Corporate Social Responsibility (CSR) is a crucial aspect of modern business, reflecting a company’s commitment to ethical and sustainable practices. In India, CSR is legally mandated for certain companies under Section 135 of the Companies Act, 2013. This article provides a comprehensive overview of CSR provisions, eligibility criteria, and key responsibilities.
Which Companies Qualify for CSR Under the Companies Act, 2013?
A company is required to comply with CSR provisions if it meets any of the following criteria during the immediately preceding financial year:
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Net worth of ₹500 crore or more.
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Turnover of ₹1000 crore or more.
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Net profit of ₹5 crore or more.
These criteria, specified under Section 135(1) of the Companies Act, 2013, read with the Companies (CSR Policy) Rules, 2014, determine which companies must engage in CSR activities.
Do Holding or Subsidiary Companies Also Need to Comply?
No. CSR compliance is specific to each company. A holding or subsidiary is not required to comply with CSR provisions unless it independently meets the eligibility criteria under Section 135(1).
Example: If Company A meets the criteria, but its holding company, Company B, does not meet any of the criteria on its own, Company B is not required to comply with CSR provisions.
Applicability of CSR Provisions to Section 8 Companies
Yes, Section 135(1) applies to Section 8 companies as well. The Act begins with “Every company,” indicating that all companies, including those registered as non-profits under Section 8, are included.
CSR Applicability to New Companies
Yes, CSR provisions apply even if a company has not completed three financial years since its incorporation, provided it meets any of the eligibility criteria. The CSR spending obligation will be based on the average net profits of the preceding financial year(s).
Example: If Company A is incorporated in FY 2018-19 and meets the eligibility criteria for FY 2020-21, its CSR spending will be based on the average net profits of FY 2018-19 and FY 2019-20.
Functions of the CSR Committee
The CSR Committee is responsible for:
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Formulating and recommending the CSR policy to the Board.
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Recommending the amount of expenditure for CSR activities.
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Monitoring the CSR policy of the company.
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Formulating and recommending an annual action plan, as per Rule 5(2) of the Companies (CSR Policy) Rules, 2014.
For companies not required to have a CSR Committee, these functions are carried out by the Board itself.
Responsibilities of the Board in Relation to CSR
The Board of a CSR-eligible company has the following responsibilities:
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Approving the CSR policy.
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Disclosing the policy in its report and on the company’s website, if any.
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Ensuring that CSR activities are undertaken.
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Ensuring the company spends at least 2% of the average net profits of the three preceding financial years on CSR.
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Satisfying itself regarding the utilization of CSR funds.
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Specifying reasons for not spending the required amount and transferring unspent CSR funds as per Sections 135(5) and 135(6) of the Act.
Role of the Government in CSR Implementation
The Government does not directly approve or implement CSR programs. Section 135, along with Schedule VII and the Companies (CSR Policy) Rules, 2014, provides the framework within which companies formulate their CSR policies. The Board of the company is empowered to plan, approve, execute, and monitor CSR activities based on the CSR Committee’s recommendations.
Mechanisms for Monitoring the CSR Process
CSR is a Board-driven process. The Board plans, decides, executes, and monitors CSR activities based on the CSR Committee’s recommendations. Companies are required to disclose CSR activities annually in the MCA21 registry. They must also make necessary disclosures in financial statements regarding CSR, including non-compliance.
Role of the Government in Monitoring CSR Compliance
The Government monitors CSR compliance through disclosures made by companies on the MCA21 portal. Violations of CSR provisions can lead to action against non-compliant companies as per the Companies Act, 2013. Non-compliance has been notified as a civil wrong effective from January 22, 2021.
How is Average Net Profit Calculated for CSR?
The average net profit for CSR spending is calculated as per Section 198 of the Act, excluding items under Rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. Section 198 specifies adjustments to be made while calculating net profit, mainly excluding capital payments/receipts, income tax, and set-off of past losses. Profit Before Tax (PBT) is used for this computation.
Conclusion
Corporate Social Responsibility, as mandated by Section 135 of the Companies Act, 2013, is a vital aspect of corporate governance in India. This article has provided a detailed overview of the eligibility criteria, responsibilities, and key provisions related to CSR, helping companies understand their obligations and contribute to societal well-being.