Provisions

Section 135 of the Companies Act

Rules

Rule 3 to 9 of The Companies (Corporate Social Responsibility Policy) Rules, 2014

Introduction

The National Corporate Social Responsibility Data Portal is an initiative by Ministry of Corporate Affairs, Government of India to establish a platform to disseminate Corporate Social Responsibility related data and information filed by the companies registered with it.

The Corporate Social Responsibility concept in India is governed by Section 135 of the Companies Act, 2013 (‘Act’), Schedule VII of the Act and Companies (CSR Policy) Rules, 2014 wherein the criteria has been provided for assessing the CSR eligibility of a company, Implementation and Reporting of their CSR Policies. India having the most elaborated CSR mechanism and implementation strategy has started its journey to set a benchmark in attaining sustainability goals and stakeholder activism in nation building.

The CSR ambit is getting bigger and for upcoming years it would turn as a unique knowledge base for analyzing and achieving sustainability goals as among various large economies. India is a country which has assured by mandating CSR through its legislative action.

On the other hand, Section 135 of the Companies Act, 2013 (“Act”) stipulates that a specific number of corporations are required to make mandatory contributions to CSR initiatives. In accordance with the Act, “Corporate Social Responsibility” refers to and encompasses, among other things:

• Programmes pertaining to the tasks listed in Schedule VII of the Act.
• Projects or programs pertaining to those actions carried out by a company’s board of directors in order to guarantee the CSR Committee of the Board’s recommendations in accordance with the declared CSR Policy, subject to the requirement that said policy cover topics listed in Schedule VII of the Act.
  
  

I. India’s Applicability of CSR

The CSR provisions are applicable to any corporation that met any of the following requirements during the previous fiscal year:

• Over Rs. 500 crore in net worth
• More than Rs. 1000 crore in revenue
• Over Rs. 5 crore in net profit

Every business for which the CSR laws are applicable must have a Board of Directors that guarantees the company will follow its CSR policy and spend, in each fiscal year, a minimum of 2% of its average net profits from the three fiscal years prior. In accordance with its CSR policy, the firm shall use 2% of its average net income from the three financial years prior to its incorporation, if those three years have not yet passed.

II. Constitution of CSR

• 3 or more directors, out of which at least 1 director shall be an independent Director
• (Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more Directors.)

• The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee
  
  

III. Importance of CSR

Corporate Social Responsibility (CSR) is a vast phrase that describes an organization’s attempts to make a meaningful contribution to society. The explanations for why CSR matters are as follows:

• By promoting initiatives for a better society and raising their chances of winning over customers, corporate social responsibility (CSR) enhances a company’s reputation.
• Because media attention casts the organization in a favorable light, CSR boosts media coverage.
• CSR strengthens a business’s social capital by fostering close ties with its clientele.
• When businesses engage with any type of community, CSR makes them stand out from the competitors.

IV. Role of the Board

The Board of Directors plays the following roles in putting CSR into practice:

• Approve the company’s CSR policy after taking the CSR Committee’s suggestions into account.
• The Board is responsible for making sure that only the actions listed in the policy are carried out.
• The Board of Directors is responsible for ensuring that the company follows CSR policy and spends at least 2% of its average net income from the three previous financial years in each of the company’s fiscal years.
• Should a business not have finished three fiscal years following its founding, the average net profits for those fiscal years will be determined.
  
  

Board disclosures in the report:

• The makeup of the CSR Committee
• The CSR Policy’s contents
• If CSR spending falls short of the 2% target as per the CSR Policy, the reasons behind the underspent amount and the specifics of transferring the underspent funds to a designated fund (transfer within a period of six months from the expiry of the financial year) should be included.

V. Net Profit for Application to CSR

According to the CSR policy, each business that must abide by the terms of the CSR must allocate 2% of its average net income from the previous three years. Section 198 of the Companies Act, 2013 governs the calculation of net profit for CSR.

According to Section 198, a credit for subsidies and bounties obtained from any government or public entity established or authorized in this regard must be applied when calculating a company’s net earnings.

