Understanding Corporate Social Responsibility (CSR) Legislation in India: An Overview of Section 135 of Companies Act 2013
Corporate Social Responsibility (CSR) legislation in India mandates companies (mentioned below) to engage in CSR activities and spend at least 2% of their average net profit from the three fiscal years prior to the current one on CSR initiatives.
A Company with
- a net worth of Rupees 500 crore or more;
- a turnover of Rupees 1000 crore or more; or
- a net profit of Rupees 5 crore or more must comply with the CSR provisions
Foreign enterprises with a branch or project office in India must fulfil CSR commitments if they match the criteria.
Companies that comply with CSR Rules must establish a CSR committee to develop an annual strategy and recommend it to the board. The CSR committee is also responsible for establishing, recommending, and monitoring the company’s CSR policy.
The Ministry of Corporate Affairs (MCA) modified the Companies (Corporate Social Responsibility Policy) Rules, 2014 according to Section 135 and Subsections (1) and (2) of Section 469 of the Companies Act 2013. (18 of 2013). These rules are called the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022. It seeks to calculate the cost of completing social impact assessments of Corporate Social Responsibility (CSR) activities and the mechanism for handling unspent CSR money of corporations.
The Amendment Rules changed the following:
1. Companies must form a CSR committee to oversee their CSR obligations and unspent CSR funds. Unused CSR funds can be kept in this account for three years. CSR monitors its use. The Amendment Rules also removed the exemption for companies that no longer meet CSR committee criteria.
2. The CSR Rules previously allowed up to 5% of CSR spending or Rs. 50 lakh for impact assessment. The Amendment Rules limit the cost of social impact evaluations, which can be considered CSR spending, to 2% of all CSR spending or Rs. 50 lakh, whichever is higher. The change authorizes higher impact assessment spending for major CSR projects.
3. The Amendment Rules provide a new format for the yearly report on CSR efforts. Annual reports must include the following information:
- A brief explanation of its CSR policy;
- Details about the CSR committee’s members, such as the director’s name, designation, and number of meetings held and attended by the director;
- The company’s website links with CSR Committee membership, policy, and board-approved initiatives; Executive summary and impact assessments of CSR projects.
Companies must now declare in their annual report the CSR amount allocated to active projects, additional projects, the surplus amount for set-off, if applicable, and the unspent CSR amount for the previous three financial years. The firm must explain how many capital assets were generated or bought via CSR spending during the fiscal year. Additionally, the annual report shall explain if the company fails to spend 2% of the average net income of the three financial years that have come before.
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