Corporate Social Responsibility - Section 135
The broad framework of CSR has been provided in Section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies (CSR Policy) Rules, 2014. Further, Ministry had also issued clarifications including FAQs from time to time on various issues concerning CSR
Which companies qualify for CSR under the Companies Act, 2013?
A company satisfying any of the following criteria during the immediately preceding financial year is required to comply with CSR provisions specified under section 135(1) of the Companies Act, 2013 read with the Companies (Corporate Social Responsibility Policy) Rules, 2014 made thereunder -
(i) net worth of rupees five hundred crore or more, or
(ii) turnover of rupees one thousand crore or more, or
(iii) net profit of rupees five crore or more.
Thus companies having a net worth of INR 500 crores or more, or turnover of INR 1,000 crores or more, or a net profit of INR 5 crores or more, are required to spend at least 2% of their 3-year annual net profit towards CSR activities in a financial year. Those activities could be related to the environment, education, gender equality, poverty, or any other activity described in Schedule VII of the 2013 Act. Thereafter, the Companies (Social Corporate Responsibility Policy) Rules 2014 were notified. CSR was not mandatory at that time and the approach was to “comply or explain”. If a company did not comply, it only had to mention the reasons for non-compliance in their report. Since there were serious compliance gaps, the Companies (Amendment) Act 2019 introduced punishments that included imprisonment, and hence, the approach shifted from “comply or explain” to “comply or pay fine”.
Section 135(1) of the Act commences with the words “Every company........” and thus applies to section 8 companies as well.
An example -
Company A is incorporated during FY 2018-19, and as per eligibility criteria the company is covered under section 135(1) for FY 2020-21. The CSR spending obligation under section 135(5) for Company A would be at least two per cent of the average net profits of the company
made during FY 2018-19 and FY 2019-20.
Constitution of CSR Committee
Under Section 135(1) - Every company to which CSR criteria is applicable shall constitute a Corporate Social Responsibility of the Board (i.e. CSR Committee)
- Minimum 3 or more directors must form a CSR Committee.
- Among those 3 directors, at least 1 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.
The Corporate Social Responsibility Committee shall -
- formulate and recommend the CSR policy to the Board;
- recommend the amount of expenditure to be incurred on CSR activities;
- monitor the CSR policy of the company from time to time; and
- formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the items as mentioned in rule 5(2) of the Companies (CSR Policy) Rules, 2014.
Role of Board
Further the recommendations of the committee would be taken up by the board which would disclose contents of such policy in its annual report and also place it on the company's website, if any.
The duty of the board is to ensure that the activities included in the CSR policy are undertaken by the company; ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years; satisfy itself regarding the utilization of the disbursed CSR funds; and if the company fails to spend at least two per cent of the average net profits of the company, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount and transfer the unspent CSR amount as per provisions of sections 135(5) and 135(6) of the Act.
The board of a company falling under section 135(1) in its report pertaining to a financial year commencing on or after 1st April shall include an annual report on the CSR activities taken up containing the particulars specified in Annexure -1 of the CSR Rules, 2014.
The Government monitors the compliance of CSR provisions through the disclosures made by the companies in the MCA 21 portal (an application in which all the master data related to a company can be accessed). Every implementing agency mentioned in rule 4(1) of the Companies (CSR Policy) Rules, 2014 shall mandatorily register itself in the MCA21 portal w.e.f. 01st April 2021 in order to enable it to undertake CSR activities on behalf of the company.
For any violation of CSR provisions, action can be initiated by the Government against such non-compliant companies as per provisions of the Companies Act, 2013 after due examination of records, and following due process of law. Noncompliance of CSR provisions has been notified
as a civil wrong w.e.f. 22nd January, 2021.
The violation of CSR provisions by a company is found under Section 134(8) of the Companies Act, 2013 or general penalty under section 450 of the Act will be applicable. Further, in case of non-payment of penalty within the stipulated period, the provisions of section 454(8) will be
Which activities do not qualify as eligible CSR activity?
Rule 2(1)(d) of the Companies (CSR Policy) Rules, 2014 defines CSR and the following activities are specifically excluded from being considered as eligible CSR activity -
(i) Activities undertaken in pursuance of normal course of business of the company. However, exemption is provided for three financial years, till FY 2022-23, to companies engaged in R&D activities for new vaccines, drugs, and medical devices in their normal course of business, related to COVID19. This exclusion is allowed only in case the companies are engaged in R&D in collaboration with organizations as mentioned in item (ix) of Schedule VII and disclose the same in their Board reports.
(ii) 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;
(iii) Contribution of any amount, directly or indirectly, to any political party under section 182 of the Act;
(iv) Activities benefiting employees of the company as defined in section 2(k) of the Code on Wages, 2019;
(v) Sponsorship activities for deriving marketing benefits for products/services;
(vi) Activities for fulfilling statutory obligations under any law in force in India.
What are the different modes of implementation of CSR activities?
Pursuant to rule 4 of the Companies (CSR Policy) Rules, 2014 a company may undertake CSR activities through following three modes of implementation -
(i) Implementation by the company itself
(ii) Implementation through eligible implementing agencies as prescribed under sub-rule (1) of rule 4.
(iii) Implementation in collaboration with one or more companies as prescribed under sub-rule (4) of rule 4.
The company that intends to undertake a CSR activity should mandatorily register themselves with the Registrar of Companies by filing the Form CSR-1 electronically.
MCA Form CSR-2
The Ministry of Corporate Affairs (MCA) vide a Notification dated February 11, 2022, has issued Companies (Accounts) Amendment Rules, 2022 to further amend the Companies (Accounts) Rules, 2014. As per amended rules, every company covered under Section 135 of the Companies Act, 2013 shall furnish a report on Corporate Social Responsibility in E-Form CSR-2 to the Registrar for the preceding financial year (2020-2021) and onwards. The new rule shall come into force from February 11, 2022.
Earlier there was no form prescribed to furnish a report on CSR. Section 135 of the act only mandates to annex the details of CSR to its Board Report and also disclose on the website of the Company, if any. Now through this notification the ministry introduced the Form CSR-2. The form is to be filed in addition to Form AOC-4 for filing the company’s financial statement with the Registrar of Companies.
MCA vide its notification dated 11th February 11 announced that Form CSR-2 shall be filed separately on or before 31st March 2022 for the preceding financial year (2020-2021) after filing Form AOC-4 or AOC-4 XBRL or AOC-4 NBFC (Ind AS). For the financial year 2020-21, the
Form CSR-2 is to be filed separately on or before 31st March 2022. For the financial year 2021-22 onwards, the Form CSR-2 is to be filed as an addendum to Form AOC-4 (due date of AOC-4) which is the MCA form for filing financial statements. Hence, Form AOC-4 is submitted with the MCA for each Financial Year within 30 days of a company’s annual general meeting. Along with Form AOC-4, the documents such as Board’s report, Auditors’ report, Statement of subsidiaries in Form AOC-1, details of CSR policy etc. are filed.