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Basic Understanding of Corporate Social Responsibility (CSR) Rules

In this pandemic time many companies coming ahead and helping by donating oxygen concentrator, Ventilators, make COVID centres available to the needy institutions, etc. Many companies have donated to COVID relief funds or PM Care Funds. Most of these expenses done by the companies are through their Corporate Social Responsibility Fund (CSR Fund). Compliance under Provisions of Corporate Social Responsibility notified from 01 April, 2014 u/s 135 of The Companies Act, 2013. CSR not limited to:-

  • Programs/Project relating to activities, subjects or areas or specified in Schedule VII to the Act; or
  • Programs/Project relating to activities undertaken by the board as recommended by CSR committee in compliance with Schedule VII.

There are 9 Subsections under section 135 to govern the CSR mention below.

Section 135 (1)

Applicability of CSR

Every company (including their subsidiary or holding & a foreign company having office in India) having:-

  • Net worth of INR 500 Cr. or more, or
  • Turnover of INR 1000 Cr. or more or
  • Net profit of INR 5 Cr. or more during the immediately preceding FY.

will make CSR Committee of the Board consisting of three or more directors, at least one director shall be an independent director out of three or more.

  • Where a company is not needed to appoint an independent director, two or more directors will have in their CSR Committee.

Section 135(2)

The Board of Directors report in their AGM (Annual General Meeting) shall disclose the Composition of the CSR committee.

Section 135(3)

The CSR Committee shall do

  • Framed and recommend to the Board, a CSR Policy which shall indicate the activities to be done by the company as specified in  Schedule VII;
  • Recommend the amount of expenditure to be done;
  • Monitor the CSR Policy timely basis.

Section 135(4)

The Board formed for CSR shall

  • Approve the CSR Policy as recommended by CSR Committee and reveal the contents of such policy in CSR Report and also put it in official website of company as may be prescribed; and
  • Ensure that Company follow the activities mention in CSR Policy.

Section 135(5)

Spending in CSR

  • For the purpose of CSR shall ensure that company spends in every financial year, at least 2 % of the Average Net Profit of Company made during the 3 immediately, the board has been formulated preceding FY. Where the firm has not completed period of 3 years since their incorporation, immediately preceding the financial years should be considered.
  • Company will give preference to local area & areas around where it operates for spending amount labeled for CSR Activities.
  • If the company fails to spend such amount, the board shall mention in their Board of Directors report u/s 134 the causes for not spending the amount.
  • If the company spends extra amount of the required, such company may set-off such excess amount against the requirement to spend under this sub section for such no. of succeeding financial years in manner as prescribed.
  • The MCA wide circular E-file no. CSR-01/4/2021-CSR-MCA dated 20 May 2021 clarified that where a company has contributed any amount to ‘PM CARES Fund’ on 31st March 2020, which is over and above the min. amount as prescribed under Companies Act, 2013 – section 135(5)  for FY 2019-20, and such excess amount or part thereof is offset against the need to spend under section 135(5) for FY 2020-21, then the same will not be viewed as a violation subject to the conditions that :
  • The amount offset as such will have factored the CSR amount which are unspent for previous financial years, if any
    • The CFO shall certify that the contribution to “PM-CARES Fund” was indeed made on 31st March 2020 in emulation of the appeal and the same shall also be so certified by the company’s statutory auditor; and
    • Such contribution’s details shall be disclosed in the Annual Report on CSR and Board’s Report separately for FY 2020-21 in terms of section 134 (3) (o) of the Act.

Section 135(6)

Unspent Amount in CSR

  • Any Balance remained which are unspent, pursuant to any ongoing project, complied with conditions as may be prescribed in CSR Policy, shall be transferred within 30 days from end of FY to a special bank a/c to be opened by company in that behalf for that financial year in any scheduled bank to be called the Unspent CSR Account, and such amount will be spent by the company in pursuance of CSR Policy within 3 Financial Years from date of such transfer.
  • If amount still remained unspent in Bank account, then company will transfer the same to a Fund specified in Schedule VII, within a period of 30 days from date of completion of 3rd financial year.

Section 135(7)

Penalty for Non Compliance of CSR Provisions

If Company defaulted in complying with Sub-section 5 & 6 above, the company will be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent CSR Account, or Rs. 1 crore, whichever is less, and every officer of the company who is in default will be liable to a penalty of 1/10 of the amount needed to be transferred by the company to such Fund mentioned in Schedule VII, or the Unspent CSR Account, as the case may be, or Rs. 2 lacs, whichever is less.

Section 135(8)

The Central Govt. may give such general or special directions to a company as it considers essential to ensure compliance of provisions of this section and such company or class of companies will comply with such directions.

Section 135(9)

Where the amount to be spent by a company under above sub-section 5 does not exceed Rs. 50 lacs, there is no need to form CSR Committee and functions of such committee shall be discharged by Board of Directors of such company.