For computing net profits, credit cannot be given for the following sums:

• Profits, by way of premium on shares, unless the company is an investment company.
• Profits on sales of forfeited shares.
• Profits of a capital nature, including profits from the sale of the undertaking or any part thereof.
• Profits from the sale of any fixed assets or immovable property of a capital nature comprised in the undertaking, unless the company business consists of buying and selling any assets or property.
• Any change in the carrying amount of an asset or of a liability recognised in equity reserves, including surplus in profit and loss accounts for the measurement of the asset or the liability at fair value.
• Any amount representing notional gains, unrealised gains or revaluation of assets
  
  

While computing net profits, the following sums should be deducted:

• Every usual working charge.
• Directors’ remuneration.
• Bonus or commission payable or paid to any member of the company’s staff, technician, engineer or person engaged or employed by the company, whether on a part-time or whole-time basis.
• Any tax notified by the Central Government as a tax on abnormal or excess profits.
• Any tax on business profits imposed for special reasons or special circumstances and notified by the Central Government.
• Interest on debenture issued by the company.
• Interest on mortgages executed by the company and on advances and loans secured by a charge on its floating or fixed assets.
• Interest on unsecured advances and loans.
• Expenses on repairs, whether to movable or immovable property, provided the repairs are not of a capital nature.
• Outgoings inclusive of contributions made under section 181.
• Depreciation to the extent specified in section 123.
• Excess of expenditure over income.
• Damages or compensation to be paid for any legal liability and any sum paid by way of insurance against the risk of meeting the such liability.
• Debts considered bad and adjusted or written off during the year of account.

While computing the net profits, the following sums cannot be deducted:

• Income-tax and super-tax payable by the company under the Income-tax Act, 1961.
• Any damages, compensation or payments made voluntarily.
• Loss of capital nature including loss on sale of the undertaking or of any part thereof not including any excess of the written-down value of any asset which is discarded, sold, discarded, destroyed or demolished over its sale proceeds or its scrap value.
• Any change in carrying amount of an asset or of a liability recognised in equity reserves, including surplus in profit and loss accounts for the measurement of the asset or the liability at fair value.

VI. Transfer and Utilization of Unused Funds

Unused CSR payments may be transferred by an organization to the following designated accounts:

• a donation to the National Relief Fund of the Prime Minister.
• Regarding socioeconomic development, alleviation, and the welfare of the scheduled caste, minorities, tribes, women, and other underprivileged groups, the central government establishes all other funds.
• The federal government, a state government, a public sector enterprise of the federal or state governments, or any other body can provide funding for an incubator.
  
  

Contributions given to:

• universities with public funding
• Technology Institute of India (IITs)
• National Labs and Independent Organizations founded under:
• Agricultural Research Council of India (ICAR)
• Scientific and Industrial Research Council (CSIR)
• Atomic Energy Department (DAE)
• Biotechnology Department (DBT)
• Division of Drugs
• Ministry of Unani, Siddha, Homoeopathy, Yoga, and Naturopathy (AYUSH)
• Ministry of Information Technology and Electronics
• Council for Medical Research in India (ICMR)
• Organization for Defense Research and Development (DRDO)
• The Department of Science and Technology (DST) is involved in technology, science, engineering, and medical research with the goal of promoting the Sustainable Development Goals (SDGs).
• If any funds remain unspent from an ongoing project covered by the company’s CSR policy, they will be transferred within 30 days of the end of the fiscal year to an exclusive account called a “Unspent Corporate Social Responsibility Account,” which must be opened by a company.

In case of the unspent amount relating to an ongoing project under the company’s CSR policy, the company will transfer the unspent amount to an exclusive account to be opened by a company, known as ‘Unspent Corporate Social Responsibility Account’, in any scheduled bank within 30 days from the end of the financial year.

The company must use the funds in the ‘Unspent Corporate Social Responsibility Account’ towards its obligations under the CSR policy within a period of three financial years from the date of the transfer.

In a case where the company fails to utilise the funds at the end of the three financial years, the funds should be transferred to the specified fund mentioned above within a period of 30 days upon completion of the third financial year.

VII. Applicability of CSR Committee

• Every company to which CSR provision are applicable must constitute a Corporate Social Responsibility (CSR) Committee.
• The CSR Committee should consist of three or more directors, out of which at least one 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.
• A private company having only two directors on its Board shall constitute its CSR Committee with two directors.
• In the case of a foreign company, the CSR Committee shall comprise of at least two persons of which one person shall be a person resident in India authorised to accept on behalf of the foreign company – the services of notices and other documents. Also, the other person shall be nominated by the foreign company.
• A company having any amount in its Unspent Corporate Social Responsibility Account shall constitute a CSR Committee and comply with the CSR provisions.

 
VIII. The CSR Committee’s obligations

• The CSR Committee will formulate and recommend a CSR policy to the Board. CSR policy shall point out the activities to be undertaken by the company as enumerated in Schedule VII of the Act.
• CSR Committee will recommend the amount of expenditure to be incurred on the CSR activities to be undertaken by the company.
• CSR Committee will monitor the CSR policy of the Company from time to time.
• The CSR Committee will establish a transparent controlling mechanism for the implementation of the CSR projects or programs or activities undertaken by the company.
  
