by Corporate Social Responsibility (CSR) refers to the responsibility of companies to contribute towards the social, economic, and environmental well being of society while carrying on their business activities. In India, CSR is governed by Section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014. Eligible companies are required to spend at least 2% of their average net profits of the preceding three financial years on approved CSR activities. CSR promotes sustainable development, ethical business practices, environmental protection, education, healthcare, poverty alleviation, and community welfare. It enhances corporate reputation, strengthens stakeholder relationships, and encourages businesses to balance profitability with social responsibility for the overall development of society.
Provisions of Section135 of the Companies Act, 2013 Applicability:
1. Companies Covered under Section 135
Section 135 of the Companies Act, 2013 applies to every company, including its holding or subsidiary company and a foreign company having a branch or project office in India, that satisfies any one of the prescribed financial criteria during the immediately preceding financial year. Such companies are required to comply with the Corporate Social Responsibility (CSR) provisions. The objective is to ensure that financially strong companies contribute to social and environmental development. Once the prescribed thresholds are met, the company must fulfil all CSR obligations provided under the Act and the relevant rules.
2. Net Worth Criterion
A company is required to comply with Section 135 of the Companies Act, 2013 if it has a net worth of ₹500 crore or more during the immediately preceding financial year. Net worth includes the company’s paid up share capital, reserves, and surplus after deducting accumulated losses and certain prescribed items. Companies meeting this threshold must constitute a CSR Committee, formulate a CSR Policy where applicable, and spend the prescribed amount on CSR activities in accordance with the Act.
3. Turnover Criterion
The CSR provisions become applicable if a company has an annual turnover of ₹1,000 crore or more during the immediately preceding financial year. Turnover refers to the gross revenue earned from the sale of goods or services in the ordinary course of business. Companies satisfying this financial threshold are required to comply with the CSR obligations under Section 135, including spending on eligible CSR activities and making necessary disclosures in the Board’s Report.
4. Net Profit Criterion
A company must comply with Section 135 of the Companies Act, 2013 if it has a net profit of ₹5 crore or more during the immediately preceding financial year. Net profit for CSR purposes is calculated in accordance with the provisions of the Act. Once this threshold is reached, the company is required to undertake CSR activities, allocate the prescribed expenditure, and comply with the reporting and governance requirements specified under the Companies Act, 2013 and the CSR Rules.
5. Constitution of CSR Committee
Every company covered under Section 135 is generally required to constitute a Corporate Social Responsibility Committee of the Board. The Committee recommends the CSR Policy, identifies CSR projects, recommends the amount of expenditure, and monitors implementation. However, where the CSR obligation does not exceed the prescribed limit under the applicable rules, the Board may discharge these functions without constituting a separate CSR Committee, as permitted by law.
6. CSR Spending Requirement
A company to which Section 135 applies must spend at least 2% of its average net profits made during the three immediately preceding financial years on CSR activities specified in Schedule VII of the Companies Act, 2013. If the company fails to spend the required amount, the Board must provide reasons in its report and comply with the provisions relating to the transfer of unspent CSR amounts wherever applicable.
7. CSR Policy Requirement
Every company covered under Section 135 is required to formulate a Corporate Social Responsibility Policy. The policy should specify the CSR activities to be undertaken in accordance with Schedule VII of the Companies Act, 2013 and provide the framework for implementation, monitoring, and reporting. The Board of Directors is responsible for approving and ensuring effective implementation of the CSR Policy in accordance with the recommendations of the CSR Committee, wherever applicable.
8. Disclosure and Reporting Requirements
Companies covered under Section 135 must disclose their CSR Policy, CSR expenditure, and details of CSR activities in the Board’s Report. They are also required to place the CSR Policy on the company’s website, if any. These disclosure requirements promote transparency, accountability, and public confidence by informing shareholders and stakeholders about the company’s social responsibility initiatives and compliance with the CSR provisions under the Companies Act, 2013.
Composition of CSR Committee:
1. Minimum Number of Directors
Under Section 135 of the Companies Act, 2013, the Corporate Social Responsibility (CSR) Committee should generally consist of three or more directors. The Board constitutes the Committee to recommend the CSR Policy, monitor CSR activities, and recommend the amount of CSR expenditure. A properly constituted Committee ensures effective planning and implementation of CSR initiatives.
