Corporate Social Responsibility

In one line

A company above any one of three financial thresholds must have a Corporate Social Responsibility Committee, adopt a policy on Schedule VII activities, and spend at least two per cent of its average net profits of the three immediately preceding financial years, transferring what it does not spend either to a Schedule VII Fund or, for an ongoing project, to a special bank account.

In exam wording: section 135 is the whole subject, and Schedule VII is the list of activities.

Why the law has this at all

India was the first country to make corporate social responsibility a statutory obligation rather than an exhortation, and the choice the Act made is worth stating because it explains the section's shape.

It did not tax companies and spend the money itself. It left the choice of activity to the company, within a list, and the management of the project to the company's own committee.

But a duty to spend with no consequence for not spending is a duty in name only. The original section said only that the Board must explain in its report why it had not spent. Companies explained. So the 2019 and 2020 amendments added the machinery that now dominates the section: transfer the unspent amount out of the company's hands, either to a Fund or into a dedicated account that can only be spent on the project it was earmarked for, and a penalty if the transfer is not made.

The result is a section with two halves. The first, sub-sections (1) to (4), is about governance: who decides, what policy, what disclosure. The second, sub-sections (5) to (9), is about money: how much, where it goes if unspent, and what it costs to keep it.

Some words this chapter uses

Net worth, turnover and net profit are the three thresholds in sub-section (1). Average net profits are computed under section 198, excluding such sums as may be prescribed. An ongoing project is one fulfilling the prescribed conditions. A Fund specified in Schedule VII means a fund named in that Schedule, such as the Prime Minister's National Relief Fund. A scheduled bank is a bank in the Second Schedule to the Reserve Bank of India Act, 1934.

Which companies are covered: section 135(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 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.