Corporate Social Responsibility Under Section 135 of Companies Act 2013

We live a dynamic life in a world that is growing more and more complex. Global-scale environment, social, cultural and economic issues have now become part of our everyday life. Boosting profits is no longer the sole business performance indicator for the corporate and they have to play the role of responsible corporate citizens as they owe a duty towards society. 

Thus, in India, the Ministry of Corporate Affairs (MCA) introduced CSR as a mandatory compliance for certain companies under the Companies Act, 2013. Thus, it is a statutory obligation for companies to engage in CSR activities and projects, which will help achieve sustainable development goals and positively impact various aspects of society.

What is Corporate Social Responsibility?

Corporate Social Responsibility (CSR) means the voluntary contributions made by companies to a better society and a cleaner environment. It is a concept whereby companies integrate social and other useful concerns in their business operations for the betterment of their stakeholders and society in general.

However, Section 135 of the Companies Act, 2013 ("Act") provides that certain companies must mandatorily contribute a certain amount towards CSR activities. As per the Act, 'Corporate Social Responsibility' means and includes but is not limited to:

• Projects or programmes relating to activities specified in Schedule VII to The Act.
• Projects or programmes relating to those activities which are undertaken by the Board of Directors of a company in ensuring the recommendation of the CSR Committee of the Board as per declared CSR Policy along with the conditions that such policy will cover subjects specified in Schedule VII of the Act.

CSR Applicability in India

The provisions of CSR applies to every company fulfiing any of the following conditions in the preceding financial year:

• Net worth of more than Rs.500 crore
• Turnover of more than Rs.1000 crore
• Net profit of more than Rs.5 crore

The Board of Directors of every company for which the CSR provisions apply must ensure that the company spends in every financial year at least 2% of its average net profits made during the immediately preceding three financial years as per its CSR policy. If the company has not completed three financial years since its incorporation, it must spend 2% of its average net profits made during the immediately preceding financial years as per its CSR policy.

Importance and Benefits of Corporate Social Responsibility

CSR is an immense term that is used to explain the efforts of a company in order to improve society in a significant manner. Below reasons reflect why CSR is important:

• CSR improves the public image by publicising the efforts towards a better society and increasing their chance of becoming favourable in the eyes of consumers.
• CSR increases media coverage as media visibility throws a positive light on the organisation.
• CSR enhances the company’s brand value by building a socially strong relationship with customers.
• CSR helps companies to stand out from the competition when companies are involved in any kind of community.

Role of Board of Directors

The role of the Board of Directors in implementing CSR is as follows:

• After considering the recommendations made by the CSR Committee, approve the CSR policy for the Company and disclose the contents of the Policy on its website.
• The Board must ensure only those activities must be undertaken which are mentioned in the policy.
• The Board of Directors shall make sure that the company spends in every financial year, a minimum of 2% of the average net profits made during the three immediately preceding financial years as per CSR policy.
• In case a company has not completed three financial years since its incorporation, the average net profits shall be calculated for the financial years since its incorporation.
• The Board’s Report shall disclose:
  • CSR Committee’s composition
  • The contents of CSR Policy
  • In case CSR spending does not meet 2% as per CSR Policy, the reasons for the unspent amount, and details of the transfer of unspent amount relating to an ongoing project to a specified fund (transfer within a period of six months from the expiry of the financial year). 

List of Permitted CSR Activities Under Schedule VII 

The Board of Directors shall ensure that the activities included by a company in its CSR Policy fall within the purview of the activities included is schedule VII of the Act. The activities specified in Schedule VII which may be included by companies in their Corporate Social Responsibility Policies are as follows:

Examples of CSR

In 2023-2024, 24,392 companies in India contributed to CSR through 51,966 projects, spending around Rs. 29,987 crore in 14 development sectors. The top companies undertaking CSR activities and projects in India include Reliance Industries Limited, Apollo Tyres Limited, Adani Group, Tata Consumer Products Limited, Asian Paints Limited, and Procter and Gamble.

