17.

7 CORPORATE SOCIAL RESPONSIBILITY (SECTION 135 Read with The Companies (CSR
Policy) Rules, 2014)

1.Which Company Every company having

is required to
constitute CSR Factor Amount in Crores When Need to be done
committee: [Sec Net worth 500 or more During the constitute a
135 (1)] immediately Corporate Social
Or preceding Responsibility
Turnover 1000 or more financial year Committee

Or
Net Profit 5 or more

CSR Committee➔consist of 3 or more directors➔ at least 1 director shall be an

independent director.

Where a company is not required to appoint an independent director➔ it shall have

in its CSR Committee with two or more directors.

Companies Required to have Independent Directors

As per Section 149(4)
Every listed public company shall have at least one-third of the total number of directors as independent
directors and the Central Government may prescribe the minimum number of independent directors in case
of any class or classes of public companies.
Rule 4 of Companies (Appointment & Qualifications of Directors) Rules, 2014
The following class or classes of companies shall have at least two directors as independent directors—
(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding
fifty crore rupees:

“Net worth” [As per Section 2(57)] means the aggregate value of the paid-up share capital and all reserves
created out of the profits and securities premium account, after deducting the aggregate value of the
accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited
balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation
and amalgamation.

Example:
The statutory auditors of a company were required to issue a certificate on the net worth of the company as
per the requirement of the management as of 30 September 2018 computed as per the provision of section
2(57) of the Companies Act, 2013.
The company had fair valued its property, plant and equipment in the current year which was mistakenly
taken into retained earnings of the company in its books of accounts. Please advise whether this fair valuation
would be covered in the net worth of the company as per the legal requirements.
Chap. 7 Account 10

Solution:
As per sec 2(57) of the Companies Act 2013, any reserves created out of revaluation of assets doesn’t form
part of net worth. The company fair valued its property, plant and equipment and took that to retained
earnings.
Even if the company has taken the fair valuation to the retained earnings in its books of accounts, the resultant
credit in reserves (by whatever name called) would be in the category of ‘reserves created out of revaluation
of assets’ which is specifically excluded in the definition of ‘net worth’ in section 2 (57) and hence should be
excluded by the company.

Example: -
ABC Ltd is a company with a turnover of more than ` 1000 crores and having incurred a loss in one of
the preceding three financial years. Will it be required to comply with CSR?

Answer: -
As per section 135(1) of the Act, if any one of the three criteria (whether net worth, or turnover or
net profit) gets satisfied then the company is mandatorily required to comply with the CSR provision s.
Hence ABC Ltd will be required to comply with CSR based on its turnover.

2. Disclosure by Disclose the composition of the CSR Committee.

Boards Report
[Sec 135 (2)]

3. Duties of CSR The CSR Committee shall, —

Committee [Sec (a) formulate and recommend to the Board➔ CSR Policy➔indicating activities to be
135 (3)] undertaken as per ➔ Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities➔in clause
(a); and
(c) monitor the CSR Policy of the company from time to time.

4. Duties of Board The Board shall, —

[Sec 135 (4)] (a) after taking recommendations by CSR Committee➔ approve the CSR Policy &
(b) ensure that the activities as are included in Policy ➔ are undertaken by the
company.

5. Amount to be The Board ➔to ensure that the company spends➔ at least 2% of the average net
spend [Sec 135 (5)] profits ➔ during the 3 immediately preceding financial years or
where the company has not completed➔ period of 3 financial years since its
incorporation➔ during such immediately preceding financial years.

Company shall give preference to the local area

If company fails to spend such amount➔ Board shall, in its report under section
134➔ specify the reasons for not spending the amount and,
unless the unspent amount relates to any ongoing project ➔ transfer such unspent
amount to a Fund specified in Schedule VII, within a period of six months of the
expiry of the financial year
Chap. 7 Account 11
If company spends an amount in excess of the requirements➔ such company may set
off such excess amount against the requirement to spend ➔ for such number of
succeeding financial years➔ as prescribed.

6. Treatment of Any amount remaining unspent under sub-section (5), pursuant to any ongoing
amount remaining project➔ undertaken ➔as per CSR Policy, shall be transferred by the company within
unpaid [Sec 135 a period of 30 days from the end of the financial year ➔ to a special account to be
(6)] opened by the company in any scheduled bank to be called ➔Unspent Corporate
Social Responsibility Account, and

Such amount shall be spent towards the CSR Policy➔ within a period of 3 F.Y. from
the date of such transfer➔ failing which➔ company to transfer it to a Fund specified
in Schedule VII➔within a period of 30 days from the date of completion of the 3rd
F.Y.

