Section 135 of Companies Act: Corporate Social Responsibility (CSR)
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As per section 135 (1) of Companies Act, 2013 (“Companies Act”), every company having net worth of INR 500 crore or more, or turnover of INR 1000 crore or more or net profit of INR 5 crore or more, during the immediately preceding financial Year (FY), shall constitute a Corporate Social Responsibility (CSR) Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
Further, as per 2nd proviso to sub-section 5, “if the company fails to spend CSR amount, the Board shall, in its report, specify reasons for not spending the amount 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 year.
Based on a reading of the above provisions, it appears that if a company would have specified reasons for not spending the CSR amount in its Board of Directors report in a given year, it should have sufficed the conditions stated in Companies Act.
In our recent interaction with Ministry of Corporate Affairs (MCA), it has been clarified that compliance of provisions of CSR is mandatory for companies meeting the specified thresholds. Further, specifying the reasons for not spending the CSR amount in Board Report does not discharge the obligation to spend at least 2% amount as mandated. Accordingly, the CSR obligation gets carried forward until it is fulfilled.
Thus, companies should keep this aspect in mind. The second proviso to section 135 (5) of the Companies Act makes it obligatory on the part of the corporate to disclose reasons for not spending or under spending the CSR amount. Non-compliance of CSR provisions would attract penal provisions (which is yet to be notified by the Ministry).
We trust the above will be useful. Let us know your feedback, if any.
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