Corporate Social Responsibility (CSR)

The landmark legal provisions and requirements therein with respect to Corporate Social Responsibility (CSR) i.e. requiring expenditure on activities of general philanthropic nature and public benefit, by large and profit making Companies, was introduced through the Companies Act 2013 (the Act) and chiefly comprises of the following —

Notified on 27 February 2014, the above said Section, Schedule and CSR Rules came into effect from 1 April 2014.

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Key Topics

Corporate Social Responsibility (CSR) has not been defined by the Act, which instead makes a reference to the activities listed by the Schedule, one or more of which is to be undertaken by the Company concerned as part of its CSR policy.

The Rules however do define CSR inclusively but not exhaustively as follows —

  • Projects or programs relating to activities specified in the Schedule or
  • Projects or programs relating to activities undertaken by the Board of Directors (the Board) in pursuance of recommendations of the CSR Committee as per the declared CSR policy of the concerned Company, subject to the condition that such policy shall cover subjects enumerated in the Schedule

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Section 135 of the Companies Act 2013 (the Act) applies to every Company having the following facts and figures —

  • Net worth of Rs.500 crore or more, or
  • Turnover of Rs.1000 crore or more, or
  • Net profit of Rs.5 crore or more, during any financial year

Section 2(57) of the Act defines “Net Worth” to mean the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

Section 2(91) of the Act also defines “Turnover” to mean the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year.

The MCA has clarified that ‘any financial year’ as stated in section 135 of the Act implies ‘any of the three preceding financial years’.

The MCA has further clarified that computation of “Net Profits” for the purposes of CSR will be as per section 198 of the Act, essentially profit before taxes.

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Section 135 of the Companies Act 2013 (the Act) requires every Company having net worth of Rs.500 crore or more, or turnover of Rs.1000 crore or more or a net profit of Rs.5 crore or more during any financial year to constitute a Corporate Social Responsibility Committee (the CSR Committee) of the Board of Directors (the Board).

The CSR Committee shall consist three or more Directors, of which at least one Director shall be an Independent Director and the Board’s Report under section 134(3) of the Act shall disclose the composition of the CSR Committee.

Corporate Social Responsibility Committee Duties —

  • Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII to the Act
  • Recommend the amount of expenditure to be incurred on the activities referred to above and
  • Monitor the Corporate Social Responsibility Policy of the company from time to time

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The above quoted section of the Act further requires the above said qualifying Company to spend, in every financial year, at least 2 percent of the average net profits of the Company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

The MCA has further clarified that computation of “Net Profits” for the purposes of CSR will be as per section 198 of the Act, essentially profit before taxes.

The said provision further requires the Company to give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.

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  • Take into account the recommendations made by the CSR Committee, approve the Corporate Social Responsibility Policy for the Company and disclose contents of such Policy in its report and also place it on the Company’s website, if any, in such manner as may be prescribed
  • Ensure that the activities as are included in Corporate Social Responsibility Policy of the Company are undertaken by the company
  • Ensure that the Company spends, in every financial year, at least 2 percent of the average net profits of the Company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

If the company fails to spend such amount, the Board shall, in its report made under section 134(3)(o) of the Act, shall specify the reasons for not spending the amount.

Read more on CSR through our comprehensive research on the subject and access CSR related services through MinusTax

 


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