Corporate incentives Reporting
This section provides that companies meeting a certain net worth or net profit threshold, are required to form a Corporate Social Responsibility (CSR) committee. Section 135 sets out the responsibilities of the CSR committee, which include formulating a CSR policy, recommending the amount of expenditure to be incurred in CSR activities, and monitoring the implementation of the CSR policy.
The Board of the company must take into account the recommendations of the CSR Committee in approving the CSR Policy for the company. Such policy must be disclosed in the company’s report, and also on the company’s website. This provision also establishes a minimum amount —2% of the average net profits made during the three preceding financial years— that companies covered by this provision must contribute towards CSR.
The activities that the company may pursue as part of these responsibilities are described in Schedule VII of the Act. The Rules under the Companies (Corporate Social Responsibility) Rules, 2014, also determine the manner in which a company’s CSR Policy is implemented.
*Please note that “Crore” is a unit in the Indian numbering system equal to ten million.
Section 135. Corporate Social Responsibility.
(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 any 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.
(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 as 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, 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.
Law / India / Companies Act 2013
The Companies Act, 2013 (the “Act”) provides that companies meeting certain financial criteria are required to set up a Corporate Social Responsibility Committee from the members of its board. This Committee is tasked with drafting a corporate social responsibility (“CSR”) policy, recommending the amount that the company should spend on this policy, and monitoring and ensuring the implementation of the policy.
The company is required to spend at least 2% of the average net profits made during the immediately preceding three financial years on CSR, or it must provide sufficient justification for its non-compliance.
The detailed requirements are set out in Section 135 of the Act and Schedule VII to the Act, and the Companies (Corporate Social Responsibility) Rules, 2014.