3.4 Corporate Social Responsibility (s.135)

3.4 Corporate Social Responsibility (s.135)

Quick Answer: If a company meets any threshold—net worth ≥ ₹500 crore, turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore—s.135 applies. Constitute a CSR Committee, adopt a CSR policy, and spend at least 2% of the average net profits of the three immediately preceding financial years on Schedule VII activities via a monitored annual action plan. Handle unspent amounts lawfully (ongoing projects vs other cases). The board is accountable; IDs on the committee are key monitors.

Corporate Social Responsibility in Indian company law is not optional philanthropy rhetoric. Section 135 of the Companies Act, 2013, the Companies (CSR Policy) Rules, and Schedule VII create a mandatory spend-and-govern framework for companies above size thresholds. For independent directors, CSR questions on the IICA test mix thresholds, committee composition, 2% computation themes, eligible activities, board responsibility, and failure modes (including unspent amounts and cosmetic compliance).

Applicability Thresholds

Section 135(1) applies to every company having, during the immediately preceding financial year:

Meeting any one of the three triggers applicability. A company can fall under CSR obligations because of profit alone even if net worth and turnover are below the other lines—and vice versa.

Exam traps:

• Treating thresholds as cumulative (all three must be met)—incorrect; it is any criterion.
• Using the wrong year (current incomplete year vs immediately preceding financial year).
• Assuming private companies are automatically exempt—private companies can and do cross thresholds.
• Confusing CSR net-profit concepts with every Income-tax adjustment; follow the CSR definitional pathway in the Act/rules for computation questions at a principles level.

Scenario: Horizon Pvt. Ltd. has net worth ₹120 crore, turnover ₹400 crore, and net profit ₹6 crore in the immediately preceding FY. CSR applicability is triggered by net profit, despite missing the worth/turnover lines.

CSR Committee Composition

Eligible companies must constitute a Corporate Social Responsibility Committee of the Board.

High-level composition rules:

• Generally three or more directors.
• At least one independent director if the company is required to appoint independent directors.
• Companies not required to appoint IDs follow the section’s modified composition (including pathways for private companies).
• Where a company is no longer required to appoint IDs but still meets CSR criteria, apply the statute’s residual composition logic carefully in fact patterns.

The committee is the design-and-monitor engine; it does not replace board approval of policy, plan, and accountability for spend.

CSR Policy

The CSR Committee formulates and recommends a CSR policy indicating activities to be undertaken in areas or subjects specified in Schedule VII. The Board considers recommendations, approves the policy, discloses contents as required (website/board’s report pathways), and ensures activities are undertaken as per policy.

A usable policy typically addresses:

1. Eligible activity themes aligned to Schedule VII.
2. Implementation modes (direct, through eligible implementing agencies, etc.).
3. Project selection and due diligence standards.
4. Monitoring and reporting cadence.
5. Treatment of surplus arising from CSR activities (surplus is not business profit).
6. Annual action plan architecture.

Independent directors should resist policies that are pure brochure text without decision criteria, or that smuggle promoter pet projects lacking Schedule VII fit.

The 2% Spend Rule

The Board shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years on CSR activities under the policy. (Where the company has not completed three years since incorporation, average net profits are computed for such immediately preceding financial years as exist—principle often tested.)

If the company fails to spend the required amount, consequences turn on whether the unspent amount relates to an ongoing project or not, with transfer to specified funds/unspent CSR account within timelines under the amended framework—high-level themes below.

Schedule VII Activities

CSR spend must map to activities in areas or subjects listed in Schedule VII (as amended). Classic themes include:

• Eradicating hunger, poverty, malnutrition; promoting health care including preventive health and sanitation.
• Promoting education, employability, livelihood enhancement.
• Gender equality, women empowerment, facilities for senior citizens, reducing inequalities.
• Environmental sustainability, ecological balance, animal welfare, conservation of natural resources.
• Protection of national heritage, art, culture.
• Measures for armed forces veterans, war widows, and dependents.
• Training to promote rural/nationally recognised sports.
• Contribution to the Prime Minister’s National Relief Fund or other specified funds.
• Contributions to incubators/research in science, technology, medicine (as prescribed).
• Rural development, slum area development, disaster management, and other listed items.

What is generally not CSR

Independent directors should watch for exclusions and non-qualifying spends commonly tested in spirit:

• Activities benefiting only employees and their families (not the wider community) in ways the rules exclude.
• Political contributions dressed as social spend.
• Activities undertaken in pursuance of normal course of business of the company (subject to specific COVID-era or notified carve-outs historically—do not generalise every product discount as CSR).
• One-off pure sponsorships that are brand advertising without Schedule VII substance.
• Spending outside India except as specifically permitted.

