WHICH COMPANIES MUST COMPLY WITH CSR UNDER COMPANIES ACT, 2013?

INTRODUCTION :

For many years, profit maximization was the only criterion for corporate success. Nevertheless, in our modern business environment, companies must step out of their traditional box of accounts and analyze their impact on the wider society. India took an unprecedented leap in 2013 when it became the first nation ever to make Corporate Social Responsibility (CSR) a mandatory legal requirement rather than a voluntary charitable activity. In accordance with the Companies Act, 2013 of India (Section 135), certain corporations are required to allocate some percentage of their profits to community development projects.

WHAT IS CSR ACCORDING TO COMPANIES ACT?

It is not only about giving money to the random charity organizations under the CSR Act. Rather, CSR is a well-defined legislative act in which the integration of socio-economic and environmental factors is to be done within the operational structure of a company.
According to the CSR Act, the companies have been mandated to make an expenditure worth a minimum of 2% of the average net profits in the three financial years that immediately preceded the current financial year for the approved social development work. In case a company is very young in terms of operation and has not passed three financial years then average profit shall be computed in such cases.

WHICH COMPANIES MUST COMPLY?

There are various financial requirements which if satisfied by any particular company then it needs to abide by the CSR Act. The CSR Act does not apply to every small business and shops but those companies who are having a certain scale of operations. The requirements include the following :

● Net Worth: ₹500 crore or more
● Turnover: ₹1,000 crore or more
● Net Profits: ₹5 crore or more

Scope of the Rules : The law is very comprehensive. The application of the rules covers not only domestic public or private limited companies, but also extends to Public Sector Undertakings and foreign companies working through branches or project offices in India. If such a foreign company earns profits in India violating these limits, it should invest back into local communities.

HOW IS CSR GOVERNED WITHIN A COMPANY?

For treating corporate social responsibility spending as seriously as any other investment made by firms, the Act provides for the following internal governance framework made up of two major components :
● CSR Committee : Each qualifying company will have to constitute a dedicated CSR Committee of its Board, comprising no less than three members, which include one Independent Director. Regulatory Relaxation: For a firm whose minimum required expenditure under mandatory corporate social responsibility program is less than ₹50 lakh per annum, there is no requirement to have a dedicated CSR Committee; instead, all activities relating to CSR will be handled by the Board itself.
● Role of Board & CFO Certification : The Board is accountable ultimately in respect of corporate social responsibility spending. It is responsible for adopting the CSR policy of the company, making sure that the entire amount allocated was used effectively, and publishing all activities on its website and in annual reports. Additionally, the Chief Financial Officer (CFO) should certify that the amount was used precisely as planned.

PERMISSIBLE ACTIVITIES :

There are constraints to the usage of CSR money as companies cannot simply allocate their money towards any social cause of their choice. It should be spent on the social causes included in Schedule VII of the Companies Act which comprise :
● Health and sanitation : Fight against poverty, hunger, and malnutrition; health care; development of safe drinking water systems.
● Education and livelihood generation : Spending on educational institutions; creation of vocational training centers; establishment of livelihood generation programs.
● Women empowerment : Creation of women safety homes and hostels; construction of old age homes; helping marginalized communities.
● Sustainability of environment : Biodiversity; agro forestry; conservation of natural resources; ecological balance.
● National heritage : Restoration of heritage structures; promotion of art and crafts.

THE HANDLING OF UNSPENT CSR FUNDS :

Initially, when the law was formulated, it used to adopt the approach of comply or explain, wherein the company had to only provide explanations about the unutilized money in the annual reports. But now, due to amendments made to the law, the comply or penalize approach is adopted. Now, if the money allocated to the CSR activity is not spent, the company will not be able to retain the funds. Depending on the type of project for which funds were meant, there are specific measures laid down for handling the unused money :
● Projects Ongoing (Multi-Year plan till 3 years) : Any leftover money needs to be transferred to the special bank account "Unspent CSR Account" within 30 days from the end of the financial year and can be utilized by the firm within 3 years.
● Projects General / Short Term : In case the money is not related to any multi-year plan, the leftover amount is required to be transferred to a public fund (PM CARES, Clean Ganga Fund etc.) prescribed by the government within six months from the end of the financial year.
Scenario Where the Firm Exceeds the Spending : In case the firm exceeds the minimum 2%, it is entitled to offset the additional expenditure against the CSR budgets for the next three years to come.

PENALTIES FOR NON-COMPLIANCE :

Non-compliance with the CSR provision will result in very serious financial penalties. As per the act, the following financial penalties will be imposed :
● On the Company : Financial penalty equal to two times the amount which should have been transferred to the fund/account or ₹1 crore, whichever is less.

● On Defaulting Officers : Every officer who commits such an offence will have to pay a financial penalty equal to one-tenth of the amount that should have been transferred or ₹2 lakhs, whichever is less.

CONCLUSION :

The Indian CSR regime has achieved institutionalizing corporate philanthropy. Through the integration of corporate success with social-economic development, it can be observed how section 135 ensures that all large companies contribute to nation building. From a corporation’s perspective, following the act is not just compliance anymore; it has become a central tenet in governance practices and reputation building.

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