Corporate Social Responsibility (CSR) under S.135 mandates that profitable companies spend a minimum of 2% of average net profits on social welfare activities. Shareholder activism refers to shareholders actively exercising their governance rights to influence company policy, hold directors accountable, and protect minority interests shifting from passive investors to active corporate citizens.
Legal Framework
| Provision | Subject |
|---|---|
| S.135 | Corporate Social Responsibility |
| S.135(5) | Mandatory 2% spending |
| Schedule VII | List of CSR activities |
| S.134(3)(o) | Board report to disclose CSR policy + spending |
| S.166(2) | Director's duty: best interests of community, employees, environment |
| S.241-242 | Prevention of oppression and mismanagement (shareholder remedy) |
| S.245 | Class action |
CSR (S.135)
Applicability
| Criterion | Threshold (ANY ONE in preceding FY) |
|---|---|
| Net worth | Rs.500 crore or more |
| Turnover | Rs.1,000 crore or more |
| Net profit | Rs.5 crore or more |
| Applies to | Companies (Indian) + foreign companies with branch/project office in India meeting thresholds |
Requirements
| Requirement | Rule |
|---|---|
| CSR Committee | Board must constitute CSR Committee (3+ directors, at least 1 independent) |
| CSR Policy | Committee recommends CSR policy; board approves and discloses on website |
| Spending | At least 2% of average net profits of preceding 3 financial years |
| Activities | Must fall within Schedule VII (listed social welfare categories) |
| Unspent amount | If not spent: transfer to a Fund specified in Schedule VII OR to Unspent CSR Account (to be spent within 3 FYs) |
| Non-compliance | If company doesn't spend AND doesn't transfer unspent amount: penalty Rs.50,000 to Rs.25 lakhs on company; Rs.50,000 to Rs.5 lakhs on officer in default |
| Reporting | Annual report must disclose CSR activities, spending, reasons for unspent (S.134(3)(o)) |
Schedule VII Activities (Illustrative List)
| Category | Examples |
|---|---|
| Poverty and hunger | Eradicating hunger, poverty, malnutrition |
| Education | Promoting education, special education, vocational skills |
| Health | Combating diseases (HIV, malaria, etc.); healthcare; sanitation |
| Gender equality | Women's empowerment; setting up old age homes, hostels for women |
| Environment | Ensuring environmental sustainability; ecological balance; animal welfare |
| Heritage | Protection of national heritage, art, culture |
| Armed forces | Measures benefiting armed forces veterans, war widows |
| Sports | Training for rural, national, Paralympic, Olympic sports |
| PM's fund | Contributions to PM National Relief Fund, PM CARES |
| Technology | Promotion of rural development; slum area development; technology incubators |
| Disaster management | Relief, rehabilitation, reconstruction |
Why: India chose MANDATORY CSR (unlike Western "voluntary" models) because decades of voluntary CSR produced minimal spending. Only statutory mandate with penalties could ensure large profitable companies contribute meaningfully to social welfare. The 2% floor is a compromise full nationalisation of profits is rejected, but pure voluntarism failed.
Shareholder Activism
Concept
| Aspect | Content |
|---|---|
| Definition | Active exercise of shareholder rights to influence corporate governance, policy, and management decisions |
| Shift from | Passive investor (buy shares, receive dividend, ignore governance) |
| Shift to | Active corporate citizen (vote, question, requisition meetings, file class actions, challenge management) |
| Indian context | Growing post-Satyam fraud (2009); strengthened by Companies Act, 2013 (class action, shareholder forums) |
Mechanisms of Shareholder Activism
| Mechanism | Section | Content |
|---|---|---|
| Voting at meetings | S.107 | Exercise voting rights; vote AGAINST proposals if unsatisfactory |
| Requisitioning EGM | S.100(2) | 1/10th members can force an EGM if board is unresponsive |
| Removal of directors | S.169 | Ordinary resolution can REMOVE any director before term ends |
| Class action | S.245 | Members (prescribed number) can sue company/directors/auditors for acts prejudicial to interests |
| Prevention of oppression | S.241-242 | Minority can approach NCLT against oppressive/mismanaged conduct |
| Postal ballot | S.110 | Vote without attending meeting (by postal/electronic ballot) |
| E-voting | S.108 | Electronic voting for listed companies (enables participation without physical presence) |
| Audit trail | S.143(3)(j) | Auditor reports to SHAREHOLDERS (not to management) accountability channel |
| Related party voting exclusion | S.188(1) proviso | Interested member cannot vote on related party transaction prevents self-dealing |
Illustrations
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CSR spending in practice (how Rs.5 crore becomes social impact): TCS (India's largest IT company) earned average net profit of Rs.40,000 crore. 2% = Rs.800 crore CSR budget annually. TCS spends on: (a) digital literacy (teaching 10 million people computer basics), (b) scholarships for SC/ST students, (c) sanitation projects in rural Maharashtra, (d) health camps for tribal areas. Without S.135: TCS might have spent Rs.10 crore voluntarily. With the mandate: Rs.800 crore is DIRECTED toward social welfare every year. Multiplied across all qualifying companies: India's CSR spending exceeds Rs.25,000 crore annually.
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Shareholder activism (voting down executive pay): Shareholders of HDFC Ltd (2020) voted AGAINST proposed compensation to the MD/CEO one of the first major "say on pay" revolts in India. Institutional investors (mutual funds, insurance companies) voted against because they felt pay was excessive relative to peer companies. The resolution failed. This is activism: shareholders didn't just accept what the board proposed they exercised VOTING POWER to reject. Post-2013 Act: this has become more common as institutional investors take governance seriously.
