How does Section 135 of the Companies Act, 2013 mandate corporate social responsibility (CSR) spending, and what are the repercussions for non-compliance?

Detailed Legal Analysis

Section 135 of the Companies Act, 2013 mandates that certain companies in India allocate a minimum amount of their profits towards Corporate Social Responsibility (CSR) activities, establishing a framework for responsible corporate behavior.

Key provisions of Section 135 include:

• Applicability: The CSR provisions apply to companies meeting at least one of the following criteria during the immediately preceding financial year:
  • Net worth of ₹500 crore or more
  • Turnover of ₹1000 crore or more
  • Net profit of ₹5 crore or more
• CSR Committee: Eligible companies are required to form a CSR Committee consisting of three or more directors, with at least one independent director.
• CSR Policy: The CSR Committee must formulate a CSR policy that outlines the activities to be undertaken in accordance with Schedule VII of the Companies Act, 2013, which includes social welfare, education, poverty alleviation, gender equality, and environmental sustainability.
• CSR Spend: Companies must spend at least 2% of their average net profits made during the three immediately preceding financial years on CSR activities.

In case a company does not spend the prescribed amount on CSR, the repercussions are as follows:

• Disclosure Requirement: The company must disclose the reasons for not meeting the CSR spending requirement in its Board Report, providing transparency regarding its CSR initiatives.
• Penalty for Non-Compliance: Non-compliance with CSR provisions may attract penalties:
  • For the company: A fine which shall not be less than ₹50,000 but which may extend to ₹25 lakh.
  • For every officer in default: A fine which may extend to ₹5 lakh, or imprisonment for a term which may extend to three years, or both.

Additionally, the Ministry of Corporate Affairs may issue guidelines and updates regarding CSR activities, thus further emphasizing the importance of compliance in promoting sustainable development and addressing social challenges in India.