Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) is outlined in Section 135 of Companies Act, 2013 and has been made mandatory for the companies following the specified criteria from April 1, 2014.

CSR Activities were introduced with an intention to allow companies to contribute to the social, environmental, and economic development of the country.

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This Article covers the provisions of Section 135 of Companies Act, 2013 along with Corporate Social Responsibility Rules, 2014 and Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 

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Applicability

Every company is required to comply with CSR provisions if it meets any of the following financial criteria during the immediately preceding financial year:

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

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CSR Implementation 

1. CSR activities may be undertaken:
   
   • By the company itself.
   • Through eligible entities like Section 8 companies, public trusts, or societies with specific conditions.
   • By the Funds specified in Schedule VII
2. Every Company/ Entity that intends to undertake the CSR Activities must file CSR-1.
3. Companies can collaborate with international organizations for designing, monitoring and evaluation of the CSR

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CSR Activities 

• Scope: Activities/projects must align with Schedule VII and exclude the company’s normal business operations.

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Formation of CSR Committee

1. Companies meeting the above thresholds must form a CSR Committee comprising: 
   
   • At least three directors, including at least one independent director.
   • In cases where independent directors are not required (e.g., private companies), the committee can have two or more directors.
2. Companies with a CSR expenditure requirement of ₹50 lakh or less are exempted from forming a CSR Committee. In such cases, the Board of Directors performs the committee’s functions.

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Responsibilities of the CSR Committee

The CSR Committee is responsible for:

• Formulating and recommending a CSR Policy to the Board, outlining activities as specified in Schedule VII.
• Recommending the amount of expenditure to be incurred on CSR activities.
• Monitoring the CSR Policy and its implementation.

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Responsibilities of the Board

The Board of Directors must:

• Approve and disclose the CSR Policy in the Board’s report and on the company’s website, if applicable.
• Ensure that the company undertakes activities as specified in its CSR Policy.

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CSR Reporting 

• CSR reports must be included in the Board’s report.
• In case of Foreign Companies, CSR report is to be reported in Balance Sheet.
• Impact assessments are mandatory for companies with average CSR obligations of ₹10 crore or more.
• Company must disclose CSR Committee composition, policy, and projects on its website.

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CSR Spending

1. Companies must spend at least 2% of the average net profits made during the three immediately preceding financial years on CSR activities.
2. Preference should be given to local areas where the company operates.
3. If the company fails to spend the required amount: 
   
   • The unspent amount must be transferred to a Fund specified in Schedule VII within six months.
   • For ongoing projects, the unspent amount should be transferred to an Unspent CSR Account within 30 days of the financial year-end and utilized within three financial years. Any remaining amount must then be transferred to a Fund specified in Schedule VII.

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CSR Expenditure 

1. Administrative overheads capped at 5% of total CSR expenditure.
2. Surplus from CSR activities: 
   
   • Not to form part of business profits.
   • To be reused in the same project or transferred to unspent accounts/funds.
3. Excess CSR spending:
   
   • Can be set off in the next three years, subject to conditions.
4. CSR amount can be spent for acquisition or creation of Capital Asset, which is to be held by: -
   
   • Section 8 companies, public trusts, or societies with specific conditions.
   • Beneficiaries of CSR Projects.

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Penalties for Non-Compliance

1. Companies failing to comply with the CSR spending or transfer provisions are liable to penalties: 
   
   • Twice the unspent amount or ₹1 crore, whichever is less.
2. Defaulting officers are liable to a penalty of one-tenth of the unspent amount or ₹2 lakh, whichever is less.

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Authors:

CA Shreyans Dedhia

Partner | Contact No -98709 25375 | LinkedIn Profile

Arisca Nadar

Associate Consultant | LinkedIn Profile

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Email: blogs@bilimoriamehta.com

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