4 Corporate Social Responsibility (CSR)

Learning Objectives

By the end of this chapter, the reader will be able to:

Trace the historical and intellectual evolution of corporate social responsibility from the philanthropic tradition of the early twentieth century to the stakeholder, triple-bottom-line, and ESG frameworks of contemporary scholarship.
Explain the principal theoretical positions on the social responsibility of the company, including the shareholder primacy view of Friedman (1970), the stakeholder theory of Freeman (1984), Carroll’s CSR pyramid (1979, 1991), and Elkington’s triple bottom line (1997).
Identify the statutory framework for mandatory CSR in India under Section 135 of the Companies Act, 2013, including the applicability thresholds, the two per cent spending requirement, the role of the CSR committee, and the activities permitted under Schedule VII.
Apply the CSR provisions to a particular company by computing its CSR obligation, identifying its qualifying activities, and evaluating its compliance with the disclosure and transfer rules introduced by the 2019 and 2021 amendments.
Evaluate the relationship between mandatory CSR and the broader stakeholder, sustainability, and ESG agendas, drawing on Indian and international examples.

4.1 Introduction

The proposition that a company has responsibilities beyond the maximisation of profit for its shareholders is no longer controversial in either the academic literature or the regulatory practice of most major economies. What remains contested is the content of those responsibilities, the persons to whom they are owed, the institutional mechanisms through which they are discharged, and the legal force, if any, by which they are imposed. Corporate social responsibility, often abbreviated as CSR, is the principal term under which these questions are addressed.

India occupies a distinctive position in the global landscape of CSR. With the introduction of Section 135 in the Companies Act, 2013, India became the first major jurisdiction in the world to make CSR a statutory obligation rather than a voluntary commitment. Companies that meet the applicability thresholds are legally required to spend at least two per cent of their average net profits over the preceding three financial years on activities specified in Schedule VII to the Act. The mandate has been refined by amendments in 2019 and 2021 that introduced the concept of an unspent CSR account, made compliance enforceable by penalty, and expanded the permitted categories of expenditure.

This chapter examines CSR from three perspectives. The first is the conceptual perspective, locating CSR within the broader scholarship on the responsibilities of the corporation. The second is the doctrinal perspective, setting out the statutory framework for mandatory CSR in India under Section 135 and the CSR Rules, 2014. The third is the practical perspective, examining how leading Indian companies design their CSR architecture and discharge their statutory obligations. The next chapter, Chapter 5, takes up the reporting and activity dimensions of CSR in greater detail.

flowchart TD
    A[Profit Maximisation] --> B[Philanthropy]
    B --> C[Stakeholder <br> Engagement]
    C --> D[CSR as <br> Strategic Discipline]
    D --> E[Mandatory CSR <br> India 2013]
    E --> F[ESG Integration]

    %% Style
    classDef dark fill:#2e4057,color:#ffffff,stroke:#ff9933,stroke-width:3px,rx:10px,ry:10px;
    class A,B,C,D,E,F dark;

4.2 The Concept of Corporate Social Responsibility

CSR is the proposition that a company, in the conduct of its business, owes duties to a broader set of stakeholders than its shareholders alone. The duties extend, in varying formulations, to employees, customers, suppliers, communities affected by the company’s operations, the environment, and society at large. The substance of CSR has accordingly varied with the prevailing scholarly framework, ranging from voluntary philanthropy at one end to integrated sustainability strategy at the other.

A Working Definition of CSR

Corporate social responsibility is the set of obligations, voluntary or statutory, owed by a company to persons and interests other than its shareholders, in the conduct of its business and in the application of its resources, with the object of advancing the welfare of those persons and interests alongside the company’s commercial objectives.

The definition treats CSR as additive rather than substitutive: the company continues to pursue commercial objectives, and CSR layers on top of those objectives a set of further commitments to the broader society in which the company operates.

4.2.1 The Indian Intellectual Lineage of CSR

Although the contemporary statutory framework for CSR in India is recent, the underlying ethical proposition has deep roots in Indian thought. Mahatma Gandhi’s doctrine of trusteeship, articulated in the 1930s and 1940s, held that the wealth of the wealthy was held in trust for the benefit of the community, and that the trustee was accountable to the community for the use to which the wealth was applied. The doctrine has shaped the philanthropic tradition of major Indian business houses for nearly a century.

