Companies Act Section 135

Companies Act - Section 135 Corporate Social Responsibility (CSR)

1. Applicability of Corporate Social Responsibility Requirements

Under the provisions of Section 135(1) of the Companies Act, every company that meets any one or more of the following financial criteria during the immediately preceding financial year is required to comply with Corporate Social Responsibility (CSR) obligations:

Companies with a net worth of ?500 crore or more; or

Companies with an annual turnover of ?1,000 crore or more; or

Companies with a net profit of ?5 crore or more.

2. Formation of the Corporate Social Responsibility Committee

Every company falling within the applicability criteria listed above must form a Corporate Social Responsibility Committee (CSR Committee) of its Board of Directors.

This committee must consist of at least three directors.

Out of these three directors, at least one director must be an independent director.

However, if the company is not required to appoint independent directors under Section 149(4) (for example, certain private companies), then the CSR Committee shall consist of at least two directors.

3. Disclosure Requirement in Board’s Report

As part of the Board’s Report, which is prepared under Section 134(3), companies must disclose the composition of the CSR Committee, including the names of the directors who are part of the committee.

4. Duties and Functions of the Corporate Social Responsibility Committee

The CSR Committee has the following key responsibilities:

Formulating and recommending a Corporate Social Responsibility Policy to the Board of Directors.
This policy must clearly outline the CSR activities to be undertaken by the company. These activities must fall within the areas or subjects specified in Schedule VII of the Companies Act.

Recommending the amount of expenditure that should be incurred on these CSR activities.

Monitoring the implementation of the CSR Policy periodically to ensure effective execution.

5. Duties and Responsibilities of the Board of Directors

The Board of Directors of every applicable company has the following responsibilities under Section 135(4):

Approving the CSR Policy after considering the recommendations made by the CSR Committee.

Ensuring that the CSR Policy is disclosed in the Board’s Report.

Placing the CSR Policy on the company’s website, if the company has one.

Ensuring that the company actually undertakes the activities specified in the approved CSR Policy.

6. Minimum CSR Expenditure Requirement

As per Section 135(5), companies meeting the applicability criteria must spend at least 2% of the average net profits of the company made during the three immediately preceding financial years on CSR activities.

In the case of newly incorporated companies (which have not yet completed three financial years), the 2% shall be calculated on the basis of the average net profits of the immediately preceding financial years available since incorporation.
The company is also expected to give preference to local areas and regions around its operational areas while deciding where to spend the CSR funds.
7. Requirement to Report Unspent Amount

If a company fails to spend the prescribed CSR amount in any financial year, the Board must provide a clear explanation in its Board’s Report (under Section 134(3)(o)), specifying the reasons for not spending the amount.
Unspent CSR amount (except for ongoing projects) must be transferred to a Fund specified in Schedule VII within six months from the end of the financial year.
8. Provision for Ongoing CSR Projects

Where the unspent CSR amount relates to an ongoing project, the following conditions apply under Section 135(6):

The company must transfer the unspent amount within 30 days from the end of the financial year to a special account called the "Unspent Corporate Social Responsibility Account" in any scheduled bank.

This amount must be utilized for the ongoing project within a period of 3 financial years from the date of such transfer.

If the company fails to spend this amount within the stipulated 3 years, it must be transferred to a Fund specified in Schedule VII within 30 days after the end of the third financial year.

9. Penalty for Non-Compliance

If a company fails to comply with the CSR spending obligations (under subsection 5 or subsection 6), the following penalties will apply under Section 135(7):

The company shall be liable to a penalty equal to the lower of:

Twice the amount required to be transferred to the specified Fund or the Unspent CSR Account; or

?1 crore.

Every officer in default shall be liable to a penalty equal to the lower of:

One-tenth of the amount required to be transferred to the specified Fund or the Unspent CSR Account; or

?2 lakh.

10. Power of Central Government to Issue Directions

As per Section 135(8), the Central Government is empowered to issue general or special directions to companies or classes of companies to ensure compliance with the CSR provisions. Such companies are obligated to follow these directions.

11. Exemption for Companies with Smaller CSR Obligations

If the required CSR spending amount for a company does not exceed ?50 lakh in a financial year, the requirement to form a CSR Committee (under subsection 1) does not apply.

In such cases, the functions of the CSR Committee (such as formulating and monitoring the policy) shall be directly discharged by the Board of Directors itself.

Explanation: Calculation of Net Profit

For the purpose of determining net profit under this section, the term “net profit”:

Excludes certain prescribed sums as specified by the rules.

Must be calculated in accordance with Section 198 of the Companies Act, which sets out the methodology for calculating profits.