2. Presence of Independent Director
In the case of a public company required to appoint an Independent Director under the Companies Act, 2013, the CSR Committee must include at least one Independent Director. The Independent Director brings impartiality, transparency, and objective judgment in the planning, monitoring, and evaluation of CSR activities, thereby strengthening corporate governance.
3. Composition in Private Companies
A private company that is not required to appoint an Independent Director may constitute its CSR Committee with two or more directors. Such companies are exempt from including an Independent Director on the Committee. This flexibility enables private companies to comply with CSR requirements while maintaining an appropriate governance structure.
4. Composition for Foreign Companies
A foreign company covered under Section 135 must constitute a CSR Committee consisting of at least two persons. One person should be the individual authorized under Section 380(1)(d) to accept notices and documents on behalf of the company, while the other person must be nominated by the foreign company. This ensures proper implementation of CSR obligations in India.
5. Role of the Board in Constituting the Committee
The Board of Directors is responsible for constituting the CSR Committee and appointing its members. The Board also considers the Committee’s recommendations regarding the CSR Policy, annual action plan, and expenditure. By constituting an effective CSR Committee, the Board ensures proper governance, monitoring, and implementation of CSR activities in accordance with Section 135 of the Companies Act, 2013.
6. Exemption from CSR Committee
Under the Companies (Corporate Social Responsibility Policy) Rules, 2014, if the amount required to be spent on CSR does not exceed ₹50 lakh in a financial year, the company need not constitute a CSR Committee. In such cases, the Board of Directors performs all the functions of the CSR Committee, including formulating the CSR Policy and monitoring CSR activities.
Mandatory 2% Spending and Treatment of Unspent Amount:
1. Mandatory 2% CSR Spending
Under Section 135(5) of the Companies Act, 2013, every company covered by the CSR provisions must spend at least 2% of the average net profits earned during the three immediately preceding financial years on eligible CSR activities specified in Schedule VII. The Board of Directors must ensure that the CSR expenditure is made in accordance with the approved CSR Policy and annual action plan. This mandatory spending encourages companies to contribute towards education, healthcare, environmental protection, rural development, and other activities that promote the welfare of society and sustainable national development.
2. Unspent Amount Relating to Ongoing Projects
If the company fails to spend the required CSR amount on an ongoing project, Section 135(6) of the Companies Act, 2013 requires the unspent amount to be transferred within 30 days from the end of the financial year to a special Unspent Corporate Social Responsibility Account. The company must utilize this amount for the approved ongoing project within three financial years. If the amount remains unspent after this period, it must be transferred to a fund specified in Schedule VII within 30 days after the completion of the third financial year.
3. Unspent Amount Not Relating to Ongoing Projects
Where the unspent CSR amount does not relate to an ongoing project, the company must transfer the amount to a Fund specified in Schedule VII of the Companies Act, 2013, such as the Prime Minister’s National Relief Fund or any other notified fund. This transfer must be made within six months from the end of the financial year. The provision ensures that unspent CSR funds are ultimately utilized for public welfare and are not retained indefinitely by the company.
4. Disclosure of Unspent CSR Amount
The Board of Directors must disclose the details of CSR expenditure and any unspent CSR amount in the Board’s Report as required under Section 135 and the Companies (Corporate Social Responsibility Policy) Rules, 2014. The report should explain the reasons for not spending the required amount and specify the treatment of the unspent funds. These disclosure requirements promote transparency, accountability, and compliance with CSR obligations while enabling shareholders and regulators to monitor the company’s social responsibility initiatives.
5. Importance of Mandatory CSR Spending
The mandatory CSR spending requirement ensures that financially capable companies actively contribute to the social and economic development of the country. It promotes responsible corporate behaviour by directing funds towards education, healthcare, environmental sustainability, rural development, poverty alleviation, and other approved activities under Schedule VII of the Companies Act, 2013. Proper treatment of unspent CSR amounts ensures that the intended social benefits are not lost due to delays or non utilization. These provisions strengthen corporate accountability and encourage companies to participate in inclusive and sustainable national development.