Combined Analysis of Sec 135 (5) and (6)

Company Spend less than required Company Spend more than required
Having ongoing project No such Project Excess money can be set-off in subsequent 3 years

Within 30 days Within

6 Month

Transfer to Special Transfer such amount to

Account i.e. “Un spend fund in Schedule VII
CSR A/c “

To be spend for CSR Else

project within 3 years

7. Penalty upon If a company is in default in complying (5) or (6) ➔

default [Sec 135
(7)]
Fine

Company 2 X amount Or Unspent Or 1 Cr

required to be Corporate
transferred to Social
fund specified in Responsibility
Schedule VII Account
Chap. 7 Account 12

every officer 1/10th of amount Or Unspent Or 2 Lower

who is in required to be Corporate Lacs
default transferred to Social
Fund specified Responsibility
in Schedule VII, Account

8. Exemption from Where the amount to be spent ➔ under sub-section (5) does not exceed 50 lakh ➔
constitution of requirement for constitution of CSR Committee shall not be applicable and the
CSR committee functions of such Committee ➔ be discharged by the Board of Directors
[Sec 135 (9)]

Companies (Corporate Social Responsibility Policy) Rules, 2014

Definition-1- It shall not include the following, namely: -

Meaning of CSR

(i) activities undertaken in pursuance of normal course of business of the company:

Provided that any company engaged in research and development activity of new
vaccine may undertake research and development activity of new vaccine, drugs and
medical devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23
subject to the conditions that-

(a) such activities ➔ carried out in collaboration with any ➔institutes or

organizations as mentioned in Schedule VII to the Act;
(b) details of such activity to be disclosed separately in the Annual report on CSR➔in
Board’s Report;

(ii) any activity undertaken by the company outside India except for training of Indian
sports personnel representing any State or Union territory at national level or India at
international level;

(iii) contribution of any amount directly or indirectly to any political party;

(iv) activities benefitting employees of the company;

(v) activities supported by the companies on sponsorship basis for deriving marketing
benefits for its products or services;

(vi) activities carried out for fulfilment of any other statutory obligations under any
law in force in India;

Definition-2- “Ongoing Project” means a multi-year project undertaken by a Company in fulfilment

Ongoing Project of its CSR obligation having timelines not exceeding three years excluding the
financial year in which it was commenced,
It shall include such project that was initially not approved as a multi-year project but
whose duration has been extended beyond one year by the board based on reasonable
justification;
Chap. 7 Account 13

3. Rule-3- Every company including its holding or subsidiary, and a foreign company ➔ having
Application its branch office or project office in India, which fulfills the criteria specified in section
135(1) shall comply with the provisions of the Act:

Every company which ceases to be covered under 135(1)➔ for three consecutive
financial years shall not be required to -
(a) constitute a CSR Committee; and
(b) comply with the provisions contained in sub-section (2) to (6) of the said section,
till such time it meets the criteria specified in sub-section (1) of section 135.

4. Rule-4-CSR (1) The Board shall ensure ➔CSR activities are undertaken by the company itself or
Implementation through –

Situation Mode

Through own • company established under section 8

Company or with • registered public trust
other company • registered society

Established by • company established under section 8

CG/SG • registered public trust
• registered society

Other company • company established under section 8

• registered public trust
• registered society
having an established track record of at least 3 years in
undertaking similar activities

any entity established under an Act of Parliament or a State legislature

(2) (a) Every entity, ➔ who intends to undertake any CSR activity, shall register itself
with the CG➔ by filing the form CSR-1 electronically with the ROC➔with effect
from the 01st day of April 2021:

(b) Form CSR-1 shall be signed by the entity and shall be verified digitally by a CA
or CS or CMA in practice.

(c) On the submission, a unique CSR Registration Number shall be generated by the
system automatically.

(3) A company may engage international organizations for designing, monitoring and
evaluation of the CSR projects➔ as per its CSR policy + capacity building of their
own personnel.
Chap. 7 Account 14
(4) A company may also collaborate with other companies in such a manner that the
CSR committees of each company are in a position to report separately on such
projects or programmes.

(5) The Board to satisfy itself that the funds so disbursed have been utilised for the
purposes as approved by it and the CFO, the person responsible for financial
management shall certify to the effect.

(6) In case of ongoing project, the Board shall monitor the implementation of the
project as per approved timelines and year-wise allocation

Rule 5. CSR 1) The companies mentioned in the rule 3 shall constitute CSR Committee as under. -
Committees
(i) a company covered under 135(1) which is not required to appoint an independent
director u/s 149(4)➔shall have its CSR Committee without such director;

(ii) a private company having only two directors on its Board shall constitute its CSR
Committee with two such directors;

(iii) with respect to a foreign company ➔ CSR Committee shall comprise of at least
2 persons of which one person shall be as per Sec 380 + another person shall be
nominated by the foreign company.

