Corporate Social Responsibility (CSR) Mandate: Section 135 Explained

In today’s business world, making a profit is important, but so is making a difference. Across India, there’s a growing understanding that companies have a role to play in society’s well-being. This isn’t just about good feelings; it’s increasingly becoming a legal requirement. This blog post dives deep into the mandatory Corporate Social Responsibility (CSR) provisions governed by Section 135 Explained within the Companies Act, 2013.

Understanding this mandate is crucial, not just for large corporations, but also for growing businesses approaching the specified financial thresholds. Even for salaried individuals, knowing about these corporate responsibility laws India provides insight into how companies they work for, invest in, or buy from contribute to society. We’ll cover who needs to comply, what the specific requirements are, the types of activities allowed, and the importance of adhering to these rules.

What is Corporate Social Responsibility (CSR) in the Indian Context?

Defining CSR

Corporate Social Responsibility, or CSR, is more than just donating money to charity. It’s about how companies manage their business processes to produce an overall positive impact on society. This means integrating social, environmental, and ethical concerns into their core operations and interactions with stakeholders – employees, customers, communities, and the environment.

The Legal Mandate: Introduction to Section 135

In India, CSR took a formal, mandatory shape with the introduction of Section 135 of the Companies Act, 2013. This legislation marked a significant shift, moving CSR from a voluntary practice for some to a legal obligation for many. This post provides Section 135 Explained in detail, outlining how the law encourages eligible companies to actively contribute towards achieving social and environmental goals, embedding responsible practices into the corporate framework. Understanding CSR mandate for Indian companies starts here.

Does the CSR Mandate Apply to Your Business? Understanding Section 135 Applicability

Not every company in India falls under the mandatory CSR spending rules. Section 135 clearly defines which companies need to comply based on their financial size during any financial year.

For those looking to understand more about setting up their businesses in India, you can refer to Company Registration in India.

The Threshold Criteria

A company must comply with Section 135 provisions if it meets any one of the following criteria in the immediately preceding financial year:

• Net worth: INR 500 Crore or more
• Turnover: INR 1000 Crore or more
• Net profit: INR 5 Crore or more

It’s important to note that meeting just one of these thresholds triggers the applicability of CSR rules.

Calculating Net Worth, Turnover, and Net Profit

Understanding how these figures are calculated is key:

• Net Worth: Generally calculated as per Section 2(57) of the Companies Act, 2013. It typically means the aggregate value of paid-up share capital, all reserves created out of profits, securities premium account, and debit or credit balance of profit and loss account, after deducting the aggregate value of accumulated losses, deferred expenditure, and miscellaneous expenditure not written off, as per the audited balance sheet.
• Turnover: As defined under Section 2(91) of the Companies Act, 2013, it usually means the gross amount of revenue recognised in the profit and loss account from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year.
• Net Profit: This is calculated as per Section 198 of the Companies Act, 2013, but with certain adjustments specified under the CSR Rules. For instance, profits from overseas branches and dividends received from other Indian companies complying with CSR are typically excluded. It’s crucial to compute this accurately as it forms the basis for the CSR spending requirement.

What if Your Company Crosses the Threshold?

Once a company crosses any of the specified thresholds in a financial year, the CSR provisions become applicable from the immediately succeeding financial year. This means the company needs to start planning for Corporate Social Responsibility compliance India by establishing the necessary structures (like a CSR committee) and allocating funds. The compliance requirements continue for three consecutive financial years even if the company ceases to meet the criteria during that period.

Key Requirements Under Section 135 Explained

Once a company falls under the ambit of Section 135, it must adhere to several specific requirements. Understanding these CSR requirements under Section 135 India is vital for smooth compliance.

Forming a CSR Committee

• Requirement: Companies meeting the criteria must constitute a Corporate Social Responsibility Committee of the Board.
• Composition:
  • Generally, the CSR Committee must consist of three or more directors, with at least one independent director.
  • However, there are exceptions:
    • Unlisted public companies or private companies not required to appoint an independent director don’t need one on their CSR committee.
    • Private companies with only two directors on their Board can constitute the Committee with these two directors.
    • In case of a foreign company, the CSR committee shall comprise of at least two persons of which one person shall be as specified under clause (d) of sub-section (1) of section 380 of the Act and another person shall be nominated by the foreign company.
• Responsibilities: The CSR Committee plays a crucial role. Its primary responsibilities under CSR Section 135 include:
  • Formulating and recommending a CSR Policy to the Board.
  • Recommending the amount of expenditure to be incurred on CSR activities.
  • Monitoring the company’s CSR Policy implementation from time to time.

Developing and Implementing a CSR Policy

• Requirement: The Board of Directors, based on the CSR Committee’s recommendations, must approve a formal CSR Policy for the company.
• Content: The CSR Policy should outline:
  • The company’s CSR philosophy and objectives.
  • A list of CSR projects or programs the company plans to undertake, specifying modalities of execution and implementation schedules. These activities must align with those listed in Schedule VII of the Companies Act, 2013.
  • A mechanism for monitoring the progress of the CSR projects/programs.
  • The roles and responsibilities of the CSR Committee, Board, and implementation team.
• Approval & Disclosure: The Board-approved CSR Policy must be disclosed on the company’s website (if any) and details about the policy and committee composition must be included in the Board’s Report. This is a key part of Section 135 CSR policy implementation.

