by Corporate Social Responsibility (CSR) obligation under Section 135 of the Companies Act, 2013 is an essential legal requirement for certain companies, ensuring that they contribute to societal welfare. The section applies to companies that meet specific financial criteria, ensuring that the larger companies with substantial resources participate in CSR activities.
Applicability of CSR Criteria
As per Section 135, CSR is mandatory for companies that meet any one of the following criteria in the preceding financial year:
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Net worth of ₹500 crore or more,
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Turnover of ₹1,000 crore or more, or
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Net profit of ₹5 crore or more.
If a company fulfills any of these criteria, it must adhere to CSR regulations outlined in the Act.
Formation of CSR Committee
For companies meeting the criteria under Section 135, it is required to constitute a CSR Committee. This committee should have:
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At least three directors, including at least one independent director for public companies.
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For private companies and unlisted companies, the requirement may be adjusted, but at least two directors should be appointed to the CSR Committee.
The CSR Committee is responsible for overseeing CSR activities, ensuring funds are allocated appropriately, and reporting to the board.
Formulation of CSR Policy
The CSR Committee is tasked with formulating a CSR Policy for the company. The policy outlines the strategic direction, scope, and focus areas for CSR activities. The Board must approve the policy, and it must be:
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Aligned with Schedule VII of the Companies Act, which lists eligible CSR activities,
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Measurable and time-bound for effective implementation,
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Consistent with the company’s values and goals for sustainability.
CSR Expenditure Obligation
The Act mandates that the applicable company spends at least 2% of its average net profit from the last three financial years on CSR activities. If a company does not spend the prescribed amount, it is required to explain the reasons in the Board’s report. CSR spending should be directed towards activities listed in Schedule VII of the Companies Act.
CSR Activities Covered under Schedule VII
The companies must use their CSR funds for activities specified in Schedule VII of the Companies Act, which include:
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Environmental sustainability,
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Eradicating hunger,
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Promoting education and healthcare,
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Providing skills development,
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Supporting national heritage and culture,
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Promoting gender equality and women empowerment,
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Disaster management, and more.
Companies are encouraged to align CSR with national priorities, including projects in the areas of rural development and the welfare of marginalized communities.
Reporting of CSR Activities
CSR activities need to be disclosed in the Board’s report, which is a mandatory part of the company’s annual filing. The report should include:
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The CSR policy followed by the company,
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The details of the CSR initiatives undertaken,
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The amount spent on each activity,
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The reasons for shortfall in spending (if applicable).
Additionally, companies with a website must also publish their CSR policy and initiatives on the website for public transparency.
Impact Assessment of CSR Initiatives
While not mandatory, it is encouraged that companies engage in impact assessment for large CSR projects. This helps measure the effectiveness of CSR spending, ensuring that initiatives achieve their intended outcomes. This can be undertaken either by internal teams or through independent third-party assessments, and the results must be made available in public records.
Unspent CSR Funds
If a company is unable to spend the prescribed CSR amount in a given year, the unspent amount must be transferred to one of the following funds within 6 months from the end of the financial year:
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PM CARES Fund,
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Swachh Bharat Kosh,
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Clean Ganga Fund,
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Other government-specified funds.
This provision ensures that CSR funds are directed towards national welfare even if companies cannot directly engage in projects in that particular year.
Penalties for Non-Compliance
Non-compliance with CSR spending regulations invites penalties under the Companies (Amendment) Act, 2019:
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Company: Fine of twice the unspent amount or ₹1 crore (whichever is lower),
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Officers in default: A fine of ₹2 lakh or imprisonment for up to 1 year, or both.
These penalties ensure that companies comply with CSR regulations and contribute effectively to society.
Governance and Transparency in CSR:
To ensure accountability and transparency in CSR spending, companies are expected to:
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Regularly update the Board and the public on CSR activities and expenditures,
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Ensure compliance with CSR policy guidelines,
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Maintain records for auditing purposes to prevent misuse of funds.
By focusing on governance and transparency, the Companies Act aims to make CSR a meaningful contribution to society.
CSR and Public Perception:
Adherence to CSR regulations positively influences public perception, enhancing the company’s brand image. Businesses with strong CSR initiatives are perceived as responsible corporate citizens, which can strengthen customer loyalty, attract investors, and foster better relationships with government and society. The growing awareness of corporate responsibility has made CSR a strategic tool for modern companies.