2) The CSR Committee shall formulate and recommend to the Board➔action plan in
pursuance of its CSR policy, which include the following: -

(a) the list of CSR projects or programmes that are approved to be undertaken as per
Schedule VII;
(b) the manner of execution of such projects;
(c) utilisation of funds and implementation schedules for the projects;
(d) monitoring and reporting mechanism; and
(e) details of need and impact assessment➔for the projects undertaken by the
company:

Board may alter such plan at any time ➔ as per the recommendation of its CSR
Committee

Rule 7. CSR (1) Administrative overheads shall not exceed 5% of total CSR expenditure of the
Expenditure company for the financial year.

(2) Any surplus arising out of the CSR activities shall not form part of the business
profit of a company and ➔to be ploughed back into the same project or

shall be transferred to the Unspent CSR Account which shall be spent as per CSR
policy or
Chap. 7 Account 15

Transfer such surplus amount to a Fund specified in Schedule VII, within a period of
6 months of the expiry of the financial year.

(3) Where a company spends an amount in excess of requirement ➔ such excess

amount may be set off ➔ up to immediate succeeding 3 financial years subject to the
conditions that –
(i) the excess amount available for set off shall not include the surplus arising out of
the CSR activities.
(ii) the Board of the company shall pass a resolution to that effect.

(4) The CSR amount may be spent by a company for creation or acquisition of a capital
asset, which shall be held by -
(a) a company established under section 8 of the Act, or a Registered Public Trust or
Registered Society, having charitable objects and CSR Registration Number; or
(b) beneficiaries of the said CSR project; or
(c) a public authority:

If any capital asset created by a company prior to these rules➔It shall within 180 days
from such commencement comply with the requirement of this rule, which may be
extended by a further period of not more than 90 days with the approval of the Board
based

Rule 8-CSR (1) The Board's Report shall include an annual report on CSR.
Reporting

(2) In case of a foreign company, the balance sheet shall contain an annual report on
CSR.

(3) (a) Every company having average CSR obligation of 10 crore rupees or more in
the 3 immediately preceding financial years, shall undertake impact assessment,
through an independent agency, of their CSR projects having outlays of one crore
rupees or more, and which have been completed not less than one year before
undertaking the impact study.

(b) The impact assessment reports shall be placed before the Board + annexed to the
annual report on CSR.

(c) A Company undertaking impact assessment may book the expenditure towards
CSR for that financial year, which shall not exceed 5% of the total CSR expenditure
for that financial year or 50 Lacs, whichever is less.

Rule-9-Display of The Board of Directors mandatorily disclose the composition of the CSR Committee,
CSR activities on and CSR Policy and Projects approved by the Board on their website
its website
Chap. 7 Account 16

Rule-10- Transfer Until a fund is specified in Schedule VII for the purposes of subsection (5) and (6) of
of unspent CSR section 135 of the Act, the unspent CSR amount, if any, shall be transferred by the
amount. company to any fund included in schedule VII of the Act

Schedule VII

Activities which may be included by companies in their Corporate Social Responsibility Policies Activities
relating to:—
(i) Eradicating hunger, poverty and malnutrition, ‘‘promoting health care including preventinve health
care’’ and sanitation including contribution to the Swach Bharat Kosh set-up by the Central
Government for the promotion of sanitation] and making available safe drinking water.
(ii) promoting education, including special education and employment enhancing vocation skills
especially among children, women, elderly and the differently abled and livelihood enhancement
projects.
(iii) promoting gender equality, empowering women, setting up homes and hostels for women and
orphans; setting up old age homes, day care centres and such other facilities for senior citizens and
measures for reducing inequalities faced by socially and economically backward groups.

(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal
welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water
including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation
of river Ganga.
(v) protection of national heritage, art and culture including restoration of buildings and sites of historical
importance and works of art; setting up public libraries; promotion and development of traditional art
and handicrafts;
(vi) measures for the benefit of armed forces veterans, war widows and their dependents;
(vii) training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports
(viii) contribution to the prime minister's national relief fund or any other fund set up by the central govt.
for socio economic development and relief and welfare of the schedule caste, tribes, other backward
classes, minorities and women;
(ix) contributions or funds provided to technology incubators located within academic institutions which
are approved by the central govt.
(x) rural development projects
(xi) slum area development.
(xii) disaster management, including relief, rehabilitation and reconstruct ion activities.
Explanation.—For the purposes of this item, the term `slum area' shall mean any area declared as such by the
Central Government or any State Government or any other competent authority under any law for the time
being in force.