies Act, 2013 introduced Section 135. Unlike voluntary CSR frameworks in most other countries, Indian law requires qualifying companies — those with a net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more during any of the immediately preceding three financial years — to spend at least 2% of their average net profit of the preceding three years on CSR activities.
Eligible companies must constitute a CSR Committee of the board, consisting of at least three directors including at least one independent director. Smaller companies (not required to have an independent director) are exempt from this requirement but must still constitute the committee. The CSR Committee formulates and recommends the CSR policy and monitors its implementation.
CSR activities must be undertaken in the areas specified in Schedule VII of the Companies Act, which includes eradicating hunger and poverty, promoting education, gender equality, environmental sustainability, rural development, disaster relief, protection of national heritage, and several other social objectives. Activities that benefit only employees of the company or their families, or contributions to political parties, do not qualify as CSR.
The 2019 and 2021 amendments to the CSR rules significantly tightened compliance requirements. Companies that fail to spend the prescribed CSR amount must transfer the unspent amount to a designated government fund within specified timelines, or to a separate unspent CSR account if the project is ongoing. Persistent non-compliance can attract penalties.
From an investment perspective, CSR disclosures in the annual report and the Board's Report provide insight into a company's broader stakeholder engagement philosophy. ESG-focused investors increasingly analyse not just the quantum but the nature and impact of CSR spending as part of their sustainability assessment.