Companies Act Section 135 — Corporate Social Responsibility

CHAPTER IX ACCOUNTS OF COMPANIES

Commercial / Corporate

Summary

Sub-section (1) requires a company with a net worth of at least five hundred crore rupees, or a turnover of at least one thousand crore rupees, or a net profit of at least five crore rupees in the immediately preceding financial year, to set up a Corporate Social Responsibility Committee of the Board. This committee must have three or more directors, and at least one of them must be an independent director. However, if the company is not required to appoint an independent director under another provision of the Act, the committee may instead have two or more directors.

Sub-section (2) states that the company's Board report, as required under another section of the Act, must disclose the composition of the Corporate Social Responsibility Committee.

Under sub-section (3), the Corporate Social Responsibility Committee has three specific duties. Under clause (a), it must formulate and recommend to the Board a Corporate Social Responsibility Policy that indicates the activities the company will undertake in areas or subjects specified in Schedule VII of the Act. Under clause (b), it must recommend the amount of expenditure to be incurred on those activities. Under clause (c), it must monitor the Corporate Social Responsibility Policy of the company from time to time.

Sub-section (4) sets out the Board's responsibilities for companies covered by sub-section (1). Under clause (a), the Board must, after considering the committee's recommendations, approve the Corporate Social Responsibility Policy, disclose its contents in its report, and place it on the company's website, if any, in the manner prescribed. Under clause (b), the Board must ensure that the activities included in the policy are actually undertaken by the company.

Sub-section (5) requires the Board of every company covered by sub-section (1) to ensure that the company spends, in every financial year, at least two percent of the average net profits made during the three immediately preceding financial years, or, if the company has not completed three financial years since incorporation, during the immediately preceding financial years, in line with its Corporate Social Responsibility Policy. The first proviso states that the company should give preference to the local area and areas around it where it operates for spending the earmarked amount. The second proviso states that if the company fails to spend the required amount, the Board must specify the reasons for not spending it in its report, and, unless the unspent amount relates to an ongoing project under sub-section (6), transfer the unspent amount to a Fund specified in Schedule VII within six months of the expiry of the financial year. The third proviso allows a company that spends more than the required amount to set off the excess against the requirement for succeeding financial years, in the manner prescribed. The explanation clarifies that for this section, net profit does not include certain sums as prescribed, and is calculated according to the provisions of section 198 of the Act.

Sub-section (6) deals with unspent amounts related to ongoing projects. If any amount remains unspent under sub-section (5) because it is part of an ongoing project that meets prescribed conditions, the company must transfer that amount 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. The company must spend this amount within three financial years from the date of transfer, and if it fails to do so, it must transfer the amount to a Fund specified in Schedule VII within thirty days from the completion of the third financial year.

Sub-section (7) imposes penalties for non-compliance with sub-section (5) or sub-section (6). If a company defaults, it is liable to a penalty of twice the amount required to be transferred to the Fund or the Unspent Corporate Social Responsibility Account, or one crore rupees, whichever is less. Every officer of the company who is in default is liable to a penalty of one-tenth of the amount required to be transferred, or two lakh rupees, whichever is less.

Sub-section (8) allows the Central Government to give general or special directions to a company or class of companies to ensure compliance with this section, and the company or class of companies must comply with those directions.

Sub-section (9) provides an exception. If the amount a company is required to spend under sub-section (5) does not exceed fifty lakh rupees, the requirement to constitute a Corporate Social Responsibility Committee under sub-section (1) does not apply. In such cases, the functions of the committee are instead discharged by the Board of Directors of the company.

Official Text

(1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during 2[the immediately preceding financial year] shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director: 3[Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.]

(2) The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

(3) The Corporate Social Responsibility Committee shall,—

(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company 4[in areas or subject, specified in Schedule VII];

(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and

(c) monitor the Corporate Social Responsibility Policy of the company from time to time.

(4) The Board of every company referred to in sub-section (1) shall,—

(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and

(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, 5[or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years,] in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount 1[and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial years]. 2[Provided also that if the company spends an amount in excess of the requirements provided under this sub-section, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.] 3[Explanation.—For the purposes of this section “net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.] 4[

(6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year. 5[

(7) If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.]

(8) The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions.] 6[

(9) Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.]