J.R.D. Tata, who led the Tata group from 1938 to 1991, articulated a stakeholder conception of the company decades before stakeholder theory was formalised in the Anglo-American academic literature. He held that “what is good for India is good for Tata” and constructed an elaborate architecture of charitable trusts, the Tata Trusts, that today hold the controlling interest in Tata Sons Private Limited. The Indian CSR tradition is therefore older than the statutory framework, and Section 135 should be understood as the codification of an ethic that already enjoyed substantial corporate acceptance in India.

4.3 The Theoretical Foundations of CSR

The contemporary scholarly literature on CSR has been shaped by a sequence of theoretical positions, each responding to the limitations of its predecessors. A graduate student of corporate law should be familiar with the principal frameworks.

4.3.1 Friedman and the Shareholder Primacy Thesis

Milton Friedman (1970): The Social Responsibility of Business Is to Increase Its Profits

Milton Friedman, writing in The New York Times Magazine on 13 September 1970, advanced the influential thesis that:

“The social responsibility of business is to increase its profits.”

Friedman argued that the executives of a corporation are agents of the shareholders, that their fiduciary duty is to act in the shareholders’ interest, that the shareholders’ interest is to maximise the value of their investment, and that any expenditure of corporate resources on social objectives, beyond what is required to maximise long-run profitability, is an unauthorised use of the shareholders’ money. CSR, on Friedman’s view, is properly the personal choice of the shareholder, who may apply dividends to charitable causes after they have been received.

The Friedman position was the dominant academic view in the United States for much of the second half of the twentieth century and remains influential in finance and economics. Its principal weaknesses, identified by subsequent scholarship, are that it presupposes well-functioning markets that internalise externalities, that it treats the corporation as a simple agent of shareholders rather than as a complex institution embedded in a network of stakeholders, and that it has limited normative force where the costs of corporate activity fall on persons who have no contractual relationship with the firm.

4.3.3 Freeman and Stakeholder Theory

R. Edward Freeman (1984): Strategic Management: A Stakeholder Approach

R. Edward Freeman’s Strategic Management: A Stakeholder Approach (1984) is the foundational text of stakeholder theory. Freeman defined a stakeholder as:

“Any group or individual who can affect or is affected by the achievement of the organization’s objectives.”

The definition deliberately encompasses a wider set of persons than the shareholders alone, including employees, customers, suppliers, lenders, regulators, communities, and the natural environment. Freeman argued that the strategic success of a corporation depends on its ability to manage its relationships with all of its stakeholders, not merely its relationship with its shareholders, and that stakeholder management is therefore both an ethical obligation and a strategic imperative.

Stakeholder theory has subsequently been refined by Donaldson and Preston (1995), who distinguished three uses of the theory: descriptive (an account of how corporations are actually run), instrumental (a claim that stakeholder management produces better outcomes), and normative (a claim that corporations are morally obliged to consider stakeholders). The normative branch has been the most contested, but the instrumental branch has acquired substantial empirical support, particularly in the management of employees, customers, and communities.

4.3.4 Elkington and the Triple Bottom Line

John Elkington (1997): Cannibals with Forks: The Triple Bottom Line of 21st Century Business

John Elkington introduced in 1997 the metaphor of the triple bottom line, abbreviated as TBL or 3BL, to describe a comprehensive measure of corporate performance comprising:

Economic performance (profit) — the traditional financial measure of corporate success.
Social performance (people) — the impact of the company on its employees, customers, and communities.
Environmental performance (planet) — the impact of the company on the natural environment.

The triple bottom line proposes that corporate performance should be measured, reported, and managed across all three dimensions simultaneously, and that a single-dimension measure of profit is an incomplete account of how the company has performed.

The TBL has been particularly influential in sustainability reporting, including the Global Reporting Initiative framework, the Sustainability Accounting Standards Board (SASB) standards, and more recently the disclosure standards of the International Sustainability Standards Board (ISSB). Indian listed companies are now required, under SEBI’s Business Responsibility and Sustainability Reporting (BRSR) framework introduced in 2021, to report on a range of TBL-style indicators.

