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Corporate Social Responsibility / Companies Act — UPSC Mains Model Answer

Polity · UPSC CSE
Question: Mandatory Corporate Social Responsibility under Section 135 of the Companies Act, 2013 — framework, significance, and governance challenges

Introduction

Section 135 of the Companies Act, 2013 institutionalised CSR in India, making it one of the few jurisdictions globally to mandate corporate spending on social development through a statutory framework rather than voluntary commitment.

Body

1. Statutory Threshold and Applicability

Companies meeting any one of three criteria — net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more in the immediately preceding financial year — must constitute a CSR Committee. This threshold-based design ensures proportionality, targeting only financially capable entities while exempting smaller firms from compliance burden.

2. Role of the CSR Committee

The CSR Committee, comprising Board members including at least one independent director, formulates and recommends a CSR Policy to the Board, specifying eligible activities aligned with Schedule VII of the Act. It also recommends the quantum of expenditure and monitors implementation, embedding accountability at the governance level rather than leaving it to executive discretion.

3. Mandatory Spending Obligation

Qualifying companies must spend at least 2% of their average net profits over the three immediately preceding financial years on CSR activities. Unspent amounts must be transferred to designated funds, a provision strengthened through 2021 amendments to prevent perpetual deferral and ensure actual community impact.

4. Implementation Gaps and Governance Concerns

Despite mandatory status, CSR spending often concentrates in sectors and geographies proximate to corporate headquarters, limiting reach to underserved regions. Reporting quality varies, and impact measurement remains inconsistent, weakening the policy's developmental effectiveness.

Conclusion

Mandatory CSR represents a significant governance innovation, bridging private capital with public welfare goals. Strengthening third-party impact audits and directing spending toward aspirational districts would align statutory intent with measurable development outcomes.

Word count: 256

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