What Are CSR Rules and Why Do They Matter for Indian Companies?

In recent years, Corporate Social Responsibility (CSR) has become a crucial aspect of doing business in India. With the introduction of formal CSR rules under the Companies Act, 2013, businesses are now legally required to contribute to the social and environmental development of the country. But what exactly are these CSR rules, and why are they important? Let’s break it down in a simple, informative way.

What Are CSR Rules?

CSR rules are the guidelines set by the Indian government that define how certain companies must plan, execute, and report their Corporate Social Responsibility activities. These rules are part of Section 135 of the Companies Act, 2013, and the Companies (CSR Policy) Rules, 2014, which were further amended in 2021 to ensure better compliance and impact.

These rules make CSR mandatory for companies that meet specific financial thresholds and require them to spend a portion of their profits on CSR activities every financial year.

Applicability of CSR Rules

CSR rules apply to companies that meet any one of the following criteria in the preceding financial year:

• Net worth of ₹500 crore or more, or
  
• Turnover of ₹1,000 crore or more, or
  
• Net profit of ₹5 crore or more
  

If a company meets these thresholds, it must:

• Form a CSR Committee
  
• Spend at least 2% of the average net profit of the last three years on CSR
  
• Disclose CSR activities in the Board’s Report and on its official website
  

Key Provisions Under CSR Rules

Here are the main highlights of the CSR rules that every qualifying company must follow:

1. Formation of CSR Committee

The company must form a CSR Committee comprising at least three directors, one of whom must be an independent director. This committee is responsible for formulating and monitoring the CSR policy.

2. Creating a CSR Policy

The CSR Policy must outline the company’s planned activities, spending strategy, and monitoring framework. It should align with the areas mentioned in Schedule VII of the Companies Act, which include:

• Eradicating hunger and poverty
  
• Promoting education and gender equality
  
• Ensuring environmental sustainability
  
• Supporting healthcare and sanitation
  
• Rural development projects
  
• Contribution to PM CARES Fund and more
  

3. Mandatory Spending and Penalty

If a company fails to spend the required 2%, it must specify the reason in its Board report. If the amount remains unspent for ongoing projects, it should be transferred to a special CSR account within 30 days and used within three years. Failing to do so can result in financial penalties and legal action.

4. CSR Reporting

Companies must report their CSR activities in the Annual Report and file Form CSR-2 with the Ministry of Corporate Affairs. Transparency and accountability are key aspects of CSR compliance.

Recent Updates to CSR Rules (As of 2024)

The CSR rules have seen several updates to ensure more accountability and long-term impact. Some key changes include:

• Introduction of  Impact Assessment for companies spending ₹10 crore or more annually on CSR.
  
• Allowing companies to engage registered implementing agencies only (registered with MCA).
  
• Prohibition on treating employee welfare activities as CSR unless they benefit the public at large.
  
• Unspent CSR funds must be carried forward under a dedicated CSR account and not be merged with general profits.
  

Why CSR Rules Matter for Companies

1. Legal Compliance
   CSR is no longer optional. Following CSR rules ensures companies stay compliant with Indian laws and avoid penalties.
   
2. Enhanced Brand Image
   Companies that actively engage in social responsibility build better brand trust and public goodwill.
   
3. Positive Social Impact
   Through CSR, businesses play a vital role in uplifting society, supporting sustainable development, and reducing inequalities.
   
4. Stakeholder Engagement
   CSR activities improve relationships with stakeholders, including customers, employees, investors, and the community.
   

How to Ensure CSR Compliance

For companies looking to ensure full compliance with CSR rules, here are a few tips:

• Consult with CSR consulting firms or legal advisors
  
• Maintain detailed documentation of all CSR projects
  
• Collaborate with credible NGOs or implementation partners
  
• Regularly update and monitor the CSR policy and spending
  
• Focus on long-term, measurable outcomes
  

Conclusion

The CSR rules in India have brought much-needed structure and accountability to corporate philanthropy. These rules ensure that businesses don’t just focus on profit-making but also contribute to the greater good of society. As CSR regulations continue to evolve, companies must stay informed, adapt, and make meaningful contributions that align with both the law and their core values.