4.3.5 From CSR to ESG

The contemporary evolution of CSR has been towards the ESG framework, which integrates environmental, social, and governance considerations into investment analysis and corporate strategy. ESG differs from earlier conceptions of CSR in three respects. First, it is investor-led rather than corporate-led, with major institutional investors using ESG metrics in their allocation decisions. Second, it is data-driven, relying on standardised disclosures and third-party ratings. Third, it explicitly incorporates governance, recognising that the social and environmental performance of a company depends on its governance architecture.

Why CSR and ESG Are Not Synonyms

A common conflation in everyday discussion treats CSR and ESG as different names for the same thing. They are related but distinct. CSR is, in the Indian statutory sense, the company’s commitment of resources to specified categories of social activity outside its core business. ESG is the broader assessment, by investors and analysts, of how the company manages environmental, social, and governance risk and opportunity in the conduct of its core business itself. A company may have an exemplary CSR programme and a poor ESG profile, or vice versa. The most sophisticated practitioners now treat the two as complementary rather than alternative.

Comparative Summary of Theoretical Frameworks

Framework	Principal Architect	Core Proposition	Year
Shareholder Primacy	Milton Friedman	The social responsibility of business is to increase its profits	1970
CSR Pyramid	Archie B. Carroll	Economic, legal, ethical, and philanthropic responsibilities form an integrated whole	1979, 1991
Stakeholder Theory	R. Edward Freeman	The corporation must manage relationships with all groups affected by its activity	1984
Stakeholder Use Distinction	Thomas Donaldson and Lee E. Preston	Stakeholder theory has descriptive, instrumental, and normative branches	1995
Triple Bottom Line	John Elkington	Performance measured across people, planet, and profit	1997
ESG Framework	Various, institutional investor-led	Environmental, social, and governance criteria in investment analysis	2004 onwards

4.4 The Statutory Framework: Section 135 of the Companies Act, 2013

India’s mandatory CSR regime is contained in Section 135 of the Companies Act, 2013, supplemented by the Companies (Corporate Social Responsibility Policy) Rules, 2014, and refined by Schedule VII to the Act. The framework has been amended in 2019 and again in 2021 to address gaps in the original design.

4.4.1 Applicability of Section 135

Section 135 applies to any company that meets at least one of the following financial thresholds in any of the immediately preceding three financial years:

Applicability Thresholds (Section 135(1))

Section 135 applies to every company having:

a net worth of ₹500 crore or more; or
a turnover of ₹1,000 crore or more; or
a net profit of ₹5 crore or more,

during the immediately preceding financial year.

The thresholds are disjunctive: meeting any one of them brings the company within the scope of Section 135. The thresholds are tested annually, and a company that ceases to meet all three thresholds for three consecutive financial years exits the CSR mandate.

The applicability thresholds are deliberately set at a level that captures the larger Indian companies while excluding most small and medium enterprises. As of recent years, approximately 25,000 Indian companies fall within the scope of Section 135, accounting for the bulk of organised corporate activity in the country.

4.4.2 The Spending Obligation

A company to which Section 135 applies must spend, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, on CSR activities specified in Schedule VII.

Computation of the Two Per Cent

The phrase “net profit” for the purposes of Section 135 is defined by reference to Section 198 of the Companies Act, 2013, which prescribes a method of computation that excludes certain capital and exceptional items. The two per cent is computed on the average of the net profits over three preceding financial years, not on the profit of any single year. The use of an average smooths the year-on-year volatility of profits and prevents a one-year fluctuation from determining the spending obligation.

For a company that is required to spend, but has not made an average profit in the three preceding financial years, the spending obligation for the year is reduced to nil by application of the formula.

4.4.3 The CSR Committee

Section 135(1) requires every company to which the section applies to constitute a CSR committee of the board of directors. The committee must consist of three or more directors, of whom at least one must be an independent director. For a company that is not required to appoint an independent director, the requirement is two or more directors on the committee.

The functions of the CSR committee, prescribed by Section 135(3), include the formulation and recommendation to the board of a CSR policy specifying the activities to be undertaken under Schedule VII, the recommendation of the amount of expenditure to be incurred on those activities, and the monitoring of the CSR policy from time to time.

