Corporate Social Responsibility (CSR) as per Companies Act, 2013
Corporate Social Responsibility (CSR) refers to the ethical obligation of businesses to contribute positively to society and the environment.
Section 135 of Companies Act mandates eligible companies to spend a portion of their profits on social, economic, and environmental causes.
Applicability of Section 135 of Companies Act, 2013
CSR provisions apply to companies that satisfy any one of the following financial criteria during any financial year:
Net Worth: Rs. 500 crore or more.
Turnover: Rs. 1,000 crore or more.
Net Profit: Rs. 5 crore or more.
CSR Expenditure-Section 135(5)
The company must spend at least 2% of the average net profits made during the three immediately preceding financial years on CSR activities. If the company fails to spend the prescribed amount, the board must specify the reasons for not spending in its annual report.
Calculation of Average Net Profit
The net profit should be calculated before tax and should not include any profits arising from overseas branches.
Divide the addition of net profit of three immediately preceding financial years by three to determine the average net profit.
Section 198 outlines specific inclusions and exclusions to consider when calculating net profit.
Inclusions:
Profit before tax as shown in the profit and loss account.
Any income from investments, dividends, and other revenue sources recieved from a company otherthan complting with section 135. Exclusions: Certain incomes specified under Section 198, such as:
Profits arising from the sale of the company’s property or undertaking.
Any change in the carrying amount of an asset or a liability recognized in equity, including surplus in the profit and loss account. Specific expenses not deductible, such as:
Expenditure relating to CSR activities.
Losses of capital nature.
Income tax and super-tax.
CSR Committee Section 135(1)
Eligible companies are required to form a CSR Committee. The committee's primary roles are to formulate and recommend a CSR policy to the board, recommend the amount of expenditure on CSR activities, and monitor the CSR policy's implementation. The composition of the CSR Committee should include:
A minimum of three directors.
At least one independent director (for public companies).
Exemptions from Constituting a CSR Committee Section 135(9)
Companies with a CSR expenditure requirement of Rs. 50 lakh or less in a financial year are not required to constitute a CSR Committee.
Compliance Requirements for Exempt Companies
Even though these companies are exempt from constituting a CSR Committee, they are still required to fulfill their CSR obligations. The responsibilities of the CSR Committee in such companies are undertaken by the Board of Directors. The Board must ensure that the company spends the required amount on CSR activities and complies with the other CSR provisions specified under Section 135 of the Companies Act, 2013.
Board's Responsibilities in Absence of a CSR Committee
Formulating and Implementing CSR Policy:
The Board of Directors is responsible for formulating the CSR policy and ensuring its implementation.
Expenditure on CSR Activities:
The Board must ensure that the company spends at least 2% of the average net profits of the preceding three financial years on CSR activities.
Reporting and Disclosure:
The Board is required to disclose details of the CSR policy and CSR activities in the company’s annual report.
The Board must also include information about the CSR activities on the company’s official website.
CSR Policy Section 135(3)
The CSR Policy is a document that outlines the specific activities the company will undertake as part of its CSR initiatives. The policy must align with the activities listed in Schedule VII of the Companies Act, 2013, which includes, but is not limited to:
Eradicating Hunger and Poverty: Initiatives that address extreme hunger, poverty, and malnutrition, and promote preventive healthcare and sanitation.
Education: Programs that promote education, including special education and employment-enhancing vocational skills, especially among children, women, elderly, and the differently-abled.
Gender Equality and Women Empowerment: Projects that promote gender equality, empower women, and support women’s livelihoods.
Environmental Sustainability: Efforts to ensure environmental sustainability, ecological balance, protection of flora and fauna, conservation of natural resources, and maintaining the quality of soil, air, and water.
National Heritage: Protection of national heritage, art, and culture, including restoration of buildings and sites of historical importance.
Armed Forces: Measures for the benefit of armed forces veterans, war widows, and their dependents.
Sports Promotion: Promotion and development of rural sports, nationally recognized sports, and Olympic sports.
Public Funds: Contributions to the Prime Minister's National Relief Fund or any other fund set up by the central government for socio-economic development and relief.
Technology Incubators: Support for technology incubators located within academic institutions approved by the central government.
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