Minimum CSR Spending

• The 2% Rule: This is perhaps the most well-known aspect of Section 135. The Act mandates that qualifying companies spend at least 2% of their average net profits made during the three immediately preceding financial years on CSR activities.
• Calculating Average Net Profit: The average net profit is calculated as per the provisions of Section 198 of the Companies Act, 2013 (as explained earlier). For companies that haven’t completed three financial years since incorporation, the average is calculated for the financial years since their incorporation.
• Preference for Local Areas: While companies can undertake CSR activities anywhere in India, the Act encourages them to give preference to the local area and areas around where they operate.

Permitted CSR Activities (Schedule VII)

• Reference Schedule VII: Section 135 explicitly states that the CSR expenditure must be directed towards activities listed in Schedule VII of the Companies Act, 2013. This schedule provides the broad domains for CSR engagement.
• Examples: Schedule VII covers a wide range of activities, providing flexibility for companies to align CSR initiatives with their values and expertise. Some key examples include:
  • Eradicating hunger, poverty, and malnutrition; promoting health care (including preventive healthcare) and sanitation; making available safe drinking water.
  • Promoting education, including special education and employment enhancing vocation skills, especially among children, women, elderly, and the differently-abled, and livelihood enhancement projects.
  • Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres, and other facilities for senior citizens; measures for reducing inequalities faced by socially and economically backward groups.
  • Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources, and maintaining quality of soil, air, and water (including contribution to the Clean Ganga Fund).
  • Protection of national heritage, art, and culture, including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts.
  • Measures for the benefit of armed forces veterans, war widows, and their dependents.
  • Training to promote rural sports, nationally recognised sports, paralympic sports, and Olympic sports.
  • Contribution to the Prime Minister’s National Relief Fund (PMNRF) or Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities, and women.
  • Contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).
  • Rural development projects.
  • Slum area development.
  • Disaster management, including relief, rehabilitation, and reconstruction activities.
• Adhering to this list is central to following CSR guidelines for Indian corporations.
• Exclusions: It’s equally important to know what doesn’t count as CSR spending under Section 135. Key exclusions include:
  • Activities undertaken in pursuance of the company’s normal course of business.
  • Activities benefiting only the employees of the company and their families.
  • Contributions of any amount directly or indirectly to any political party.
  • Activities undertaken outside India (except for training of Indian sports personnel representing any State or Union territory at national level or India at international level).
  • Expenditure on activities not listed in Schedule VII.

Reporting and Disclosure Requirements

Transparency is a cornerstone of the CSR mandate.

• Board’s Report: The Board’s Report of a qualifying company must include an annual report on CSR containing particulars specified in the annexure to the CSR Rules. This typically covers a brief outline of the CSR policy, composition of the CSR Committee, average net profit for the last three financial years, prescribed CSR expenditure, details of CSR spent, reasons for not spending (if applicable), and details of any impact assessment conducted.
• Website Disclosure: As mentioned earlier, the approved CSR Policy must be placed on the company’s website, if any.
• Specific Format: The reporting requirements often follow a prescribed format, ensuring consistency and comparability. This detailed reporting is crucial for Section 135 compliance for Indian firms.

Consequences of Non-Compliance with Section 135

Failure to comply with the provisions of Section 135 and the related rules can lead to significant consequences.

Penalties for the Company

The Companies (Amendment) Acts of 2019 and 2020 brought significant changes, moving towards stricter enforcement, particularly regarding unspent CSR amounts.

• Failure to Spend/Transfer Unspent Amount: If a company fails to spend the required CSR amount and does not transfer the unspent amount related to an ‘ongoing project’ to a special account (Unspent CSR Account) within 30 days of the end of the financial year, or fails to transfer any remaining unspent amount (not related to an ongoing project) to a Fund specified in Schedule VII (like PM CARES Fund, etc.) within six months of the end of the financial year, the company shall be liable to a penalty. The penalty is twice the amount required to be transferred to the specified fund or the Unspent CSR Account, or INR 1 Crore, whichever is less.

Penalties for Officers in Default

The responsibility doesn’t just lie with the company as an entity.

• Officer Liability: Every officer of the company who is in default (often including directors involved in the CSR function) is liable to a penalty. The penalty is one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII or the Unspent CSR Account, as the case may be, or INR 2 Lakhs, whichever is less.
• General Non-Compliance: For non-compliance with other provisions (like constituting the CSR committee, reporting, etc.), general penalty provisions under the Companies Act might apply, which could involve fines for the company and officers in default.

