How does Section 135 of the Companies Act, 2013, govern Corporate Social Responsibility (CSR) obligations for companies, and what are the timelines for compliance?

Detailed Legal Analysis

Section 135 of the Companies Act, 2013, governs Corporate Social Responsibility (CSR) obligations for specified classes of companies in India, mandating them to allocate a certain percentage of their profits towards social initiatives.

Under this section, companies are required to implement CSR activities and adhere to compliance timelines which are crucial for fulfilling their legal obligations. The key provisions of Section 135 are as follows:

• Applicability: The CSR provisions apply to companies meeting any of the following criteria:
  • Net worth of ₹500 crore or more
  • Annual turnover of ₹1,000 crore or more
  • Net profit of ₹5 crore or more during any financial year
• CSR Committee: Companies meeting the criteria must establish a CSR Committee consisting of three or more directors, with at least one independent director, to oversee CSR activities.
• CSR Policy: The CSR Committee is responsible for formulating and recommending a CSR policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII of the Act.
• Annual CSR Expenditure: Companies are required to spend at least 2% of their average net profits made during the three immediately preceding financial years on CSR activities.
• Reporting and Compliance:
  • Companies must disclose the composition of the CSR Committee and the CSR policy in their annual report.
  • Failure to spend the stipulated amount must be explained in the report, detailing the reasons for not doing so.
• Timeline for Compliance:
  • The CSR policy should be formulated and approved by the Board of Directors at the beginning of the financial year.
  • The actual expenditure on CSR activities should be incurred during the financial year, and compliance is evaluated during the annual audit.

Furthermore, non-compliance with the CSR provisions can lead to penalties, including fines on the company and its officers in default, as prescribed under Section 134(8) and Section 450 of the Companies Act, 2013. This emphasizes the importance of adhering to CSR obligations as a vital aspect of corporate governance in India.