Saturday, May 10, 2025

Corporate Social Responsibility (CSR) Compliance under the Companies Act, 2013

 

Corporate Social Responsibility (CSR) Compliance under the Companies Act, 2013

The Companies Act, 2013 mandates Corporate Social Responsibility (CSR) for certain companies. This is aimed at encouraging companies to contribute towards social, environmental, and economic welfare. CSR activities can range from improving education, healthcare, environmental sustainability, and supporting disadvantaged communities.

Key Provisions for CSR Compliance under the Companies Act, 2013

1. Applicability of CSR Provisions

Section 135 of the Companies Act, 2013:

  • Companies Required to Comply:

    • Companies having a net worth of ₹500 crore or more.

    • Turnover of ₹1,000 crore or more.

    • Net profit of ₹5 crore or more during any financial year.

  • If a company satisfies any one of these criteria in a given financial year, it is required to comply with CSR provisions.

  • Exemptions:

    • One Person Companies (OPC) and small companies (companies with a paid-up share capital of less than ₹50 lakh and turnover of less than ₹2 crore) are exempt from CSR provisions.

2. CSR Committee Formation

Section 135(1) – CSR Committee:

  • Companies that meet the CSR criteria must form a CSR Committee of the board of directors.

  • The committee should consist of at least 3 directors, and at least one of them should be an independent director.

The role of the CSR Committee includes:

  • Formulating CSR Policy.

  • Recommending CSR activities to be undertaken.

  • Monitoring CSR spending and ensuring it is in line with the approved policy.

3. CSR Policy

Section 135(4) – CSR Policy:

  • The company must develop a CSR Policy, which should clearly outline:

    • CSR initiatives the company plans to undertake.

    • Focus areas of CSR (e.g., education, healthcare, environment, rural development).

    • Budget allocated for CSR activities.

    • Mechanisms to monitor the implementation of CSR projects.

  • The CSR Policy must be approved by the board of directors and should be publicly available.

4. CSR Spending Requirement

Section 135(5) – CSR Expenditure:

  • A company must spend at least 2% of its average net profit (calculated over the last three financial years) on CSR activities.

    • Example: If the company’s average net profit over the last three years is ₹10 crore, the minimum CSR expenditure should be ₹20 lakh (2% of ₹10 crore).

  • If the company fails to spend the required 2%, it must provide a reason for the shortfall in its Board Report.

5. CSR Activities and Projects

Schedule VII of the Companies Act, 2013:

The Act defines the list of eligible CSR activities in Schedule VII, which include:

  1. Eradicating hunger, poverty, and malnutrition.

  2. Promoting education, including special education and employment.

  3. Promoting gender equality and empowering women.

  4. Ensuring environmental sustainability.

  5. Protection of national heritage, art and culture.

  6. Measures for reducing child mortality and improving maternal health.

  7. Employment enhancing vocational skills.

  8. Social business projects that promote health, education, and employment.

  9. Contribution to government-funded funds like the PM CARES Fund.

6. Monitoring and Reporting CSR Activities

Section 134(3) – Board’s Report:

  • The company must disclose CSR activities in the Annual Report (in the Board’s Report section).

    • The report should include:

      • The CSR Policy adopted by the company.

      • The amount of CSR spent during the year.

      • The nature of the projects and programs funded.

      • The explanation for any shortfall in CSR spending.

  • Form CSR-2: Companies need to file Form CSR-2 with the Registrar of Companies (RoC) detailing CSR activities, especially if the company is spending on CSR through third-party implementation.

7. Penalties for Non-Compliance

Section 134(8) – Penalties for Non-Compliance:

  • If the company fails to spend the mandated 2% of its average net profit on CSR activities:

    • Fine: ₹50,000 to ₹25 lakh.

    • Imprisonment: The company may face imprisonment of up to 3 years for officers in default.

  • Non-disclosure of CSR Activities in the board’s report could also attract penalties.

8. CSR Implementation by Companies

a. Direct or Indirect Implementation:

  • Companies may directly implement CSR projects through their internal teams or indirectly through third-party organizations like NGOs, trust, or Section 8 companies.

  • When implementing indirectly, the company should ensure proper monitoring and transparency to ensure the funds are being used appropriately.

b. Contribution to CSR Funds:

  • Companies may also donate to government-approved CSR funds (e.g., the PM CARES Fund, Clean Ganga Fund, etc.) for certain types of projects.

9. CSR Compliance in Practice

Example 1: Infosys Ltd.

  • Infosys commits to promoting education and sustainability under its CSR initiatives, focusing on skills development, primary education, and environmental projects.

  • In their annual report, Infosys clearly mentions the CSR activities undertaken, the amount spent (which complies with the 2% requirement), and future goals.

Example 2: Tata Group

  • The Tata Group is known for its extensive CSR programs, including initiatives in healthcare, education, infrastructure development, and environmental sustainability.

  • The Group has robust monitoring mechanisms, ensuring all CSR funds are used for their intended purposes and reported in the board’s annual report.

Summary Checklist for CSR Compliance:

  1. Determine Applicability: Check if your company meets the net worth, turnover, or net profit criteria to be subject to CSR provisions.

  2. Form a CSR Committee: Establish a CSR committee with at least 3 directors, including an independent director.

  3. Create a CSR Policy: Draft and implement a CSR policy that aligns with Schedule VII of the Companies Act, 2013.

  4. Allocate CSR Budget: Ensure the company spends at least 2% of its average net profit over the last 3 years on CSR activities.

  5. Disclose CSR Activities: In the annual report, disclose all CSR activities, the amount spent, and the reason for any shortfall.

  6. File CSR Form: File Form CSR-2 with the Registrar of Companies if required.

Conclusion

CSR compliance is essential not just for legal reasons but also for companies aiming to contribute positively to society. Having clear governance around CSR activities helps in ensuring transparency, accountability, and meaningful contributions to various social causes.

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