By understanding the applicability and requirements of CSR, companies can fulfill their responsibility towards society and promote sustainable development and inclusive growth in India.
Corporate Social Responsibility (CSR) is a vital aspect of corporate governance. It has gained significant importance in recent years. Under Section 135 of the Companies Act 2013 in India, CSR has been mandated for certain companies. It obligates the companies to contribute to society and address social and environmental challenges.
This section requires qualifying companies to allocate a specified percentage of their profits towards CSR activities, fostering sustainable development and inclusive growth. This provision aims to positively impact various stakeholders and promote a more equitable and sustainable business environment by encouraging businesses to embrace their responsibility towards society. In this article, we will discuss the various aspects of CSR under the Companies Act 2013.
CSR Applicability in India
Under Section 135 of the Act, certain companies are required to comply with CSR provisions. It aims to promote responsible business practices and contribute towards the welfare of society. The criteria for CSR applicability are based on the company’s net worth, turnover, and profit.
As per Section 135 of the Companies Act 2013, every company meeting certain criteria must constitute a CSR committee and undertake CSR activities. The criteria are as follows:
- Companies with a net worth of ₹ 500 crore or more, or
- Companies with a turnover of ₹ 1,000 crore or more, or
- Companies with a net profit of ₹ 5 crore or more
Such companies are mandated to spend at least 2% of their average net profits made during the preceding three financial years on CSR activities.
Click here to learn about: CSR-1 Form Registration
Importance of Corporate Social Responsibility
- CSR helps companies be socially responsible and give back to society.
- It improves the company’s reputation.
- CSR activities attract and retain employees.
- It helps build long-term stakeholder relationships.
- CSR can have a positive impact on the environment.
- It can also benefit the communities in which the company operates.
Role of Board of Directors
The Board of Directors plays a crucial role in ensuring that the company meets its CSR obligations. The Board must approve the company’s CSR policy and ensure that the company spends at least 2% of its average net profits of the preceding three years on CSR activities. The Board must also ensure that the company has a CSR committee in place and that the committee is functioning effectively.
Net Profit for CSR Applicability
Net profit is a crucial factor in determining the applicability of CSR (Corporate Social Responsibility) provisions in India. Under Section 135 of the Companies Act 2013, qualifying companies are required to allocate a specified percentage of their net profits towards CSR activities.
The net profit for calculating CSR spending is the profit before tax, as per Section 198 of the Companies Act 2013. This means that companies cannot deduct taxes from their profits when calculating the 2% CSR spending requirement.
Transfer and Use of Unspent Amount
The transfer and use of unspent amounts in the context of CSR (Corporate Social Responsibility) refer to the treatment of funds allocated for CSR activities that remain unutilised at the end of the financial year.
Any unspent CSR amount must be transferred to a special CSR account within six months of the end of the financial year. This amount must be spent on CSR activities within three years, failing which the unspent amount must be transferred to a fund specified by the government.
CSR Committee Applicability
Companies that meet the CSR criteria must constitute a CSR committee consisting of at least three directors, including one independent director. The CSR committee must formulate and recommend the company’s CSR policy to the Board of Directors for approval.
The committee must consist of at least three directors, with at least one of them being an independent director. These directors bring diverse perspectives and expertise to the committee’s discussions and decision-making processes, ensuring an effective CSR governance structure within the company.
Duties of the CSR Committee
The CSR committee has several duties, including:
- Formulating and recommending the CSR policy to the Board of Directors
- Recommending the CSR activities to be undertaken by the company
- Monitoring the CSR activities of the company
- Recommending the amount of CSR spending
CSR Reporting
Companies must disclose their CSR activities in their annual report, including details of the CSR committee, the CSR policy, the amount spent on CSR activities, and the impact of the activities. The annual report must also include a statement indicating that the company has complied with the CSR provisions of the Companies Act 2013.
CSR Policy
The CSR policy of the company must include the following:
- The activities to be undertaken by the company
- How the activities will be undertaken
- The geographical areas in which the activities will be undertaken
- The reasons for undertaking the activities
- The expected impact of the activities
List of Permitted Activities To Be Included in Accordance With Schedule VII of the Companies Act, 2013
The activities that the company can undertake as part of its CSR activities are listed in Schedule VII of the Companies Act 2013. The activities include:
- Eradicating hunger, poverty, and malnutrition
- Promoting education
- Promoting healthcare, including preventive healthcare
- Promoting gender equality and empowering women
- Ensuring environmental sustainability
- Protection of national heritage, art, and culture
- Supporting armed forces veterans, war widows, and their dependents
- Promoting sports
Fines and Penalties for Non-Compliance
If a company doesn’t follow the rules about spending money on social responsibility activities, they can be punished with a fine of at least ₹ 50,000. This fine can go up to ₹ 25 lakh. Also, any officer of the company who doesn’t follow the rules can be punished with imprisonment for up to three years or a fine of at least ₹ 50,000. This fine can go up to ₹ 5 lakh, or they could face both imprisonment and a fine.
Reason For Introduction of CSR for Companies
The introduction of CSR provisions in the Companies Act 2013 aimed to promote corporate social responsibility and encourage companies to give back to society. The government recognised that companies are responsible for society, and CSR was seen as a way to ensure that companies meet this responsibility. The provisions also help to promote sustainable development and inclusive growth in the country.
Conclusion
CSR is an important concept for companies in India, and the provisions under Section 135 of the Companies Act 2013 mandate certain companies to undertake CSR activities. The CSR activities can positively impact the environment, society, and the company’s stakeholders.
The Board of Directors plays a crucial role in ensuring that the company meets its CSR obligations, and companies must disclose their CSR activities in their annual report. Non-compliance with CSR provisions can lead to fines and penalties, and it is important for companies to ensure that they meet their CSR obligations.
Vakilsearch can help companies in India with their Corporate Social Responsibility (CSR) obligations. Vakilsearch can assist companies in drafting their CSR policy, identifying permitted activities, setting up a CSR committee, and complying with CSR reporting requirements. Contact us today.
FAQs
Why is CSR mandatory?
As per the Companies Act of 2013, CSR is regulated under section 135. Hence, companies falling under this section are obligated to adhere to CSR regulations in India.
What is Section 135 of the Companies Act MCA?
According to Section 135(1) of the Act, every company meeting the specified net worth, turnover, or net profit criteria is required to form a CSR committee. Therefore, even section 8 companies must establish a CSR committee and adhere to CSR regulations upon reaching the defined net worth, turnover, or net profit thresholds.
What is Section 135 of the CSR rules?
Section 135 of the CSR rules mandates certain companies to allocate a portion of their profits towards social responsibility initiatives.
How much CSR is mandatory?
As part of CSR obligations, companies must allocate at least 2% of their net profit from the preceding three years.
Whether provisions of CSR apply to a section 8 Company?
Under Section 135(1) of the Act, companies meeting defined net worth, turnover, or net profit criteria are required to form a CSR committee. Therefore, even Section 8 companies must establish such a committee and follow CSR provisions upon reaching the specified financial benchmarks.