Examples of CSR in 2023-24 in India are as follows:

Example 1: 

As per the CSR Journal, Reliance Industries Limited (RIL) spent Rs. 1,592 crore for its CSR initiatives in 2023-24. The company made efforts in water conservation, leading to an increase in the water harvesting capacity by around 28.5 million cubic meters. It has also undertaken initiatives to improve agricultural practices and benefit more than 39,000 hectares of farmland. Its healthcare initiatives have impacted the lives of more than 9.29 million people. It has also benefitted 84,000 women through its digital literacy programmes in the last financial year alone.

Example 2: 

As per the CSR Journal, Apollo Tyres Limited spent Rs. 15.7 crore on its CSR initiatives in 2024, impacting the lives of more than 1.23 million people in India. Apollo Tyres supports the Indian Government’s commitment to eliminate Tuberculosis in India by 2025 by setting up a dedicated healthcare programme for the trucking community in partnership with the Union and Central TB Division, USAID, and the Ministry of Health and Family Welfare. It is also working to empower rural women through Project Navya, its CSR initiative to provide access to women SHGs in rural areas to microfinancing and support through skill training to start their entrepreneurial journeys. 

Example 3: 

As per the CSR Journal, Adani Group spent more than Rs. 650 crore on CSR in FY 2023-24. It has committed to invest $100 billion over the next decade in various green energy projects in alignment with India’s goal to achieve net zero emissions by 2070. It includes investment for the development of 10 gigawatts (GW) of hydroelectric projects internationally.

Transfer and Use of Unspent Amount

If a company fails to spend 2% of its net average profits for CSR, it must transfer unspent CSR amount to the following specified funds within six months from the end of the financial year:

• A contribution made to the Prime Minister’s National Relief Fund.
• Any other fund is initiated by the central government concerning socio-economic development, relief and welfare of the scheduled caste, minorities, tribes, women and other backward classes.
• A contribution made to an incubator is funded either by the central government, the state government, public sector undertaking of the state or central government, or any other agency.
• Contributions made to:
  • Public-funded universities
  • Indian Institute of Technology (IITs)
  • National Laboratories and Autonomous Bodies established under:
    • Indian Council of Agricultural Research (ICAR)
    • Council of Scientific and Industrial Research (CSIR)
    • Department of Atomic Energy (DAE)
    • Department of Biotechnology (DBT)
    • Department of Pharmaceuticals
    • Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH)
    • Ministry of Electronics and Information Technology 
    • Indian Council of Medical Research (ICMR)
    • Defence Research and Development Organisation (DRDO) 
    • Department of Science and Technology (DST) engaged in conducting research in technology, science, medicine, and engineering aimed at encouraging Sustainable Development Goals (SDGs).

In case of the unspent amount relating to an ongoing project under the company’s CSR policy, the company will transfer the unspent amount to an exclusive account to be opened by a company, known as ‘Unspent Corporate Social Responsibility Account’, in any scheduled bank within 30 days from the end of the financial year.

The company must use the funds in the ‘Unspent Corporate Social Responsibility Account’ towards its obligations under the CSR policy within a period of three financial years from the date of the transfer.

In a case where the company fails to utilise the funds at the end of the three financial years, the funds should be transferred to the specified fund mentioned above within a period of 30 days upon completion of the third financial year.

Net Profit for CSR Applicability

Every company which needs to comply with the CSR provisions have to spend 2% of the average net profits made during the preceding three years as per the CSR policy. The computation of net profit for CSR is as per Section 198 of the Companies Act, 2013.

Section 198 provides that while computing the net profits of a company, a credit should be given for the subsidies and bounties received from any government or public authority constituted or authorised on this behalf.

For computing net profits, credit cannot be given for the following sums:

• Profits, by way of premium on shares, unless the company is an investment company.
• Profits on sales of forfeited shares.
• Profits of a capital nature, including profits from the sale of the undertaking or any part thereof.
• Profits from the sale of any fixed assets or immovable property of a capital nature comprised in the undertaking, unless the company business consists of buying and selling any assets or property.
• Any change in the carrying amount of an asset or of a liability recognised in equity reserves, including surplus in profit and loss accounts for the measurement of the asset or the liability at fair value.
• Any amount representing notional gains, unrealised gains or revaluation of assets

In making the computation of net profits, the following sums should be deducted:

