A Detailed Analysis on Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) has become a cornerstone of corporate governance in India, thanks to the landmark provisions of Section 135 of the Companies Act, 2013, and its accompanying rules. This legislation mandates certain companies to allocate a portion of their profits towards social and environmental initiatives, making India one of the countries to legally formalize CSR obligations.

Under this framework, companies meeting specified financial thresholds are required to form CSR committees, develop policies, and ensure transparent reporting of their initiatives. The objective is to integrate corporate growth with social development, addressing critical issues such as education, healthcare, environmental sustainability, and rural development.

This article delves into the intricacies of CSR under the Companies Act, 2013, highlighting its implications, compliance requirements, and the broader impact it aims to achieve on Indian society.

1. APPLICABILITY OF CSR:

As per Section 135 of the Companies Act 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014, every Company[1] in the immediately preceeding financial year has:

a) Net worth of rupees five hundred crores or more

or

b) turnover[2] of rupees one thousand crore or more

or

c) net profit[3] of rupees five crore or more

needs to spend at least two per cent of the average net profits of the company made during the three 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], in pursuance of its Corporate Social Responsibility Policy.

Example:

We are checking as on 01/04/2024

XYZ Pvt Ltd has the following figures for the FY 2023-24 as on 31/03/2024:

Turnover (Revenue from Operations) = Rs 100 Cr

Net worth = Rs 150 Cr

Net profit = 40 Cr

Applicability: Net profit in the proceeding FY i.e. 2023-24 crosses Rs 5 Cr- Provision of CSR Applicable

Amount to be Spend in FY 2024-25 – 2% of Average net profit of preceeding 3 Financial year i.e. (2023-24, 2022-23, 2021-22)

= 2% (40 Cr + 35 Cr + 30 Cr/3)

= 2% (35 Cr)

=70 Lakhs

2. CSR COMMITTEE:

Applicability:

a) As per Section 135(1) of Companies Act 2013, Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more Directors, out of which at least one director shall be an independent director.

Provided that

• • a company covered under subsection (1) of section 135 which is not required to appoint an independent director pursuant to sub-section (4) of section 149 of the Act, shall have its CSR Committee without such director.
  • a private company having only two directors on its Board shall constitute its CSR Committee with two such directors;
  • with respect to a foreign company covered under these rules, the CSR Committee shall comprise of at least two persons of which one person shall be as specified under clause (d) of sub-section (1) of section 380 of the Act and another person shall be nominated by the foreign company.

b) As per Section 135(9) of Companies Act 2013, Where the amount required to be spent by a Company as a CSR does not exceed fifty lakh rupees, then requirement under 135(1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.

However if the Company is not required to constitute CSR Committee as per law can voluntarily constitute the committee.

Functions of CSR committee:

The CSR Committee shall formulate and recommend to the Board, an annual action plan in pursuance of its CSR Policy, which shall include the following, namely: –

(a) the list of CSR projects or programs that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act.

(b) the manner of execution of such projects or programs.

(c) the modalities of utilization of funds and implementation schedules for the projects or programs.

(d) monitoring and reporting mechanism for the projects or programs; and

(e) details of need and impact assessment, if any, for the projects undertaken by the company.

• • formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII.
  • recommend the amount of expenditure to be incurred on the activities; and
  • monitor the Corporate Social Responsibility Policy of the company from time to time.

3. ROLE OF BOARD OF DIRECTORS:

a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in Board report and also place it on the company’s website, if any.

b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are only undertaken by the company.

c) The Board of a company shall satisfy itself that the funds so disbursed have been utilised for the purposes and in the manner as approved by it.

d) In case of ongoing project, the Board of a Company shall monitor the implementation of the project with reference to the approved timelines and year wise allocation and shall be competent to make modifications, if any.

4. MODES OF IMPLEMENTATION OF CSR ACTIVITIES:

There are three major modes for the implementation of CSR Activities which are

1. Direct Spending by the Company itself – where Company identifies the CSR projects and spends directly on it.

2. Indirect spending – where the Company gives the sum required to be spend to the trust or foundation or other entities which is eligible for Implementation of CSR activities (Any entity to be eligible for Implementation of CSR activities needs to file form CSR-1 with the ministry of corporate affairs).

3. A Company may also collaborate with other companies for undertaking projects or programmes or CSR activities.

5. SPENDING OF AMOUNT AS A CSR ACTIVITY:

a) Every Company, in the immediately preceeding financial year has Net worth of rupees five hundred crores or more or turnover of rupees one thousand crore or more or net profit of rupees five crore or more, needs to spend at least two per cent of the average net profits of the Company made during the three immediately preceding financial years.

b) Where the Company fails to spend the amount required to spend as per above point till the end of the financial year, then

i. If the amount pertaining towards the Ongoing Project then such unspent amount needs to transfer to the separate bank account named as Unspent CSR account within 30 days of end of Financial Year and that amount needs to be utilised in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

ii. If the amount is not pertaining towards the Ongoing Project then such unspent amount needs to transfer to the Funds specified in Schedule VII, within a period of six months from the end of financial year.

6. REPORTING OF CSR ACTIVITIES:

1. Every Company which is required to comply with the provisions of CSR needs to annex an Annexure containing details of CSR activities in the report of Board of Directors under section 134 of the Companies Act 2013, format of which is prescribed in Companies (Corporate Social Responsibility Policy) Rules, 2014.

2. In case of a foreign company, the balance sheet filed under clause (b) of sub-section (1) of section 381 of the Act, shall contain an annual report on CSR, format of which is prescribed in Companies (Corporate Social Responsibility Policy) Rules, 2014.

3. Every Company which is required to comply with the provisions of CSR needs to file the form CSR-2 which is addendum to form AOC-4 with the Ministry of Corporate Affairs.

7. OTHER COMPLIANCES:

1. Every company having average CSR obligation of ten crore rupees or more in pursuance of section 135 of the Act, in the three immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of one crore rupees or more, and which have been completed not less than one year before undertaking the impact study. And The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR.

2. A Company undertaking impact assessment may book the expenditure towards Corporate Social Responsibility for that financial year, which shall not exceed two percent of the total CSR expenditure for that financial year or fifty lakh rupees, whichever is higher.

3. The Board of Directors of the Company shall mandatorily disclose the composition of the CSR Committee, and CSR Policy and Projects approved by the Board on their website, if any, for public access.

4. Chief Financial Officer or the person responsible for financial management shall certify that the funds so disbursed have been utilised for the purposes and in the manner as approved by Board of Directors.

CONCLUSION:

The implementation of CSR under Section 135 of the Companies Act, 2013, has set a transformative precedent in aligning corporate activities with societal and environmental goals in India. By mandating specific thresholds and providing clear guidelines for governance, spending, and reporting, the legislation has created a structured framework for companies to contribute to national development.

CSR is not merely a compliance requirement but an opportunity for businesses to foster goodwill, enhance brand value, and build trust with stakeholders. Companies that strategically invest in CSR activities can achieve sustainable growth while addressing critical social challenges such as education, healthcare, and environmental sustainability.

As the scope and impact of CSR initiatives continue to evolve, it is imperative for organizations to embrace this responsibility with innovation and commitment, thereby playing a pivotal role in the nation’s inclusive and sustainable development.

[1] Here if the holding Company or subsidiary Company fulfils the criterial then such company needs to comply with the provision separately.

It also includes foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India, which fulfills the criteria specified in section 135.

[2] Turnover means income earned from the main objects of the Company or Revenue from Opertaion.

[3] Net profit wherever mentioned means net profit calculated as per Section 198 of the Companies Act 2013.