Corporate Social Responsibility in Company Law: Understanding Section 135 of the Companies Act 2013

Introduction

Corporate Social Responsibility (CSR) has emerged as a crucial aspect of contemporary business practices, driven by the need for companies to go beyond profits and contribute to societal well-being. In India, Section 135 of the Companies Act 2013 mandates CSR for certain companies, making it a groundbreaking provision that has helped shape responsible business practices in the country. This article explores Section 135 of the Companies Act 2013 and its significance in promoting Corporate Social Responsibility.

What is Corporate Social Responsibility (CSR)?

A company's moral and ethical behavior towards the general public is referred to as corporate social responsibility (CSR). According to section 135 of the Companies Act of 2013, all companies, whether public or private, must comply with CSR.  In other words, CSR is mandatory for all companies registered under the Companies Act, 2013. Some of the examples of CSR initiatives are as follows;

• Reducing carbon footprint and energy use
• Taking part in wildlife conservation programmes
• Encouraging charity and volunteerism
• Assisting local communities
• Improving labor laws
• Ensuring diversity and equality at work
• Investing in nonprofit organizations
  
  

What is Section 135 of the Companies Act, 2013?

Section 135 of the Companies Act, 2013 sets forth the legal framework for CSR in India. The section applies to companies meeting specific criteriaduring any financial year, which includes the following;

• Net worth of INR 500 crore or more; OR
• Turnover of INR 1,000 crore or more; OR
• A Net profit of INR 5 crore or more

Such companies must establish a CSR Committee and devote 2% or more of their average net income over the previous three fiscal years to CSR initiatives.

Key Provisions and Requirements of Corporate Social Responsibility

The following are some of the key provisions and requirements of Corporate Social Responsibility;

1. Identification of CSR Projects

   Section 135 stipulates that companies should undertake CSR activities in areas such as eradicating poverty, promoting education, gender equality, environmental sustainability, and healthcare. They are given flexibility in selecting and implementing CSR projects based on their sector-specific needs and potential impact.
   
   

2. CSR Committee

   Companies covered by Section 135 are required to constitute a CSR Committee comprising at least three directors, including one independent director. The committee's role is to formulate and recommend CSR policies, monitor their implementation, and ensure effective utilization of CSR funds.
   
   

3. CSR Expenditure

   Section 135 requires eligible companies to spend at least 2% of their average net profits made during the three immediately preceding financial years on CSR activities. This ensures that companies contribute a reasonable proportion of their profits towards societal and environmental well-being.
   
   

4. CSR Policy

   Companies are required to formulate a CSR policy that outlines the activities to be undertaken, the manner of implementation, and the reasons for selecting specific projects or initiatives. The policy must be approved by the board and made available on the company's website.
   
   

5. Reporting and Disclosure

   Companies must disclose their CSR initiatives, policies, and expenditure in their annual reports, ensuring transparency and accountability. Detailed information regarding the CSR projects undertaken, the amount spent, and the impact achieved should be provided to stakeholders.

Types of CSR Activities under the Companies Act, 2013

According to Schedule VII of the Companies Act of 2013, the following CSR initiatives are permissible in India for eligible listed companies to support:

1. Eradicating malnutrition, poverty, and hunger
2. Promoting Gender Equality
3. Promoting Education
4. CSR Environment-Related Initiatives
5. Preservation Of National Art, Culture, and Heritage
6. Actions Can Be Taken To Help And Support Veterans, War Widows, And Families Of The Armed Forces.
7. Donations to the Prime Minister's National Relief Fund or any other Central Government Fund established for the welfare, development, and relief of Schedule Caste, Tribes, Other Backward Classes, Women, and Minorities.
8. Financial support or contributions made to the advancement of technology in institutions of higher learning recognized by the central government.
9. Donations Made For Slum Area Development and Rural Development Projects.
   
   

Benefits and Impact of Section 135 of Companies Act, 2013

Section 135 of the Companies Act 2013 has had several positive outcomes, including:

1. Focused Social Investment

   The provision has compelled companies to allocate a specific proportion of their profits towards addressing social and environmental issues. This has resulted in a focused and strategic approach to CSR, leading to more impactful initiatives and greater alignment with societal needs.
   
   

2. Stakeholder Engagement

   Companies are encouraged to engage with stakeholders, including local communities, NGOs, and government agencies, to identify and address pressing social concerns. Collaborative efforts foster better understanding, effective implementation of projects, and a sense of shared responsibility.
   
   

3. Enhanced Accountability

   The disclosure requirements under Section 135 ensure that companies are accountable for their CSR activities. Stakeholders can evaluate the performance, impact, and alignment of CSR initiatives with national development goals, promoting transparency and responsible practices.
   
   

4. Social and Economic Development

   The mandated CSR expenditure has contributed significantly to social and economic development in India. Companies have been actively involved in initiatives such as skill development, education, healthcare, sanitation, and environmental conservation, thereby addressing critical societal challenges.
   
   

The Bottom Line

Section 135 of the Companies Act 2013 has played a pivotal role in institutionalizing corporate social responsibility in India. By making CSR a legal obligation for eligible companies, the provision has driven positive change, empowered communities, and fostered sustainable development. While challenges remain, the integration of CSR into company law has set the stage for responsible and ethical business practices, positioning India as a global leader in corporate social responsibility. To know more about the Corporate Social Responsibility, you must contact experienced corporation lawyer or corporate law firms in the relevant jurisdiction. For example, if you are located in Kolkata, you must contact a corporation lawyer or corporate law firms in Kolkata.

FAQs

1. What is CSR under Companies Act 2013?

   CSR is essentially a company's moral and ethical behavior towards society at large. CSR is compulsory for all companies whether it may be public or private, per section 135 of the Companies Act of 2013.

2. What are corporate social responsibilities?

   "Corporate social responsibility" is a management idea that pushes companies to take social and environmental issues into account in their day-to-day operations and interactions with stakeholders.

3. What is corporate social responsibility explain with five examples?

   Reducing carbon footprint and energy use, taking part in wildlife conservation programmes, encouraging charity and volunteerism, assisting local communities, improving labor laws, ensuring diversity and equality at work, investing in nonprofit organizations are some examples of CSR components.