"Companies must embrace the noble cause of serving society. It's not just about making profits; it's about making a difference." - Ratan Tata
1. Meaning
CSR means businesses help society and the environment through their strategies and actions. For example, a company might reduce its carbon footprint by using renewable energy, or support education by funding scholarships for underprivileged students. This demonstrates a commitment to ethical behavior and social improvement.
2. Voluntary Contribution
Companies can choose to give money to CSR activities even if they are not required by law. For example, a tech company might build a school in a rural area or fund a healthcare project. However, some companies must give money because the government mandates it. This helps both the company and society grow.
3. Classes of Companies
Certain companies must follow CSR rules. These include:
| Criteria | Example |
|---|---|
| Net worth of ₹500 crore or more | A large manufacturing company |
| Turnover of ₹1000 crore or more | A national retail chain |
| Net profit of ₹5 crore or more | A successful IT services firm |
Illustrative Example:
- ABC Manufacturing Ltd. has a net worth of ₹600 crore, a turnover of ₹1500 crore, and a net profit of ₹8 crore in the last financial year. This company must comply with CSR regulations.
4. Prescribed Contribution
Companies that meet the criteria above must spend at least 2% of their average net profits from the last three years on CSR. For instance, if a company made an average profit of ₹10 crore over the past three years, it must spend ₹20 lakh on CSR.
Illustrative Example:
- XYZ Tech Ltd. has an average net profit of ₹10 crore over the last three years. It must contribute ₹20 lakh (2% of ₹10 crore) to CSR activities.
5. CSR Committee
Qualified companies must have a CSR committee with at least three directors, including one independent director. For example, a company's CSR committee might plan initiatives like setting up free health camps. Companies with a CSR contribution of ₹50 lakh or less don't need a separate committee; the Board of Directors can manage CSR activities.
Illustrative Example:
- LMN Enterprises forms a CSR committee with three directors, including one independent director, to oversee its CSR projects.
6. CSR Policy
The CSR committee or the Board must have a CSR policy that outlines the company's goals, actions, committee roles, implementation, and monitoring. For instance, a policy might include plans to improve local education facilities or enhance healthcare services.
Illustrative Example:
- DEF Corp. drafts a CSR policy focusing on sustainable agricultural practices and educational scholarships for underprivileged children.
7. Computation of Average Net Profit
The average net profit is calculated before tax based on audited financial statements. This ensures clarity on how much should be spent on CSR. For example, if a company’s net profit before tax for the past three years is ₹10 crore, ₹12 crore, and ₹8 crore, the average is ₹10 crore.
Illustrative Example:
- PQR Ltd. calculates its average net profit as ₹10 crore over three years (₹10 crore in 2020, ₹12 crore in 2021, and ₹8 crore in 2022).
8. Recurring Applicability
Once a company qualifies for CSR, it must continue contributing every year unless it falls below the criteria for three continuous years. For instance, if a company meets the criteria in 2020 but not in 2021, 2022, and 2023, it can stop contributing after 2023.
Illustrative Example:
- GHI Pvt. Ltd. qualifies for CSR in 2020 but not in 2021, 2022, and 2023. It can stop its CSR contributions in 2024.
9. Payment of CSR Amount
CSR money must be spent directly from the company's account. No third-party payments are allowed. For instance, if a company supports a local NGO, the payment should come directly from the company’s account.
Illustrative Example:
- STU Industries directly transfers funds to a local NGO’s bank account for setting up a community library.
10. Disclosure of Expenditure
Companies must report their CSR spending in their financial returns using FORM AOC-4. For example, if a company spends ₹1 crore on CSR activities, it must disclose this in its annual financial report.
Illustrative Example:
- VWX Ltd. reports its ₹1 crore CSR expenditure in its financial returns for the year using FORM AOC-4.
Summary Table
| Point | Description | Example |
|---|---|---|
| Meaning | Businesses help society through their actions. | Using renewable energy, funding scholarships |
| Voluntary Contribution | Companies can give money voluntarily; some must by law. | Building a rural school |
| Classes of Companies | Must follow if net worth ≥ ₹500 crore, turnover ≥ ₹1000 crore, or net profit ≥ ₹5 crore. | A large manufacturing company |
| Prescribed Contribution | Spend at least 2% of average net profits from the last three years on CSR. | ₹20 lakh for a company with ₹10 crore average profit |
| CSR Committee | Must have a committee with three directors; exceptions for contributions ≤ ₹50 lakh. | Planning health camps |
| CSR Policy | Policy must outline goals, actions, committee roles, implementation, and monitoring. | Improving local education facilities |
| Computation of Net Profit | Calculate net profit before tax based on audited statements. | Average of ₹10 crore over three years |
| Recurring Applicability | Continue CSR unless criteria not met for three years. | Stopping CSR after not qualifying for three years |
| Payment of CSR Amount | Spend directly from company's account, no third-party payments. | Direct payment to a local NGO |
| Disclosure of Expenditure | Report CSR spending in financial returns using FORM AOC-4. | Reporting ₹1 crore spending in financial report |
Compliance Requirements
- Forming a CSR Committee: Companies that meet the criteria must form a CSR committee with three directors, including an independent director.
- Creating a CSR Policy: Draft and approve a CSR policy that outlines the company’s CSR goals and strategies.
- Spending Requirement: Spend at least 2% of average net profits from the last three years on CSR activities.
- Direct Payments: Ensure CSR funds are spent directly from the company’s account.
- Annual Reporting: Disclose CSR expenditures in the company’s annual financial returns using FORM AOC-4.
Conclusion
Section 135 of the Companies Act, 2013, ensures companies contribute to social welfare. Understanding these rules helps companies align their CSR efforts with legal and societal expectations. By engaging in CSR, companies not only comply with regulations but also build a better community and enhance their own reputation. This commitment to CSR can lead to long-term benefits, including improved public image, customer loyalty, and employee satisfaction.
