Mandatory CSR In India: Responsibility, Not A Charity

1. INTRODUCTION Ask most people what CSR means in India and they will describe a company building a school, funding a hospital or contributing towards a charitable cause. This understanding is not wrong but carries a significant gap within it. More importantly, it reveals a problem with the way CSR is understood: it is often seen as an act of corporate generosity rather than an acknowledgement of corporate responsibility. Section 135 of the Companies Act, 2013 introduced a statutory framework for CSR in India. Although the original framework largely followed a ‘comply or explain’ approach, subsequent amendments, effective from January 2021, strengthened the obligation by providing for the transfer of unspent amounts and monetary penalties for non-compliance. The Corporate Laws (Amendment) Bill, 2026 now proposes further changes to this framework. This article argues that CSR should remain mandatory, but that the present law rests on a wrong idea of what CSR is for, and that this must be corrected before the mandate can work. 2. CSR AND THE LEGAL FRAMEWORK

2.1 What is CSR? CSR broadly refers to the responsibility of businesses towards society, extending beyond the immediate objective of generating profits. The arguments supporting CSR can be understood from three perspectives. First, the normative argument recognises that businesses operate within society and benefit from its resources, infrastructure and workforce. They therefore have responsibilities towards the communities within which they function. Second, there is the legal argument, under which businesses are required to comply with obligations imposed by law. Third, there is the economic argument. Although CSR may appear to be an additional expenditure in the short term, responsible business practices can improve a company's reputation, customer loyalty and long-term profitability. Smith distinguishes between the normative and business cases for CSR, recognising that both may provide substantial reasons for corporate engagement with social responsibility.1

2.2 Recent Development Section 135 applies to companies with a net worth of ₹500 crore or more, turnover of ₹1,000 crore or net profit of ₹5 crore during the preceding financial year. Such companies are, then, required to spend at least two per cent of their average net profit of the preceding three years on the activities specified in Schedule VII of the Act2. A CSR Committee oversees the spending, and Section 135(7) provides a penalty for default. The Bill, introduced in the Lok Sabha in March 2026 and now with a Joint Parliamentary Committee, proposes several changes through clause 433. The net profit threshold in Section 135(1) is increased from ₹5 crore to ₹10 crore. The time for transferring unspent money for ongoing projects under Section 135(6) is extended from 30 to 90 days. The exemption from forming a CSR Committee under Section 135(9) rises from ₹50 lakh to ₹1 crore. A new Section 135(10) lets the Central Government exempt prescribed classes of companies from Section 135 altogether, and an amendment to Section 446B allows lower penalties for eligible companies4. The CSR-specific penalty in Section 135(7) is left as it is5. Almost every change lightens the burden on companies, and none of them asks what the obligation is meant to achieve. The Joint Parliamentary Committee submitted its report on the Bill on 3 August 2026. It also expressed concerns regarding the broad exemption power proposed under Section 135(10), particularly the absence of adequate statutory guidance. The Bill remains pending and these proposals have not yet become law6. 3. PROBLEMS WITH THE CURRENT REGIME

3.1 Treating CSR as welfare instead of responsibility The main problem is conceptual. Companies often see CSR as philanthropy, where profit has been made and some of it is distributed to society. The Act encourages this reading because the amount is a percentage of profit and has no link to the harm a company causes. Arora and Puranik noted early that CSR in India has been understood largely in philanthropic terms7. But a company that pollutes a river and then funds a water project is not being generous. It is taking responsibility for what it did. Indian courts already accept the polluter pays principle in environmental law8. Although the principle operates independently of Section 135 and cannot be treated as a direct basis for calculating CSR expenditure, it offers an important way of understanding corporate responsibility. A company cannot claim to have fulfilled its environmental obligations merely by spending on unrelated welfare activities. The responsibility to remedy harm must remain separate from its CSR expenditure.

3.2 A disproportionate penalty Under Section 135(7), the company’s penalty for failing to transfer unspent CSR money is twice the unspent amount or ₹1 crore, whichever is less9. Although the underlying obligation to transfer the unspent amount remains, the ceiling on the penalty raises questions about its deterrent effect. For a large company with substantial CSR obligations, a penalty capped at ₹1 crore may not adequately reflect the scale of the default. A uniform ceiling may therefore have a different impact on companies with significantly different financial capacities. The purpose of a penalty should not merely be to impose a financial consequence but to discourage non-compliance. A more proportionate mechanism should take into account the amount involved, the company's financial capacity and whether the default was deliberate or resulted from genuine difficulties.

3.3 No settled meaning of CSR Another concern is the absence of a substantive understanding of CSR within the statutory framework. Although the Companies (Corporate Social Responsibility Policy) Rules, 2014 define CSR by reference to activities undertaken pursuant to Section 135, neither the Act nor the Rules provide a sufficiently clear conceptual explanation of what corporate responsibility should achieve. Gautam and Singh’s study of the top 500 companies found that the meaning of CSR varied from company to company, largely according to how individual CEOs saw it10. Although this study predates Section 135 and does not reflect present compliance practices, it demonstrates the longstanding difficulty in establishing a common understanding of CSR. When the meaning of an obligation changes with each boardroom, it is hard to say whether anyone has met it.

3.4 Weak Impact Assessment and Unequal Geographical Distribution The framework runs mainly on disclosure. Companies report what they spent, and the data is published on a national portal11, but there is little independent check of what the spending achieved. Greater attention is therefore needed towards measuring the actual outcomes of CSR projects rather than concentrating primarily on expenditure and reporting. Geography adds to the problem. Section 135(5) tells companies to give preference to the local areas around where they operate12. That sounds sensible until one looks at where companies operate. According to Lok Sabha replies drawing on the national CSR portal, CSR expenditure in 2022-23 was about ₹5,497 crore in Maharashtra and about ₹235 crore in Bihar13. It is not the case that Bihar needs less. It simply has fewer large companies, so a law meant to spread corporate wealth and contribute to national development ends up concentrating the wealth where it already is, further extending the economic divide between states.

