CSR - Legal Framework

The ratio of the total annual CSR spending to the country’s GDP provides a broad indication of the potential impact of CSR expenditure on the country’s development in the socioeconomic and environmental arena. The country has experienced significant growth in its Gross Domestic Product (GDP) during the period from FY 2014-15 to FY 2021-22. GDP increased from Rs. 1,24,67,959 crores in FY 2014-15 to Rs. 2,34,71,012 crores in FY 2021-22, with a compound annual growth rate (CAGR) of 8.23%.

Two per cent Profit for CSR

Section 135 (5) of the Companies Act, 2013 specifies that the Board of every company with CSR liability (referred to in sub-section (1)), shall ensure that the company spends, in every financial year, at least two percent of the average net profits of the company, made during the three immediately preceding financial years, for Corporate Social Responsibility(CSR) activities.

Applicability of CSR: Liable Companies

A company satisfying any of the following criteria during the immediately preceding financial year is required to comply with CSR provisions specified under section 135(1) of the Companies Act, 2013 and the Companies (CSR Policy) Rules, 2014:

1) net worth of rupees five hundred crore or more, or

2) turnover of rupees one thousand crore or more, or

3) net profit of rupees five crore or more.

Average Net Profit Calculation for CSR

Profit Before Tax (PBT) is used for computation of net profit for CSR calculations under section 135 of the Act. The average net profit for the purpose of determining the spending on CSR activities is to be computed in accordance with the provisions of section 198 of the Act.

Composition of the CSR Committee

The composition of the CSR Committee for different categories of companies shall be as follows:

1) Listed companies -Three or more directors, out of which at least one shall be an independent director

2) Unlisted public companies- Three or more directors, out of which at least one shall be an independent director, if there is requirement of having an independent director in the company; otherwise, two or more directors.

3) Private companies - Two or more directors.

4) Foreign Company - at least two persons of which one person shall be a person resident in India authorised to accept on behalf of the company services and notices (as specified under clause (d) of subsection (1) of section 380 of the Act) and another person to be nominated by the foreign company.

Functions of the CSR Committee

The Corporate Social Responsibility Committee shall:

formulate and recommend the CSR policy to the Board;
recommend the amount of expenditure to be incurred on CSR activities;
monitor the CSR policy of the company from time to time; and
formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the items as mentioned in rule 5(2) of the Companies (CSR Policy) Rules, 2014.

Role of the Government in the Implementation and Monitoring of CSR Programmes

The Government monitors the compliance of CSR provisions through the disclosures made by the companies in the MCA 21 portal. For any violation of CSR provisions, action can be initiated by the Government against such non-compliant companies as per provisions of the Companies Act, 2013 after due examination of records, and following due process of law. Non-compliance of CSR provisions has been notified as a civil wrong w.e.f. 22nd January, 2021.