What steps must a company take to comply with the provisions of Section 135 of the Companies Act, 2013, regarding Corporate Social Responsibility (CSR) obligations?

Detailed Legal Analysis

Under Section 135 of the Companies Act, 2013, certain companies in India are mandated to comply with Corporate Social Responsibility (CSR) obligations. A company qualifies for CSR obligations if it meets any of the following financial thresholds: a net worth of ₹500 crores or more, a turnover of ₹1,000 crores or more, or a net profit of ₹5 crores or more during the immediately preceding financial year (as outlined in Section 135(1)).

Once a company falls under this category, the first step is to constitute a CSR Committee as stipulated in Section 135(1). This committee should consist of at least three directors, with at least one being an independent director. The committee is tasked with formulating and recommending a CSR policy to the Board of Directors, detailing how the company plans to spend the required 2% of its average net profits from the preceding three financial years on CSR activities. This policy must be approved by the Board and should be disclosed in the company’s annual report as per Section 135(2).

Next, the company must ensure that the CSR activities undertaken are in alignment with Schedule VII of the Companies Act, 2013. This schedule includes various sectors where CSR contributions can be directed, such as education, health, gender equality, and environmental sustainability. It’s imperative that the CSR Committee monitors the implementation of the CSR policy, as well as the spending, to ensure compliance. The company must also disclose the CSR spending in the financial statements, as per Section 135(5), detailing the specific activities undertaken, the amount spent, and the reasons for any shortfalls.

Lastly, if a company fails to spend the mandated amount on CSR, it must explain the reasons for not doing so in its annual report, as stipulated in Section 135(5). Companies should maintain proper records of their CSR activities, expenditures, and the impact created, as these can be subject to scrutiny by auditors or regulatory bodies. Therefore, it is advisable for companies to not only allocate the necessary budget but also engage with stakeholders and communities to ensure that their CSR initiatives are effectively addressing societal needs, thereby enhancing their corporate reputation while fulfilling legal requirements.