A CSR Committee Is Not a Charitable Trust

A frequent confusion in early-stage compliance is the conflation of the statutory CSR committee with a charitable trust or implementing agency. The CSR committee is a committee of the board of directors of the company. It is not an implementing agency, nor is it a separate legal entity. It oversees the CSR policy and recommends activities and expenditure, but the activities themselves are typically implemented either directly by the company, by a separately incorporated charitable trust or Section 8 company, or by a third-party implementing agency registered with the Ministry of Corporate Affairs.

4.4.4 Schedule VII: Permitted Activities

Schedule VII to the Companies Act, 2013 specifies the activities that qualify as CSR for the purposes of Section 135. The schedule has been amended several times to expand the list. As it presently stands, Schedule VII includes the following categories of activity, with each category capable of further specification through ministerial notification.

Principal Categories under Schedule VII

Category	Illustrative Activities
Eradication of hunger, poverty, and malnutrition	Food security programmes, nutrition supplementation, sanitation
Promotion of education	Schools, scholarships, vocational training, special education for the differently abled
Promotion of gender equality and empowerment of women	Women’s hostels, livelihood programmes, support for survivors of violence
Reducing child mortality and improving maternal health	Maternal and child healthcare, immunisation programmes
Combating HIV, malaria, and other diseases	Disease prevention, treatment access, public health campaigns
Ensuring environmental sustainability	Renewable energy, ecological balance, conservation of natural resources
Protection of national heritage, art, and culture	Restoration of monuments, support for traditional arts and crafts
Measures for the benefit of armed forces veterans, war widows, and their dependants	Pensions, healthcare, education for dependants
Training to promote rural sports, nationally recognised sports, and Olympic sports	Sports academies, athlete sponsorship
Contributions to the Prime Minister’s National Relief Fund or PM CARES Fund	Direct contributions to specified funds
Contributions to incubators, R&D, or scientific research	Funding of approved research institutions, technology business incubators
Rural development projects	Rural infrastructure, agricultural modernisation, drinking water
Slum area development	Urban renewal, low-cost housing, civic infrastructure
Disaster management, including relief, rehabilitation, and reconstruction	Flood, cyclone, earthquake, and pandemic response
Welfare of senior citizens	Old-age homes, healthcare, recreational programmes

The breadth of Schedule VII is intentional. It allows the company to align its CSR activities with its core competencies and the needs of the geographies in which it operates, while ensuring that the resources are channelled towards genuinely social objectives rather than disguised commercial activity.

4.4.5 The 2019 and 2021 Amendments

The original 2013 framework of Section 135 was structured as a “comply or explain” regime: the company was required to spend two per cent or, if it did not, to disclose in its annual report the reasons for the shortfall. Empirical research conducted in the years following implementation found that a substantial fraction of companies were under-spending and disclosing perfunctory explanations. The 2019 and 2021 amendments tightened the regime.

The 2019 Amendment: Unspent CSR Account

The Companies (Amendment) Act, 2019 introduced the concept of the unspent CSR account. Where a company has unspent CSR funds at the end of a financial year, the funds must be transferred:

for amounts allocated to ongoing projects, to a special account designated as the “Unspent Corporate Social Responsibility Account” within thirty days of the end of the financial year, with utilisation required within three financial years; and
for unspent amounts not allocated to ongoing projects, to a fund specified in Schedule VII, such as the PM National Relief Fund, within six months of the end of the financial year.

The 2021 Amendment: Penalty for Default

The Companies (Amendment) Act, 2020, brought into force in 2021, introduced a monetary penalty for non-compliance with Section 135. A company that fails to transfer unspent CSR funds to the prescribed account or fund is liable to a penalty of twice the amount required to be transferred, or one crore rupees, whichever is less. Every officer in default is liable to a penalty of one-tenth of the amount required to be transferred, or two lakh rupees, whichever is less.

The 2021 amendment thereby converted the regime from “comply or explain” to “comply or pay”, with material consequences for non-compliance.

CSR Is Not a Tax-Deductible Expense

A persistent misconception is that CSR expenditure is a deduction from taxable income, on the analogy of a charitable donation under Section 80G of the Income Tax Act, 1961. It is not. The Income Tax Act expressly excludes CSR expenditure from the scope of allowable business deductions under Section 37(1). The two per cent spending obligation is therefore borne wholly out of post-tax profits, except where the specific activity is independently eligible for deduction under another provision of the tax code.