Scenario: A company books luxury product giveaways at a promoter family wedding as “community wellbeing under Schedule VII.” That fails both spirit and typically letter—CSR is not private celebration accounting.

Annual Action Plan

Under the CSR Rules, the committee recommends and the board approves an annual action plan, which generally includes:

1. List of CSR projects or programmes to be undertaken in Schedule VII areas.
2. Manner of execution (direct / implementing agency).
3. Modalities of utilisation of funds and implementation schedules.
4. Monitoring and reporting mechanism.
5. Details of need and impact assessment, if any, for applicable projects.

Boards may alter the plan mid-year for reasonable justification, with committee recommendation—useful when disasters reallocate priorities, but not a licence for chaos without documentation.

Unspent Amounts, Ongoing Projects, and Transfer Themes

Modern CSR law distinguishes unspent amounts:

You need the architecture more than every calendar date: identify ongoing vs non-ongoing, park money in the correct pot, spend within statutory windows, and disclose. Failure to transfer unspent amounts is a classic compliance breach.

ID scenario: Management says “we will spend next year” without transferring unspent CSR to the required account/fund. Optimism is not compliance. Insist on the statutory transfer path and minute the instruction.

Board Responsibility

The Board’s CSR duties include:

1. Constituting the CSR Committee when applicable.
2. Approving CSR policy and annual action plan after committee recommendations.
3. Ensuring the company spends the mandated amount or lawfully deals with unspent amounts.
4. Disclosing CSR policy, composition of the committee, and prescribed particulars in the board’s report / website as required.
5. Satisfying itself on implementation quality—not only cheque issuance.
6. Ensuring any impact assessment requirements for large projects are met where thresholds under rules apply.

CSR is therefore a fiduciary-process obligation, not a CSR manager’s private portfolio. When spends fail, questions reach the boardroom.

Independent Director Role on the CSR Committee

Where IDs sit on the CSR committee (mandatory when the company must have IDs), their value-add includes:

• Eligibility filter: Is the project truly Schedule VII?
• Partner diligence: Are implementing agencies eligible, registered as required, and free of obvious conflicts?
• Related-party caution: CSR routed to promoter-controlled trusts or entities needs heightened scrutiny for genuine public benefit vs brand/control benefits.
• Evidence of utilisation: Utilisation certificates, site visits for large projects, photos/MIS are weak alone but absence of all evidence is worse.
• Balance of portfolio: Avoid last-fortnight dumping into a single fund solely to hit 2% without monitoring capacity—while contributions to specified funds can be eligible, governance quality still matters.
• Integration with ethics: CSR should not be a bargaining chip for regulatory favours or related-party camouflage.

Schedule IV’s broader call for independent judgment applies: challenge tokenism.

Common Compliance Failures

Worked End-to-End Example

“Sagar Chemicals Ltd.” reports immediately preceding FY figures: net worth ₹620 crore, turnover ₹900 crore, net profit ₹18 crore. Average net profits of last three years = ₹12 crore.

1. Applicability: Yes—net worth and net profit both cross thresholds.
2. Minimum CSR: 2% × ₹12 crore = ₹24 lakh.
3. Committee: ≥3 directors including ≥1 ID (listed/public with ID requirement).
4. Plan: Education scholarships + primary health camps in plant-adjacent districts; one multi-year school infrastructure ongoing project of ₹15 lakh; ₹9 lakh direct health camps.
5. Execution year: Health camps completed (₹9 lakh). School project spends only ₹6 lakh; ₹9 lakh remains for the ongoing project.
6. Unspent ongoing: Transfer ₹9 lakh to Unspent CSR Account within timeline; complete within permitted years.
7. Board report: Disclose committee, policy highlights, spend, ongoing project details, and reasons/transfer mechanics.
8. ID questions: Implementing NGO registration status? Any promoter trustee conflict? Impact metrics for scholarships?

Exam Drill Sheet

1. Check thresholds: 500 / 1000 / 5 — any one.
2. Committee + policy + board ownership.
3. Compute 2% of three-year average net profits concept.
4. Map activities to Schedule VII; exclude fake CSR.
5. Annual action plan existence and monitoring.
6. Unspent: ongoing project account vs specified fund path.
7. Disclosure and ID gatekeeping against tokenism and conflicts.

With board process (3.1), committees (3.2), RPTs (3.3), and CSR (3.4) in hand, you have the operational core of how boards lawfully decide, filter risk through committees, police self-dealing, and discharge mandatory social spend—foundational for both the Companies Act domain and later governance scenarios on the IICA Independent Director test.