Corporate social responsibility

Indian Economy glossary

Also called: CSR · Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Class 8, Ch 7 "Factors of Production"

Meaning

Corporate social responsibility (CSR) is a company's duty to use part of its profit for the good of society and nature. In India, it is a legal duty under s. 135 of the Companies Act, 2013. Any company that meets any one of three size limits in the immediately preceding financial year must spend on activities listed in Schedule VII of the Act [2].

Formula: CSR spend ≥ 2% × average net profit of the preceding 3 financial years

It matters because the law brings private money and private project skills into social sectors such as education and health. It is also a clear example of how the state moved from owning industry to regulating it after 1991.

Explanation

Roots: why business owes something to society

  • NCERT (Class 8, Factors of Production) gives business two kinds of duties:
  • To nature: cut waste and pollution. NCERT's example is effluents (polluted waste water) from Tamil Nadu leather factories, which damaged rivers and soil.

  • To workers: fair wages, safe working conditions, training and respect for workers' rights.

  • After 1991 (LPG): private firms grew fast, so private power also grew.

  • The state stopped owning most industry and started regulating it instead.
  • CSR is one tool the state uses to make big private firms share some of their gains with society.

How the law works (s. 135, Companies Act 2013)

  • In force from: 1 April 2014.
  • Who must spend: any company that meets any one of these limits in the immediately preceding financial year [2]:
  • net worth (what the company owns minus what it owes) ≥ Rs 500 crore; or
  • turnover (total sales) ≥ Rs 1,000 crore; or

  • net profit ≥ Rs 5 crore.

  • How much: at least 2% of the average net profit of the preceding 3 financial years.

  • Where the money can go: only to Schedule VII activities, such as education, health, hunger, environment and PM CARES.

Worked example

  • Company X made net profits of Rs 90 cr, Rs 100 cr and Rs 110 cr in the last 3 years.
  • Average = (90 + 100 + 110) ÷ 3 = Rs 100 cr.

  • Minimum CSR = 2% × 100 = Rs 2 cr.

  • Note: the limits use "OR", so they do not all have to be met. A small firm with a net profit of just Rs 5 cr is still covered, even if its net worth and turnover are low.

Unspent money and penalties

  • Money for an ongoing project that is not spent in the year:
  • It moves to a special Unspent CSR Account.

  • It must be spent within 3 years.

  • Money not tied to an ongoing project that is not spent:

  • It must go to a Schedule VII fund, such as PM CARES, within 6 months.

  • Penalties: these are civil (fines), not criminal (jail), after the 2020 decriminalisation.

  • Tax treatment: in 2019, a High Level Committee on CSR recommended treating CSR spending as a tax-deductible expense, which means it would reduce the company's taxable income [6].

In India

  • Law: s. 135, Companies Act 2013, together with Schedule VII (the list of allowed activities). Both are managed by the Ministry of Corporate Affairs (MCA).
  • Transparency: MCA runs the National CSR Data Portal (csr.gov.in). It shows each company's CSR filings from the MCA21 company registry. Anyone can see spending by state, district and sector [5][2].
  • How spending has grown:
  • Rs 13,625.25 cr in FY 2015-16 [4].
  • Rs 21,231 cr by 21,349 companies in 2019-20 [3].

  • Over Rs 1,44,159 cr in total over the five years 2019-20 to 2023-24, based on companies' annual filings [2]. That is about Rs 29,000 cr a year on average.

  • Where the money goes (skew):

  • Most of it goes to education and health.
  • Most of it goes to industrialised states, where companies have their factories and offices.

  • Poorer, aspirational districts get less.

  • Global position: India was among the first countries to make CSR spending mandatory by law. It was not the first. Mauritius made CSR mandatory in 2009, so NCERT's claim that India was the "first nation in the world" is wrong.

Don't confuse with

  • Corporate governance: these are the rules on how a company is directed and controlled, for example independent directors and related-party transactions. Governance protects shareholders, especially minority shareholders. CSR is about spending profit on society.
  • ESG / BRSR: ESG (Environmental, Social, Governance) is the way investors judge a firm's non-financial risks. BRSR is SEBI's mandatory disclosure (reporting) format for listed firms. CSR is a legal duty to spend money, set by the Companies Act and managed by MCA. BRSR is a duty to report data, set by SEBI.
  • Philanthropy / charity: charity is voluntary giving by choice. CSR in India is mandatory for companies above the size limits, and the money must go to Schedule VII activities.
  • Unspent CSR Account vs Schedule VII fund: unspent money for an ongoing project goes to the Unspent CSR Account and must be spent within 3 years. Money not tied to an ongoing project goes to a Schedule VII fund (e.g. PM CARES) within 6 months.

Prelims Hooks

  • CSR, s. 135, Companies Act 2013: net worth ≥ Rs 500 cr OR turnover ≥ Rs 1,000 cr OR net profit ≥ Rs 5 cr. Only one limit needs to be met, and it is checked for the immediately preceding financial year [2].
  • Minimum spend = 2% of the average net profit of the preceding 3 financial years, only on Schedule VII activities. The rule has been in force since 1 April 2014.
  • Unspent CSR money: ongoing project → Unspent CSR Account, spend within 3 years. Otherwise → Schedule VII fund (e.g. PM CARES) within 6 months. Penalties have been civil since 2020.
  • Trap: India was not the first country with a CSR law. Mauritius (2009) was earlier.
  • Scale: over Rs 1,44,159 cr was spent in the five years 2019-20 to 2023-24 [2]. Rs 21,231 cr was spent by 21,349 companies in 2019-20 [3].
  • Institutions: the National CSR Data Portal (csr.gov.in) is run by MCA, not SEBI [5]. BRSR, which is ESG reporting, comes from SEBI.

Mains Points

  • Mandatory CSR: a tax in disguise or a partnership for development?
  • For: cumulative spending of over Rs 1.44 lakh cr (2019-20 to 2023-24) [2] brings private money and project-management skills into social sectors.
  • Against:
    • Spending is concentrated in rich, industrialised states and in education and health, while aspirational districts get less.
    • It adds to compliance costs.
    • Money sent to PM CARES blurs the line between CSR and state funding.

  • The 2019 recommendation to make CSR spending tax-deductible [6] shows this tension. If the spend is really a public duty, companies argue it should not be taxed as well.

  • CSR in post-1991 industrial policy: after LPG (1991), the state gave up owning much of industry and began to regulate it.

  • CSR (Companies Act 2013), corporate governance rules and SEBI's BRSR together push private firms to answer to society, not only to shareholders.

  • The 2020 decriminalisation (civil penalties only) shows the effort to balance ease of doing business with social duty.

  • Way forward: use the National CSR Data Portal data [5][2] to guide money towards neglected districts and sectors. Encourage firms to pool CSR funds for larger projects with more impact. Measure what the spending actually achieves, not just how much is spent.

Related concepts

Read more

Sources

  1. 1Class 8, Ch 7 "Factors of Production" (primary)
  2. 2PIB — Annual filings by companies on development CSR expenditure totals over 1,44,159 crores in last five FYs (2019-20 to 2023-24)pib.gov.in · tier 1
  3. 3PIB — Rs 21,231 crore spent by 21,349 companies on CSR funds in 2019-20pib.gov.in · tier 1
  4. 4PIB — CSR expenditure of companies for FY 2015-16 is Rs 13,625.25 crorespib.gov.in · tier 1
  5. 5PIB — Launch of National CSR Data Portal & Corporate Data Portalpib.gov.in · tier 1
  6. 6PIB — High Level Committee on CSR recommends CSR expenditure to be made tax deductible expenditurepib.gov.in · tier 1