Reputational Impact

Beyond monetary penalties, non-compliance can severely damage a company’s reputation. In an era of conscious consumerism and investor activism, a poor CSR track record can negatively affect brand image, stakeholder trust, and overall business sustainability. This highlights the broader CSR mandate impact on Indian businesses.

Ensuring Smooth CSR Compliance

Given the detailed requirements and potential penalties, proactive management of CSR obligations is essential.

Proactive Planning

Companies nearing the applicability thresholds should start planning early. This involves:

• Accurately tracking net worth, turnover, and net profit.
• Understanding the requirements of Section 135 and Schedule VII.
• Identifying potential CSR focus areas aligned with Schedule VII and the company’s values.
• Budgeting for potential CSR expenditure.

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Seeking Expert Guidance

Navigating the nuances of CSR requirements under Section 135 India can be complex. Calculation of net profits, interpretation of Schedule VII activities, drafting a compliant CSR policy, and ensuring correct reporting require careful attention. Consulting with financial advisors, legal experts, or specialized compliance firms like TaxRobo can provide clarity and ensure adherence. [TaxRobo offers services like CSR compliance checks, policy drafting assistance, and guidance on reporting requirements to help businesses meet their obligations effectively.]

Leveraging Technology

Modern accounting and compliance software can aid businesses in tracking financial metrics accurately. Specific tools might also help manage CSR projects, track expenditure against budgets, and generate data needed for mandatory reporting, streamlining the compliance process.

Conclusion

The mandate under Section 135 Explained has fundamentally integrated social responsibility into the legal framework for qualifying Indian companies. It’s not just about charity; it’s a structured requirement involving the formation of a CSR Committee, development of a formal policy, mandatory spending of 2% of average net profits on activities specified in Schedule VII, and transparent reporting.

Understanding and adhering to Corporate Social Responsibility compliance India is no longer optional for eligible businesses. It’s essential for legal adherence, avoiding penalties, and maintaining a positive corporate reputation in an increasingly socially conscious environment. The CSR mandate impact on Indian businesses is significant, driving corporate contributions towards national development goals.

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If your business is approaching the CSR thresholds or is already covered by Section 135, take the time to thoroughly review your obligations. Ensure robust systems are in place for policy implementation, spending, and reporting. For personalized advice or assistance with Section 135 compliance for Indian firms, consider reaching out to experts like TaxRobo.

Frequently Asked Questions (FAQs)

Q1: What happens if a company is unable to spend the required 2% CSR amount in a financial year?

A: If the company fails to spend the full 2%, the Board must specify the reasons for not spending in its annual Board’s Report. Furthermore, any unspent amount, unless it relates to an ‘ongoing project’, must be transferred to a Fund specified in Schedule VII (e.g., PM CARES Fund, Clean Ganga Fund) within six months of the end of the financial year. If the unspent amount pertains to an ‘ongoing project’ (a multi-year project approved by the Board), it must be transferred to a special bank account called the ‘Unspent Corporate Social Responsibility Account’ within 30 days from the end of the financial year. This amount must then be spent on the ongoing project within three financial years; failing which, it must be transferred to a Schedule VII Fund.

Q2: Can activities benefiting company employees be considered CSR under Section 135?

A: No. The CSR rules explicitly state that activities undertaken in pursuance of the normal course of business or activities that benefit only the employees of the company and their families shall not be considered as CSR activities under Section 135. The focus must be on benefiting the wider community or environment.

Q3: Does Section 135 apply to newly incorporated companies?

A: The applicability of Section 135 depends on meeting the net worth, turnover, or net profit criteria in the immediately preceding financial year. The 2% spending requirement is based on the average net profits of the three immediately preceding financial years. If a company has not completed three financial years since its incorporation, it must calculate the average net profit for the financial years it has existed, provided it met one of the applicability criteria in the preceding year. For example, a company incorporated two years ago would calculate the average profit of those two years if it met the applicability threshold in its second year.

Q4: What are some examples of activities listed under Schedule VII of the Companies Act, 2013?

A: Schedule VII provides broad categories. Besides those mentioned earlier (hunger/poverty, education, gender equality, environment, heritage), it includes promoting healthcare including preventive healthcare and sanitation, making available safe drinking water, livelihood enhancement projects, promoting rural sports or nationally recognised sports, contributions to certain government relief funds (like PMNRF, PM CARES), supporting technology incubators located within academic institutions, rural development projects, slum area development, and disaster management activities.

Q5: Are there recent amendments to Section 135 that companies should be aware of?

A: Yes, the CSR framework under Section 135 and the Companies (CSR Policy) Rules are periodically amended. Key recent changes have included decriminalizing non-compliance (shifting primarily to monetary penalties for spending defaults), introducing mandatory impact assessments for companies with large CSR budgets/projects, clarifying rules around ‘ongoing projects’, modifying reporting formats, and specifying rules for CSR implementation agencies. It’s crucial for companies to stay updated. Always refer to the latest notifications and circulars issued by the Ministry of Corporate Affairs (MCA). You can find updates on the Ministry of Corporate Affairs (MCA) website.