CSR Under Section 135 of the Companies Act

CSR under section 135 of the Companies Act, 2013 is a spending obligation with a disclosure obligation bolted on. A company crossing any one of three financial thresholds must set up a Corporate Social Responsibility Committee, adopt a policy, publish it, and spend at least two per cent of a three year average of net profits. Since the 2019 and 2020 amendment Acts commenced, money the company does not spend does not simply stay with it.

Which companies fall inside CSR under section 135?

CSR under section 135(1) is triggered by any one of three tests, applied to a single financial year:

The measurement window is narrower than it once was. The words "the immediately preceding financial year" were substituted for "any financial year" by the Companies (Amendment) Act, 2017 (Act 1 of 2018), section 37, with effect from 19 September 2018. Before that substitution, having crossed a threshold in any past year kept a company inside the section.

Note that two different windows operate in the same section, and they are easy to run together. The trigger in sub-section (1) looks at the immediately preceding financial year. The amount in sub-section (5) is a two per cent average over the three immediately preceding financial years.

A company that is caught constitutes a CSR Committee of the Board of three or more directors, of which at least one is an independent director. The proviso, inserted by section 37 of Act 1 of 2018 with effect from 19 September 2018, reduces that to two or more directors where the company is not required to appoint an independent director under section 149(4).

What the Committee and the Board each have to do

Section 135(3) gives the Committee three jobs: formulate and recommend a CSR Policy indicating the activities to be undertaken "in areas or subject, specified in Schedule VII" (those words substituted by section 37 of Act 1 of 2018 with effect from 19 September 2018), recommend the amount of expenditure on those activities, and monitor the policy from time to time.

Section 135(4) then puts the accountability on the Board: approve the policy after taking the Committee's recommendations into account, disclose its contents in the Board's report and also place it on the company's website, if any, in the prescribed manner, and ensure the activities in the policy are actually undertaken. Section 135(2) separately requires the Board's report under section 134(3) to disclose the composition of the Committee.

Section 135(5) adds a short-history rule: where the company has not completed three financial years since incorporation, the average is taken over such immediately preceding financial years as it has. Those words were inserted by the Companies (Amendment) Act, 2019 (Act 22 of 2019), section 21, with effect from 22 January 2021. The first proviso requires preference to the local area and areas around where the company operates.

The Explanation defines the base: net profit shall not include such sums as may be prescribed, and shall be calculated in accordance with section 198. It was substituted by section 37 of Act 1 of 2018 with effect from 19 September 2018. The sums excluded are a rules question, not a statutory one.

What happens to money a company does not spend

This is where the section changed most, and where the two routes run on different clocks.

Ongoing project, section 135(6). Any amount remaining unspent that relates to an ongoing project fulfilling prescribed conditions is transferred within thirty days from the end of the financial year to a special account in a scheduled bank, called the Unspent Corporate Social Responsibility Account. It must be spent within three financial years from that transfer, failing which it goes to a Schedule VII Fund within thirty days of completing the third financial year. Sub-section (6) was inserted by section 21 of Act 22 of 2019 with effect from 22 January 2021.

Everything else, second proviso to section 135(5). Where the company fails to spend, the Board specifies the reasons in its report under section 134(3)(o) and, unless the unspent amount relates to an ongoing project, transfers it to a Schedule VII Fund within six months of the expiry of the financial year. Those words were inserted by the same section 21 with effect from 22 January 2021.

The ongoing-project route therefore has the tighter first deadline, thirty days rather than six months, because the money is being parked for later use rather than given away.

Excess spending, third proviso to section 135(5). Where a company spends more than the sub-section requires, it may set off the excess against the requirement to spend for such number of succeeding financial years and in such manner as may be prescribed. Both the number of years and the manner are left to the rules.

A note on the source of that proviso. The consolidated text of the Act on India Code carries the set-off proviso with a footnote reading "The Proviso ins. by s. 27, ibid.", where the preceding footnote on the same page cites the Companies (Amendment) Act, 2019 (Act 22 of 2019). Read literally, the "ibid." attributes the proviso to that Act. It was in fact inserted by section 27 of the Companies (Amendment) Act, 2020 (Act 29 of 2020), which we verified against the text of that Act: section 27(a) inserts this proviso after the second proviso to section 135(5), section 27(b) substitutes sub-section (7), and section 27(c) inserts sub-section (9). We cite Act 29 of 2020 on this page rather than the footnote.

The penalty, and the fifty lakh committee exemption

Section 135(7) was substituted by section 27 of Act 29 of 2020 with effect from 22 January 2021. It punishes default in complying with sub-section (5) or sub-section (6), and it is measured against the money that should have moved:

Section 135(8) lets the Central Government give general or special directions to a company or class of companies to ensure compliance. Section 135(9), inserted by the same section 27, removes the Committee requirement where the amount to be spent under sub-section (5) does not exceed fifty lakh rupees, and the Board then discharges the Committee's functions. Note what the threshold measures: the amount to be spent, not net worth, turnover or profit.

Where CSR reaches an outside reader

• What is BRSR is the sustainability report where a listed company's CSR sits in a wider disclosure.
• What is the directors' responsibility statement covers the Board's report that carries the CSR disclosure.
• What is in the annual return, section 92 covers the annual return filed alongside it.
• What is a corporate governance report covers the quarterly governance filing for a listed company.

CSR under section 135 is a statutory obligation, not a signal about a company's prospects. Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.