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

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

For a defined class of large companies, India has converted social responsibility from a

purely voluntary choice into a binding statutory obligation — under Section 135 of the Companies Act, 2013, read with Schedule VII of the Act and the CSR Rules made under it. India

was among the first countries in the world to make CSR spending a legal requirement rather than

a purely voluntary practice, which is exactly why MSBSHSE's OCM syllabus treats CSR as its own

dedicated topic within this chapter, distinct from the general, voluntary social-responsibility

discussion of Sections 1-3.

Applicability — which companies must comply. Section 135 applies to every company that, in

the immediately preceding financial year, meets ANY ONE of the following thresholds:

• Net worth of Rs 500 crore or more, OR
• Turnover of Rs 1,000 crore or more, OR
• Net profit of Rs 5 crore or more.

Meeting even one of these three thresholds — net worth is NOT the only qualifying test — brings

a company within the scope of Section 135.

The CSR Committee of the Board. An applicable company must constitute a CSR Committee

of its Board of Directors, consisting of three or more directors, of whom at least one must be an independent director (a company not otherwise required by law to appoint an

independent director may constitute the committee with two or more directors instead). The CSR

Committee's responsibilities include:

• Formulating and recommending to the Board a CSR Policy indicating the CSR activities the company will undertake.
• Recommending the amount of expenditure to be incurred on those activities.
• Monitoring the CSR Policy from time to time and ensuring the company's CSR activities are genuinely carried out.

The mandatory spending obligation. An applicable company must ensure it spends, in every

financial year, at least 2% of its average net profits made during the three immediately

preceding financial years, on CSR activities in pursuance of its CSR Policy. If the company is

unable to spend this amount, the Board must specify the reasons for the shortfall in its

Board's Report, and any unspent amount linked to an ongoing project must be transferred to a

separate "Unspent CSR Account" to be spent within a further prescribed period — a genuine

legal, not merely moral, obligation.

Permissible CSR activities — Schedule VII. The Act does not let a company spend its CSR

money on just anything; it must fall within the areas listed in Schedule VII, which

includes (among others): eradicating hunger, poverty, and malnutrition; promoting education,

including special education; promoting gender equality and empowering women; ensuring

environmental sustainability and ecological balance; protection of national heritage, art, and

culture; measures for the benefit of armed forces veterans and war widows; rural development

projects; slum-area development; disaster-management relief and rehabilitation; and

contributions to specified government relief funds. …