Corporate Social Responsibility (CSR)
(Section 135 of the Companies Act, 2013)
Introduction
Corporate Social Responsibility (CSR) has become an important aspect of corporate governance in India. Section 135 of the Companies Act, 2013 provides the statutory framework for CSR and requires certain prescribed companies to undertake CSR activities in accordance with the provisions of the Act, the Companies (Corporate Social Responsibility Policy) Rules, 2014 and Schedule VII.
The CSR provisions under the Companies Act, 2013 came into force with effect from 1 April 2014.
The objective of CSR is not merely to make a financial contribution to social causes, but to encourage companies to participate in activities having a positive social, environmental and economic impact.
- Applicability of Section 135
- Section 135 applies to EVERY company which, during any financial year, satisfies any of the following thresholds:
- Net worth: ₹500 crore or more; or
- Turnover: ₹1,000 crore or more; or
- Net profit: ₹5 crore or more.
- Satisfaction of ANY ONE of the above criteria triggers the CSR provisions.
- Not perpetual in nature and should be examined financial year-wise.
- Constitution of CSR Committee
A company to which Section 135 applies is required to constitute a Corporate Social Responsibility Committee of the Board.
The CSR Committee is responsible for, among other things:
- Recommending the CSR Policy to the Board;
- Recommending the amount of expenditure to be incurred on CSR activities;
- Monitoring the CSR Policy from time to time; and
- Performing such other functions as may be prescribed.
Exception:
Where the amount required to be spent by a company under Section 135(5) does not exceed ₹50 lakh, the requirement for constitution of a separate CSR Committee does not apply, and the functions of the CSR Committee are to be discharged by the Board of Directors.
- CSR Policy
- The Corporate Social Responsibility Committee (CSR Committee), or where the constitution of CSR Committee is not mandatory, the Board is responsible to frame the CSR Policy.
- The CSR Policy should identify the areas and activities in which the company proposes to undertake CSR initiatives, keeping in view the activities specified in Schedule VII of the Companies Act, 2013.
- The Board is responsible for approving the CSR Policy and ensuring appropriate implementation and monitoring.
- Activities Covered Under CSR (Schedule VII)
Broad areas covered under Schedule VII include activities relating to:
- Eradication of hunger, poverty and malnutrition;
- Promotion of health care and sanitation;
- Education and vocational skills;
- Gender equality and empowerment of women;
- Environmental sustainability;
- Protection of national heritage, art and culture;
- Measures for the benefit of armed forces veterans and their dependents;
- Rural and slum area development;
- Disaster management, including relief, rehabilitation and reconstruction; and
- Other activities covered under Schedule VII.
- Minimum CSR Expenditure
- A company covered under Section 135 is required to spend, in every financial year, at least 2% of the average net profits of the company made during the three (3) immediately preceding financial years
- Where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years
- Computation of net profit is to be made in accordance with Section 198 (*Primarily PBT)
Note: The computation of Net Profit for Section 135 is as per Section 198 of the Companies Act, 2013 which is primarily PROFIT BEFORE TAX (PBT). (Ref. General Circular No. 01/2016 dated 12/01/2016.)
- Unspent CSR Amount
One of the most important aspects of Section 135 is the treatment of unspent CSR expenditure.
The treatment depends upon whether the unspent amount relates to an ongoing project.
A. Unspent amount relating to an ongoing project
Where the unspent amount relates to an ongoing project fulfilling the prescribed conditions, the company is required to transfer the amount to a special bank account called the:
“Unspent Corporate Social Responsibility Account”
- The transfer is required to be made within 30 days from the end of the financial year.
- Under Section 135(6), the amount is required to be spent within three financial years from the date of transfer,
- failing which the remaining amount is required to be transferred to a Fund specified in Schedule VII within a period of thirty days from the date of completion of the third financial year.
B. Unspent amount not relating to an ongoing project
- Where the unspent amount does not relate to an ongoing project, Section 135 requires the amount to be transferred to a Fund specified in Schedule VII within six months from the expiry of the financial year.
- Therefore, companies should carefully classify unspent CSR amounts before determining the applicable compliance route.
- Excess CSR Expenditure
- Excess CSR expenditure may be set off against the CSR expenditure requirement of succeeding financial years.
- CSR Implementation
- CSR activities may be undertaken by the company itself
- through eligible implementing agencies such as specified Section 8 companies, registered public charitable trusts or societies and other entities meeting the prescribed requirements.
- The company should conduct appropriate due diligence of implementing agencies and maintain adequate documentation regarding:
- CSR project;
- Project objectives;
- Budget;
- Implementing agency;
- Utilization of funds;
- Project progress;
- Impact and outcomes; and
- Supporting documents.
- Board’s Responsibility
- CSR is ultimately a Board-level responsibility.
- ensure appropriate monitoring of CSR projects
- statutory disclosures.
- The Board is required to consider:
the recommendations of the CSR Committee,
approve the CSR Policy
ensure that the company undertakes CSR activities in accordance with the applicable provisions.
- CSR Disclosure and Reporting
Companies covered under the CSR provisions are required to make prescribed disclosures regarding CSR in their Board’s Report and, where applicable, on the company’s website.
The disclosures generally provide stakeholders with information regarding matters such as:
- CSR Policy;
- CSR Committee;
- CSR projects;
- Amount required to be spent;
- Amount actually spent;
- Unspent CSR amount;
- Ongoing projects; and
- Other prescribed particulars.
Proper documentation and reconciliation of CSR expenditure are therefore essential for accurate statutory reporting.
- Penalty for Default
On Company
- twice the amount required to be transferred to the specified Fund or Unspent CSR Account, or
- ₹1 crore, whichever is less.
Officer in default
- one-tenth of the amount required to be transferred, or
- ₹2 lakh, whichever is less.
Team CSPKINDIA
M/s Praveen K & Associates |Company Secretaries|
Email Id: praveenkandassociates@gmail.com
Contact: +91 8800343499