3.5 Unequal treatment of different business structures Section 135 binds only companies. A partnership or LLP with the same profit owes no CSR, though it may cause the same social and environmental harm. Vasani and Kannan have questioned whether the regime is philanthropy or really a tax levy on one form of business14. If CSR is a responsibility for harm, the form a business chooses should not decide whether it applies. Rather, the law should consider whether businesses with comparable economic capacities and social impacts ought to bear comparable responsibilities.

4. THE CASE FOR VOLUNTARY CSR The other side deserves a fair hearing. Milton Friedman’s well known argument is that the responsibility of business is to increase its profits, and that managers who spend shareholders’ money on social causes are spending what is not theirs15. In India this is often put as a constitutional point, that mandatory spending interferes with the freedom to carry on trade under Article 19(1)(g). That argument is weak, because the Supreme Court has held that a company is not a citizen and cannot claim Article 19 rights in its own name16, and even for others Article 19(6) permits reasonable restrictions. The stronger version concerns growth. Puri argues that mandatory CSR works like an additional tax and discourages business expansion, which a developing country needs17. These arguments identify genuine shortcomings. However, they assume that companies will consistently prioritise social interests even where doing so does not produce an immediate commercial benefit. This cannot always be guaranteed. Voluntary CSR also creates the possibility that companies will contribute only when they consider it commercially beneficial. While the principle of “sustainable development” says the two must go together. Growth that pushes its costs onto the environment and onto communities is borrowing from the future, and the polluter pays principle answers the shareholder’s view directly. These costs belong in the price of doing business like wages and raw materials. Voluntary CSR also depends on the goodwill of the same companies whose conduct created the need.

5. CONCLUSION Mandatory CSR in India should be retained, but its purpose and implementation require reconsideration. The Constitution supports the direction, since protecting the environment is a fundamental duty and the State is directed to safeguard it, and directors must already have regard to the community and the environment18. I treat this as one support for my argument and not its foundation. The foundation is that a company should answer for the harm it causes, and the law should say so. This requires four broad changes. First, CSR should have a clearer substantive framework that distinguishes genuine social responsibility from ordinary philanthropy. Secondly, penalties should be proportionate while ensuring that non-compliance does not become an economically convenient alternative to fulfilling the statutory obligation. Thirdly, impact assessment and transparency should be strengthened, with greater attention towards regions that receive comparatively little CSR expenditure. Finally, the law should reconsider whether comparable businesses operating through different legal structures ought to bear similar responsibilities. The 2026 Bill does none of this. It reduces the burden on companies, which is a fair aim, but it leaves the defects of Section 135 in place. The mandate is not the problem. The more important question is whether their responsibility towards society should depend entirely upon their discretion. In a developing country where the consequences of economic activity are not equally distributed, it should not. Footnotes [1] N. Craig Smith, “Corporate Social Responsibility: Whether or How?” 45 California Management Review 59 (2003). [2] The Companies Act, 2013 (Act 18 of 2013), s. 135(1). [3] The Corporate Laws (Amendment) Bill, 2026 (Bill No. 85 of 2026), introduced in the Lok Sabha on Mar. 23, 2026 and referred to a Joint Parliamentary Committee, available at: https://prsindia.org/files/bills_acts/bills_parliament/2026/Corporate_Laws_(A)_Bill_2026_Text.pdf (last visited on Oct. 27, 2026). [4] Id., cl. 98. [5] Id., cl. 43. [6] Joint Parliamentary Committee, Report on the Corporate Laws (Amendment) Bill, 2026 (3 August 2026). [7] Bimal Arora and Ravi Puranik, “A Review of Corporate Social Responsibility in India” 47 Development 93, 98 (2004). [8] Indian Council for Enviro-Legal Action v. Union of India (1996) 3 SCC 212; Vellore Citizens Welfare Forum v. Union of India (1996) 5 SCC 647. [9] Supra note 2, s. 135(7). [10] Ritu Gautam and Anju Singh, “Corporate Social Responsibility Practices in India: A Study of Top 500 Companies” 2 Global Business and Management Research: An International Journal 41 (2010). [11] Companies (Corporate Social Responsibility Policy) Rules 2014, rr 4(5) and 8(3). [12] Supra note 2, s. 135(5). [13] Lok Sabha Unstarred Question No. AU2265, Ministry of Corporate Affairs, “State-wise CSR Expenditure from FY 2018-19 to 2022-23” (source: National CSR Data Portal), available at: https://eparlib.nic.in/bitstream/123456789/2979469/1/AU2265_4Jtoad.pdf (last visited on Oct. 27, 2026). [14] Lok Sabha Unstarred Question No. AU2265, Ministry of Corporate Affairs, “State-wise CSR Expenditure from FY 2018-19 to 2022-23” (source: National CSR Data Portal), available at: https://eparlib.nic.in/bitstream/123456789/2979469/1/AU2265_4Jtoad.pdf (last visited on Oct. 27, 2026). [15] Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits” The New York Times Magazine, Sept. 13, 1970. [16] State Trading Corporation of India Ltd. v. Commercial Tax Officer, AIR 1963 SC 1811. [17] Vidhushi Puri, “Mandatory versus Voluntary Corporate Social Responsibility: A Comparative Analysis of CSR Regime in India and Singapore” 4 NLUA Law & Policy Review 256 (2019). [18] The Constitution of India, arts. 48A, 51A(g); supra note 2, s. 166(2).