• Every usual working charge.
• Directors’ remuneration.
• Bonus or commission payable or paid to any member of the company’s staff, technician, engineer or person engaged or employed by the company, whether on a part-time or whole-time basis.
• Any tax notified by the Central Government as a tax on abnormal or excess profits.
• Any tax on business profits imposed for special reasons or special circumstances and notified by the Central Government.
• Interest on debenture issued by the company.
• Interest on mortgages executed by the company and on advances and loans secured by a charge on its floating or fixed assets.
• Interest on unsecured advances and loans.
• Expenses on repairs, whether to movable or immovable property, provided the repairs are not of a capital nature.
• Outgoings inclusive of contributions made under section 181.
• Depreciation to the extent specified in section 123.
• Excess of expenditure over income.
• Damages or compensation to be paid for any legal liability and any sum paid by way of insurance against the risk of meeting the such liability.
• Debts considered bad and adjusted or written off during the year of account.

In making the computation of net profits, the following sums cannot be deducted:

• Income-tax and super-tax payable by the company under the Income-tax Act, 1961.
• Any damages, compensation or payments made voluntarily.
• Loss of capital nature including loss on sale of the undertaking or of any part thereof not including any excess of the written-down value of any asset which is discarded, sold, discarded, destroyed or demolished over its sale proceeds or its scrap value.
• Any change in carrying amount of an asset or of a liability recognised in equity reserves, including surplus in profit and loss accounts for the measurement of the asset or the liability at fair value.

CSR Committee 

• Every company to which CSR provision are applicable must constitute a Corporate Social Responsibility (CSR) Committee.
• The CSR Committee should consist of three or more directors, out of which at least one director must be an independent director.
• An unlisted public company or a private company shall have its CSR Committee without any independent director if an independent director is not required.
• A private company having only two directors on its Board shall constitute its CSR Committee with two directors.
• In the case of a foreign company, the CSR Committee shall comprise of at least two persons of which one person shall be a person resident in India authorised to accept on behalf of the foreign company – the services of notices and other documents. Also, the other person shall be nominated by the foreign company.
• A company having any amount in its Unspent Corporate Social Responsibility Account shall constitute a CSR Committee and comply with the CSR provisions.

Duties of the CSR Committee

• The CSR Committee will formulate and recommend a CSR policy to the Board. CSR policy shall point out the activities to be undertaken by the company as enumerated in Schedule VII of the Act.
• CSR Committee will recommend the amount of expenditure to be incurred on the CSR activities to be undertaken by the company.
• CSR Committee will monitor the CSR policy of the Company from time to time.
• The CSR Committee will establish a transparent controlling mechanism for the implementation of the CSR projects or programs or activities undertaken by the company.

CSR Policy

CSR Policy elaborates the activities to be undertaken by the Company as named in Schedule VII of the Act. The activities should not be the same which are done by the company in its normal course of business. Additionally, the Act provides the following in relation to CSR Policy:

• Contents of CSR Policy should be placed on the company’s website by the Board.
• The activities mentioned in the policy must be undertaken by the company.
• The company can join hands with other companies for undertaking projects or programs or CSR activities and report separately on such programs or projects.
• The CSR policy shall monitor the projects or programs.

CSR Reporting

With respect to CSR Reporting, the provisions are as follows :

• The Board’s Report referring to any financial year initiating on or after the 1st day of April 2014 shall include an annual report on CSR.
• In the case of a foreign company, the balance sheet filed shall contain an Annexure regarding a report on CSR.

Fines and Penalties for Non-Compliance

In case a company fails to comply with the provisions relating to CSR spending, transferring and utilising the unspent amount, the company will be punishable with a penalty of Rs.1 crore or twice the amount required to be transferred by the company to the CSR fund specified in Schedule VII of the Act or the Unspent Corporate Social Responsibility Account, whichever is less.

Further, every officer of such company who defaults in compliance will be liable to pay Rs.2 lakh or one-tenth of the amount required to be transferred by the company to CSR fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, whichever is less.

The concept of Corporate Social Responsibility (CSR), introduced through Companies Act, 2013 puts a greater responsibility on companies in India to set out a clear CSR framework. The Act introduces the culture of corporate social responsibility (CSR) in Indian corporate requiring companies to formulate a CSR policy and spend on social upliftment activities. CSR is all about corporate giving back to society. 

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