4.5 CSR in Indian Practice

The implementation of Section 135 has reshaped Indian corporate philanthropy. Total reported CSR expenditure in India has grown from approximately ₹10,000 crore in financial year 2014–15 to over ₹26,000 crore in recent years, with cumulative spending under Section 135 well past ₹2 lakh crore. The pattern of expenditure has converged on a small number of categories, with education, healthcare, and rural development consistently accounting for the majority of disclosed CSR.

The implementation architecture varies by company. Larger conglomerates typically operate through dedicated charitable trusts or Section 8 companies, such as the Tata Trusts, the Reliance Foundation, the Infosys Foundation, the Wipro Foundation, the Aditya Birla Centre for Community Initiatives and Rural Development, and the Mahindra Foundation. Mid-sized companies often rely on third-party implementing agencies registered under the CSR Rules, 2014. Some companies engage in direct implementation, particularly where the CSR programmes are integrated with their core business, as in the case of Hindustan Unilever’s Project Shakti, which trains rural women as micro-entrepreneurs while distributing the company’s products in remote markets, and ITC’s e-Choupal, which supplies agricultural information and inputs to farmers while integrating them into the company’s commodity supply chain.

CSR Programmes That Are Closest to the Core Business Tend to Endure

A pattern visible in two decades of CSR practice in India is that programmes closely aligned with the company’s core competencies tend to outlast programmes that are remote from the company’s core business. Hindustan Unilever’s rural distribution programmes, ITC’s agricultural value-chain programmes, Tata Power’s community welfare programmes around its plants, and Infosys’s education programmes drawing on its technical talent all illustrate the alignment principle. The implication for CSR strategy is that the “two per cent” should not be considered in isolation from the rest of the company’s value chain, but should rather be designed to leverage the company’s distinctive resources and access.

4.6 Case Studies

4.6.1 Case Study 1: The Tata Trusts and the Architecture of Indian CSR

The Tata Trusts, comprising the Sir Dorabji Tata Trust (1932), the Sir Ratan Tata Trust (1919), and several other related trusts, hold approximately sixty-six per cent of the equity of Tata Sons Private Limited, the holding company of the Tata group. Dividend income from Tata Sons flows to the Trusts, which apply it to charitable, scientific, and educational objects across India. The Trusts founded or substantially funded the Indian Institute of Science (1909), the Tata Institute of Fundamental Research (1945), the Tata Memorial Hospital (1941), the Tata Institute of Social Sciences (1936), and a long list of other major institutions of Indian science, healthcare, and education.

The Tata model is, in important respects, a model that anticipates Section 135 by nearly a century. Capital is endowed in charitable trusts; the trusts hold equity in the operating group; the dividends from the equity flow back to the trusts and are deployed for social objects. The arrangement embeds CSR in the corporate architecture itself, rather than treating it as an annual expenditure decision. The introduction of Section 135 has not displaced this model but has supplemented it: the operating Tata companies, in addition to paying dividends to the Trusts that fund their philanthropic work, are themselves subject to Section 135 and run their own CSR programmes.

Discussion Questions

To what extent does the Tata trusteeship architecture constitute a stakeholder governance model in the sense theorised by Freeman (1984)?
What are the comparative advantages and disadvantages of an endowed trust model of corporate philanthropy versus the Section 135 mandatory spending model?
Should Indian corporate law facilitate, or impose constraints on, charitable trust ownership of operating companies?

4.6.2 Case Study 2: PM CARES, COVID-19, and the Stretch of Schedule VII

In March 2020, the central government established the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES) in response to the COVID-19 pandemic. A circular issued by the Ministry of Corporate Affairs on 28 March 2020 clarified that contributions to PM CARES would qualify as CSR expenditure under item (viii) of Schedule VII, treated pari passu with contributions to the PM National Relief Fund. In the financial year 2020–21, contributions to PM CARES from corporate India aggregated several thousand crore.

The episode raised legal and policy questions that continued through the pandemic period. On the legal side, the question was whether the route by which PM CARES was inserted into Schedule VII, by ministerial circular and clarification, was procedurally adequate. On the policy side, the question was whether the diversion of CSR funds towards a single centralised emergency fund was consistent with the original design of Section 135, which contemplated company-level decisions on geography and category. Both questions remain partially unresolved, although subsequent amendments to Schedule VII have provided fuller statutory anchoring.