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Class action (S.245 the nuclear option): Satyam Computer Services (2009): promoter Ramalinga Raju confessed to fabricating accounts for 7 years (inflated revenue by Rs.7,000 crore). 2 lakh+ shareholders lost money. Pre-2013: shareholders had NO class action mechanism each would file individual suits (impractical). Post-2013 (S.245): prescribed number of members can file a CLASS ACTION against the company, directors, auditors, and experts for acts prejudicial to shareholders' interests. NCLT can order damages, restrain directors, and direct changes in management. Satyam-type fraud now has a collective remedy.
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Minority protection through EGM requisition: In a company where promoter holds 55% (majority), minority (45%) is unhappy with the promoter-appointed MD's performance (company losses for 3 consecutive years). Minority can: (a) requisition EGM (S.100(2): 10% of voting capital = sufficient), (b) propose resolution to REMOVE the MD (S.169: ordinary resolution suffices for removal), (c) even though promoter has 55%, if institutional investors (holding 20%) join minority 45% + 20% = 65% > 50% MD can be removed. This is activism changing corporate outcomes through collective shareholder action.
Recall Check
- What are the three financial thresholds for CSR applicability?
- What must a company do if it cannot spend 2% on CSR in a given year?
- Name three mechanisms through which shareholders can exercise activism.
Distinctions
| Aspect | CSR (S.135) | Philanthropy/Charity |
|---|---|---|
| Nature | MANDATORY (statutory obligation) | VOLUNTARY (goodwill) |
| Trigger | Meeting financial thresholds | Company's own choice |
| Quantum | At least 2% of average net profits | Any amount (no minimum) |
| Activities | Must be within Schedule VII | Any charitable purpose |
| Reporting | Mandatory disclosure in annual report | No statutory reporting |
| Penalty for non-compliance | Fine on company + officers | No penalty (voluntary) |
| Board involvement | CSR Committee mandatory; board approves policy | No structured governance requirement |
| Aspect | Shareholder Activism | Shareholder Passivity |
|---|---|---|
| Voting | Actively votes (including AGAINST proposals) | Doesn't attend meetings; gives blank proxy |
| Engagement | Questions management; requisitions meetings | Accepts whatever board proposes |
| Remedy | Files class action, oppression petition if needed | Sells shares and exits (Wall Street rule) |
| Impact | Changes corporate behaviour (removal of bad directors, pay reform) | No impact (management operates without accountability) |
| Indian trend | Growing post-2013 (institutional investors, proxy advisers) | Declining (but still dominant among retail investors) |
Flashcards
Q: What is the CSR spending requirement under S.135? A: At least 2% of average net profits of the preceding 3 financial years must be spent on CSR activities listed in Schedule VII.
Q: Which companies must comply with S.135? A: Companies with (in preceding FY): net worth ≥ Rs.500 Cr OR turnover ≥ Rs.1,000 Cr OR net profit ≥ Rs.5 Cr.
Q: What happens if a company doesn't spend the required CSR amount? A: Must transfer unspent amount to Unspent CSR Account (spend within 3 FYs) or to a Fund in Schedule VII (PM Relief Fund, etc.). Failure to spend AND transfer = penalty on company + officers.
Q: What is shareholder activism? A: Active exercise of shareholder governance rights (voting, requisitioning meetings, filing class actions, removing directors) to influence corporate decisions as opposed to passive investment.
Q: What is a class action under S.245? A: Collective legal action by a prescribed number of members against company/directors/auditors/experts for conduct prejudicial to shareholder interests. Filed before NCLT.
Q: Name three activities eligible as CSR under Schedule VII. A: Education, healthcare, environmental sustainability, poverty eradication, gender equality, rural development, heritage protection, disaster relief, sports promotion.
Exam Scenario
Sigma Ltd (net profit Rs.50 crore; turnover Rs.600 crore) does not constitute a CSR Committee and spends nothing on CSR for FY 2025-26. The company argues: "CSR is voluntary we prefer to invest profits in business growth." Advise on compliance.
Applicability: Sigma's net profit exceeds Rs.5 crore (threshold). Therefore S.135 APPLIES regardless of net worth or turnover (only ONE criterion needs to be met).
Non-compliance identified:
(1) CSR Committee not constituted: S.135(1) mandates: board SHALL constitute CSR Committee (3+ directors, minimum 1 independent). Sigma has NOT done this. Violation of S.135(1).
(2) No CSR spending: Required spending = 2% of average net profits of preceding 3 FYs. If average = Rs.50 Cr: 2% = Rs.1 crore must be spent on Schedule VII activities. Sigma spent Rs.0. Violation of S.135(5).
(3) No transfer of unspent amount: Since Sigma spent nothing, it must transfer Rs.1 crore to either (a) a Fund in Schedule VII (PM National Relief Fund, etc.) within 6 months of FY end, OR (b) an Unspent CSR Account (for spending within 3 years). Failure to transfer: separate violation.
Company's argument fails: Post-2021 Amendment, CSR is NOT voluntary for qualifying companies. S.135(5) uses SHALL it is mandatory. "Preferring business growth" is not a ground for non-compliance.
Penalties (S.135(7)-(8)):
- Company: Rs.50,000 to Rs.25 lakhs fine.
- Every defaulting officer: Rs.50,000 to Rs.5 lakhs fine (or imprisonment up to 3 years in case of company under S.135(6) fraudulent reporting of CSR spending).
Advice: Immediately constitute CSR Committee, formulate policy, and either (a) spend Rs.1 crore on Schedule VII activities before year-end, or (b) transfer to Unspent CSR Account and plan spending over next 3 FYs. Non-compliance is not an option it attracts monetary penalty and reputational damage.