  

IX. CSR Reporting

With respect to CSR Reporting, the provisions are as follows:

• The Board’s Report referring to any financial year initiating on or after the 1st day of April 2014 shall include an annual report on CSR.
• In the case of a foreign company, the balance sheet filed shall contain an Annexure regarding a report on CSR.
  
  

X. CSR Policy

CSR policy elaborates the activities to be undertaken by the Company as named in Schedule VII to the Act. The activities should not be the same which are done by the company in its normal course of business. Additionally, the Act provides the following in relation to CSR Policy:

Contents of CSR Policy should be placed on the company’s website by the Board.

The activities mentioned in the policy must be undertaken by the company.

The company can join hands with other companies for undertaking projects or programs or CSR activities and report separately on such programs or projects.

XI. List of CSR Activities specified Under Schedule VII

A company’s Board of Directors is responsible for ensuring that the activities included in its CSR Policy are within the parameters of the activities listed in schedule VII of the Act. Companies may incorporate the following activities listed in Schedule VII into their Corporate Social Responsibility Policies:

XII. CSR Initiatives

The Board of Directors shall ensure that the activities included by a company in its CSR Policy fall within the purview of the activities included is schedule VII of the Act. The activities specified in Schedule VII which may be included by companies in their Corporate Social Responsibility Policies are as follows:

XIII. Penalties and Fines for Failure to Comply

In case a company fails to comply with the provisions relating to CSR spending, transferring and utilising the unspent amount, the company will be punishable with a penalty of Rs.1 crore or twice the amount required to be transferred by the company to the CSR fund specified in Schedule VII of the Act or the Unspent Corporate Social Responsibility Account, whichever is less.

Further, every officer of such company who defaults in compliance will be liable to pay Rs.2 lakh or one-tenth of the amount required to be transferred by the company to CSR fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, whichever is less.

XIV. Motivation for Companies’ Introduction of CSR

We inhabit a dynamic environment that is becoming increasingly complex. Environmental, social, cultural, and economic challenges on a global scale are now a part of daily life. Increased profits are no longer the only way for corporations to measure their performance; in addition, they have a social responsibility to fulfill as responsible corporate citizens.

Introduced by the enterprises Act of 2013, the notion of Corporate Social Responsibility (CSR) places an increased obligation on Indian enterprises to establish a well-defined CSR framework.

Numerous corporations, including TATA and Birla and other various companies have been actively involved in CSR voluntarily to the identified projects. The projects shall be beneficial for the people and society and engage with the implementing agencies to make csr success. The Act establishes a corporate social responsibility (CSR) culture in India by mandating that businesses create a CSR policy and allocate funds for socially beneficial projects.

CSR is centred around corporate social responsibility. In order to advise the management and Board, company secretaries are expected to be knowledgeable about the legal and technical requirements pertaining to corporate social responsibility.

XV. Statutory Requirements for filing of CSR forms with ROC.

1. E-Form CSR-1

Entities who are in receipt of CSR funds has to register the entities by filing E-form CSR -1 with respective category under Nature of the Entity and should be digitally signed by using DSC of the authorized person along with certification form the professional

Further Entities shall receive the approval letter from the Ministry of Corporate affairs for those entities as registered entity for undertaking the CSR activities.

This CSR-1 submitted to ROC should be given to those companies who are contributing towards CSR activities(Registered entities)

2. E-form CSR-2

All the eligible Companies has to file e-form CSR-2 with all calculation and mandatory inputs and  should be digitally signed by using DSC of the authorized person along with certification form the professional. 

To comply with amended regulations, Companies need to adhere to the revised timeline and ensure the accurate filing of the necessary forms.

The following details are required for filling Web-based Form CSR-2 on MCA V2 portal:

• Completion of the filing of Forms AOC-4/AOC-4 (NBFC Ind AS)/AOC-4 (XBRL), as per the applicable requirements.
• Reporting about the constitution of the company’s CSR committee, its meetings, as well the disclosure of details of the CSR committee.
• Details relating to the capital assets if created or acquired through CSR expenditure.
• Details of CSR policy, and approved CSR projects on the company’s website.
• Details of the company’s CSR project investments and the CSR funds that have remain unspent.
• Details about the impact assessment of CSR projects (as per the Companies (CSR Policy) Rules, 2014).
• Whether or not impact assessment of CSR projects is done as per Companies (CSR Policy) Rules, 2014.
• Submit Form CSR-2 separately to ROC within the stipulated deadline, which is 31st March 2024 for FY 2022-23.