CSR under Section 135

India is one of the few countries in the world where the law requires larger companies to spend a set share of their profits on corporate social responsibility (CSR). Section 135 of the Companies Act 2013 came into force on 1 April 2014.

For investors, CSR is mainly a cost line: around 2% of average profits that does not return to shareholders directly. It can also bring benefits, such as goodwill with communities and governments, and it can sometimes become a governance issue when the money flows through foundations linked to the promoter.

CSR is not the same as ESG. CSR is money spent outside the core business. ESG is about how the core business itself is run. A company can meet its CSR duty in full and still have serious ESG problems.

Companies covered

A company must follow the CSR rules if, in the previous financial year, it had any one of:

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

Amount to spend

At least 2% of the average net profit of the three immediately preceding financial years. Net profit is calculated under Section 198 of the Act, not taken straight from the profit and loss account, and excludes profits of overseas branches and dividends from other Indian companies that are themselves covered by the CSR rules. A company that has not completed three years uses the years since incorporation.

Eligible activities

CSR money must go to activities listed in Schedule VII of the Act, such as reducing hunger and poverty, health care, education, gender equality, environmental sustainability, rural development, and contributions to specified government funds. Spending that mainly benefits the company's own employees, or activities in the normal course of its business, does not count.

The CSR committee

Covered companies must set up a CSR committee of at least three directors, including at least one independent director for listed companies. If the yearly CSR obligation is ₹50 lakh or less, the board can do the committee's work. The committee recommends the CSR policy and an annual action plan, and monitors spending.

Unspent money

• Ongoing projects: unspent money must go into a special Unspent CSR Account in a scheduled bank within 30 days of the end of the financial year, and be spent within three financial years. Anything still unspent must then go to a Schedule VII fund within 30 days.
• Other unspent money: must go to a Schedule VII fund, such as the PM's National Relief Fund, within six months of the end of the financial year.
• A company with money in its Unspent CSR Account must keep a CSR committee and follow the rules even if it falls below the thresholds.

Penalties

If a company does not transfer unspent money as required, it faces a penalty of twice the amount or ₹1 crore, whichever is less. Each officer in default faces one-tenth of the amount or ₹2 lakh, whichever is less.

Other rules

• Administrative overheads can be at most 5% of the year's CSR spending.
• Companies with an average CSR obligation of ₹10 crore or more must get an impact assessment of large projects.
• CSR can be carried out through registered implementing agencies, including the company's own foundation.
• Spending above the requirement can be set off against the next three years' obligations.

Illustrative example (hypothetical numbers)

A company's Section 198 net profit in the last three years was ₹40 crore, ₹50 crore and ₹60 crore.

• Average net profit = (40 + 50 + 60) ÷ 3 = ₹50 crore
• Minimum CSR spend = 2% × ₹50 crore = ₹1 crore

It spends ₹70 lakh during the year on an ongoing school project. The remaining ₹30 lakh must be moved to its Unspent CSR Account within 30 days of the year-end and spent within three years.