INTRODUCTION
The Corporate Social Responsibility (CSR) Committee plays a pivotal role in ensuring that companies comply with the mandates outlined in Section 135 of the Companies Act, 2013 (2013 Act), and the subsequent rules framed under it. As per legal requirements, the CSR Committee must be constituted in a specific manner, and its responsibilities encompass formulating CSR policies, recommending expenditure, and monitoring implementation. This blog provides an in-depth analysis of the compliance requirements under Section 135 of the Act and the corresponding rules, shedding light on the essential obligations imposed on companies and their boards.
CSR COMMITTEE
The CSR committee, as mandated by Section 135(1), must comprise of three or more directors, including at least one independent director, as per Section 135(2). The committee's composition must be disclosed in the Board’s Report.
Under Rule 5(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (2014 Rules), unlisted public companies and private companies exempt from appointing independent directors need not include an independent director in their CSR Committee. Private companies with only two directors may constitute their CSR Committee with these two directors.
In foreign companies, the CSR committee must include at least two members, with one being a resident of India and the other nominated by the foreign company.
However, Section 135(9) states that if a company's annual CSR spending does not exceed Rs. 50 lakhs, it is exempt from constituting a CSR committee, and the Board of Directors must fulfil the committee's functions.
COMPLIANCE UNDER SECTION 135 OF THE 2013 ACT
Every company must form a CSR Committee comprising three or more directors, including at least one independent director.
The composition of the CSR Committee must be revealed in the Board's report.
The CSR Committee is responsible for crafting CSR Policy, suggesting expenditure, and monitoring its implementation.
The Board must approve and disclose the CSR policy's contents in its report and on the company's website. Additionally, it must ensure the policy's activities are carried out.
The Board is obligated to ensure the company spends at least 2% of the average net profits of the previous three financial years on CSR activities. If the company has not completed three financial years since its inception, profits from preceding years are considered.
Priority should be given to local areas and neighbouring regions where the company operates while deciding on CSR activities.
If the company fails to meet the spending requirement, the Board must state reasons in its report. Unspent amounts related to ongoing projects must be transferred to a specified fund within six months after the financial year ends. Excess spending may be offset against future CSR obligations as prescribed.
Any unspent amount related to ongoing projects must be transferred to a designated account within thirty days after the financial year ends. If not spent within three financial years, it must be transferred to a specified Fund within thirty days after the third financial year ends.
Non-compliance with spending requirements may result in penalties for the company and its officers, as specified.
COMPLIANCE UNDER THE 2014 RULES
Rule 2(i) provides that the Board should approve a project as an ongoing multi-year project and the duration can be extended beyond one year based on reasonable justification.
Rule 4(4) states that in cases where the companies are collaborating among themselves, the CSR Committee of the respective company should separately prepare a report on such projects.
Rule 4(5) provides that the Board should satisfy itself that the funds disbursed are being used for the purposes and in the manner as approved by it. They should also seek certification to this effect from the Chief Financial Officer or the person responsible for financial management.
Rule 4(6) states that the Board should ensure smooth implementation within the given time period by monitoring the implementation of ongoing projects with reference to the approved timelines and year-wise allocation and make modifications if any. Such modification may include an extension of duration with reasonable justification, even if they were not approved as multi-year projects.
Rule 5(2) states that the CSR committee should formulate an annual action plan for its CSR policy.
Rule 7(1) states that the board should ensure that the administrative expenses are limited to 5% of total CSR expenditure for the financial year and shouldn’t exceed it.
Rule 7(3) provides that the Board has the duty to ensure that any surplus arising out of the CSR activities is given back into the same project or transferred to the unspent CSR Account and spent as per CSR Policy and annual action plan or transferred to any fund given in Schedule VII. This should be done within 6 months of the expiry of the financial year.
Rule 7(4) provides that if any capital asset is created or acquired as a part of CSR, the Board should ensure that such capital asset is held-
by a company established under Section 8 of the 2013 Act, or
a registered public trust or a registered society, having charitable objects and CSR registration number, or
beneficiaries of the said CSR project, in the form of self-help groups, collectives, and entities;
or a public authority.
If the capital assets were created or acquired before the Companies (CSR Policy) Amendment Rules, 2021 commenced, the Board should ensure that this provision is complied with, within 180 days, which can be further extended for additional 90 days with reasonable justification.
Rule 8(3) further provides that the Board should ensure that impact assessment is undertaken through an independent agency. The Board should also review the impact assessment reports and the said report should be annexed to the annual report on CSR.
ANNUAL ACTION PLAN (AAPs)
As per Rule 5(2) of the 2014 Rules, it is mandatory for CSR committees to devise a comprehensive plan encompassing approved CSR projects, execution methods, fund utilization modalities, implementation timelines, monitoring and reporting mechanisms, and, need and impact assessments. All CSR activities must align with this plan, and any deviation requires approval from the CSR Committee and Board with appropriate justification. AAPs should be updated annually to guide effective implementation of CSR policy.
CONCLUSION
In conclusion, adherence to the provisions of Section 135 of the Companies Act, 2013, and the accompanying rules is essential for companies to fulfil their social responsibility obligations effectively. The CSR Committee, in collaboration with the board, plays a crucial role in formulating and implementing CSR policies, ensuring transparent utilization of funds, and evaluating the impact of CSR activities. By upholding these compliance requirements and meticulously following the annual action plan, companies can contribute meaningfully to societal welfare while enhancing their corporate reputation and fostering sustainable growth.
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