UPSC Prelims 2024 Q50: CSR Rules under Companies Act 2013 — Explained

With reference to Corporate Social Responsibility (CSR) rules in India, consider the following statements:

1. CSR rules specify that expenditures that benefit the company directly or its employees will not be considered as CSR activities.

2. CSR rules do not specify minimum spending on CSR activities.

Which of the statements given above is/are correct?

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 nor 2

Answer: (a) 1 only

Statement-wise explanation

  • 1: correct — The Companies (CSR Policy) Rules, 2014 define CSR to exclude activities that benefit the company or its staff. Since the January 2021 amendment, Rule 2(1)(d) excludes activities that benefit the company's employees, as defined in section 2(k) of the Code on Wages, 2019. It also excludes activities done in the normal course of business and sponsorships meant to earn marketing benefits for the company's products or services. The original 2014 rules had a similar provision: projects that benefit only the company's employees and their families are not CSR.
  • 2: incorrect — Section 135(5) of the Companies Act, 2013 sets a minimum. A company covered by the CSR law must spend at least 2% of its average net profit from the three immediately preceding financial years. The money must go to activities listed in Schedule VII. If the company does not spend it, the unspent amount must be moved to a Schedule VII fund or to an Unspent CSR Account. The 2% floor applies to the Act and the CSR rules together, so the claim that there is no minimum is wrong.
  • 3: incorrect — This entry is not used. The question has only two statements.

How to eliminate

Statement 2 can be settled from basic knowledge. India's CSR law is known for its '2% of average net profit' requirement, which is a minimum spend. That makes Statement 2 false and rules out every option that includes it, leaving 'Statement 1 only' or 'neither'. For Statement 1, ask what CSR is for. It means spending for society. If spending on the company's own business or on its employees' welfare counted, companies could relabel staff perks or advertising as CSR and the law would mean nothing. So the rules have to exclude such spending, which makes Statement 1 true. Facts to remember: the 2% floor in section 135(5), and the list of exclusions in Rule 2(1)(d), which covers normal business, employee benefits, marketing sponsorships, political contributions, most activities outside India, and other statutory obligations.

Know more

CSR under the Companies Act, 2013

India was the first country to make CSR spending compulsory by law. This is done through Section 135, Schedule VII and the Companies (CSR Policy) Rules, 2014, which were substantially amended on 22 January 2021.

Who must spend. A company that met any one of these tests in the preceding financial year:

Criterion Threshold
Net worth ₹500 crore or more
Turnover ₹1,000 crore or more
Net profit ₹5 crore or more

How much. At least 2% of the average net profit of the three immediately preceding financial years.

On what. Activities listed in Schedule VII. These include hunger and poverty, health, education, gender equality, environmental sustainability, heritage, armed forces veterans, sports training, contributions to the PM CARES Fund and the PM's National Relief Fund, and rural and slum development.

What does not count (Rule 2(1)(d)):

  • Activities in the company's normal course of business
  • Activities outside India, except training Indian sportspersons
  • Contributions to political parties under section 182
  • Activities that benefit the company's employees
  • Sponsorships done for marketing benefit
  • Activities done to meet other statutory obligations

Unspent money (since 2021):

  • Money for ongoing projects goes to an Unspent CSR Account within 30 days of the financial year's end and must be spent within three years.
  • Other unspent money goes to a Schedule VII fund within six months.
  • Not complying now carries a monetary penalty. Earlier, the rule was 'comply or explain'.

Other features:

  • A company must have a CSR Committee of the Board. This is not needed if its CSR obligation is ₹50 lakh or less.
  • Companies with large CSR obligations must get an impact assessment of their big projects.
  • Spending above the 2% can be set off against the next three years' obligations.

NCERT Concepts to Revise

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