CSR Compliance Under Section 135 — Companies Act Corporate Social Responsibility Rules

Corporate Social Responsibility (CSR) is a mandatory obligation for qualifying companies in India under Section 135 of the Companies Act, 2013. Unlike voluntary CSR programmes globally, Indian law requires eligible companies to spend a minimum amount on specified social activities — and report on it annually. Here is the complete guide to CSR compliance in India.

Which Companies Must Comply with CSR?

CSR is applicable to any company that in any financial year meets any one of the following criteria:

• Net worth of ₹500 crore or more, OR
• Turnover of ₹1,000 crore or more, OR
• Net profit of ₹5 crore or more

Most SMEs and startups do not meet these thresholds. However, as companies grow, they should monitor their financials for crossing these limits.

The 2% CSR Spending Rule

Qualifying companies must spend at least 2% of their average net profits for the immediately preceding three financial years on CSR activities. "Net profit" for CSR purposes is calculated as per Section 198 of the Companies Act (essentially Profit Before Tax with certain adjustments). The amount is calculated annually and must be spent during that financial year.

Eligible CSR Activities — Schedule VII

CSR spending must be on activities listed in Schedule VII of the Companies Act. Key eligible areas include:

• Eradicating hunger, poverty and malnutrition
• Promoting education, including special education and vocational skills
• Promoting gender equality and women empowerment
• Environmental sustainability and ecological balance
• Protection of national heritage, art and culture
• Rural development projects
• Slum area development
• Disaster management, relief and rehabilitation
• Contributions to PM CARES Fund and state disaster management funds

CSR Committee

The Board must constitute a CSR Committee of at least 3 directors (at least one must be an independent director — for listed companies). The CSR Committee formulates and recommends the CSR policy, recommends the amount to be spent, and monitors the implementation of the CSR policy. For companies with CSR obligation below ₹50 lakh, the CSR Committee requirement is waived — the full Board discharges those functions.

CSR Reporting — Form CSR-2

All companies to which CSR applies must file Form CSR-2 (Annual Report on CSR Activities) with the ROC as an attachment to Form AOC-4 (annual financial statements). This discloses: the CSR amount calculated, amount spent, projects carried out and unspent amount (if any). Unspent amounts must be transferred to specific funds within 6 months of year-end.

Penalties for Non-Compliance

Failure to comply with CSR requirements attracts penalties: for the company — up to twice the amount required to be transferred plus ₹1 crore. For each defaulting officer — imprisonment up to 3 years OR fine ₹50,000 to ₹5 lakh OR both. These are significant penalties introduced by the Companies (Amendment) Act 2020.

Conclusion

CSR compliance is a significant obligation for qualifying companies — both financially and reputationally. Well-executed CSR also builds goodwill in the community. SPOTON assists companies with CSR policy, committee formation and annual CSR reporting. Contact us for comprehensive company compliance services.