Section 135 of Companies Act 2013: CSR Compliance Guide

Introduction

Corporate Social Responsibility (CSR) has become an essential element of modern business governance, especially in a rapidly developing economy like India. The legal framework for CSR was formalized with the introduction of section 135 of companies act 2013, which mandates certain companies to actively participate in social and environmental development. This provision reflects a shift from profit-only business models to a more responsible and inclusive approach toward stakeholders and society.

The implementation of section 135 of companies act 2013 has made India one of the first countries to legally enforce CSR obligations. It not only defines which companies must contribute but also outlines how these contributions should be structured, monitored, and reported. Understanding this provision is crucial for companies, professionals, and students who wish to grasp corporate governance practices in India.

This blog provides a detailed explanation of section 135 of companies act 2013, including applicability, CSR committee requirements, spending norms, compliance rules, and practical implications.

Overview of Section 135

Section 135 of companies act 2013 deals specifically with Corporate Social Responsibility. It requires eligible companies to spend a certain percentage of their profits on CSR activities that benefit society.

The main objective behind introducing section 135 of companies act 2013 is to encourage businesses to contribute toward sustainable development goals such as education, healthcare, poverty eradication, and environmental protection.

Applicability of Section 135

A company must comply with section 135 of companies act 2013 if it meets any of the following criteria during a financial year:

Once a company meets any one of these thresholds, it becomes mandatory to follow CSR provisions under section 135 of companies act 2013.

Formation of CSR Committee

One of the key requirements under section 135 of companies act 2013 is the formation of a CSR Committee.

Composition of CSR Committee:

• Minimum 3 directors
• At least one independent director (if applicable)

The CSR Committee plays a crucial role in implementing CSR policies and ensuring compliance with section 135 of companies act 2013.

Responsibilities of CSR Committee:

• Formulate CSR policy
• Recommend CSR expenditure
• Monitor CSR activities
• Ensure transparency and accountability

CSR Spending Requirement

According to section 135 of companies act 2013, companies are required to spend:

At least 2% of the average net profits of the last three financial years

This spending must be directed toward approved CSR activities as specified under Schedule VII of the Act.

If a company fails to spend the required amount, it must provide a valid explanation in its Board’s Report as per section 135 of companies act 2013.

CSR Activities Covered

The CSR activities eligible under section 135 of companies act 2013 are listed in Schedule VII and include:

• Eradicating hunger and poverty
• Promoting education
• Gender equality and women empowerment
• Environmental sustainability
• Protection of national heritage
• Rural development projects
• Healthcare and sanitation
• Disaster management support

Companies must ensure that their CSR initiatives align with these approved categories under section 135 of companies act 2013.

CSR Policy

Every eligible company must develop a CSR Policy under section 135 of companies act 2013.

Key Elements of CSR Policy:

• List of approved CSR projects
• Implementation process
• Monitoring mechanism
• Reporting structure

The CSR Policy must be approved by the Board and disclosed in the company’s annual report and website.

Treatment of Unspent CSR Amount

The law under section 135 of companies act 2013 provides clear guidelines for unspent CSR funds:

1. Ongoing Projects:

• Unspent amount must be transferred to a special CSR account within 30 days
• Must be utilized within 3 years

2. Non-Ongoing Projects:

• Unspent amount must be transferred to a government-specified fund within 6 months

This ensures that funds allocated under section 135 of companies act 2013 are not misused or retained unnecessarily.

CSR Reporting and Disclosure

Transparency is a key aspect of section 135 of companies act 2013.

Companies must include CSR details in:

• Board’s Report
• Financial statements
• CSR annual report

Information to be disclosed:

• CSR policy details
• Amount spent
• Unspent amount
• Reasons for non-spending (if any)

Proper disclosure ensures accountability and strengthens the credibility of CSR initiatives under section 135 of companies act 2013.

Penalties for Non-Compliance

Non-compliance with section 135 of companies act 2013 can result in penalties.

Penalty Structure:

• Company: Fine up to ₹1 crore
• Officers in default: Fine up to ₹2 lakh

Strict enforcement ensures that companies take CSR obligations seriously under section 135 of companies act 2013.

Amendments and Updates

Over time, the government has introduced amendments to strengthen section 135 of companies act 2013.

Key Amendments:

• Mandatory transfer of unspent CSR funds
• Introduction of penalties for non-compliance
• Clarification on CSR implementation agencies
• Enhanced reporting requirements

These changes have improved the effectiveness and transparency of CSR provisions.

Benefits of Section 135

The implementation of section 135 of companies act 2013 offers several advantages:

For Society:

• Improved education and healthcare
• Better infrastructure
• Environmental protection

For Companies:

• Enhanced brand image
• Better stakeholder relationships
• Increased employee engagement

For Economy:

• Inclusive growth
• Sustainable development
• Reduction in social inequalities

Challenges in Implementation

Despite its benefits, section 135 of companies act 2013 faces certain challenges:

• Lack of awareness among companies
• Difficulty in project selection
• Monitoring and evaluation issues
• Misallocation of funds

Addressing these challenges is essential for effective implementation of CSR initiatives.

Practical Example

Consider a company with an average net profit of ₹10 crore over the last three years. Under section 135 of companies act 2013, it must spend:

2% of ₹10 crore = ₹20 lakh on CSR activities

This amount must be allocated to approved CSR projects and properly reported.

Importance for Corporate Governance

Section 135 of companies act 2013 plays a vital role in strengthening corporate governance.

It ensures:

• Ethical business practices
• Social accountability
• Transparency in operations

Companies are no longer judged only by profits but also by their contribution to society.

Future of CSR in India

The future of CSR under section 135 of companies act 2013 looks promising.

With increasing awareness and stricter regulations:

• CSR spending is expected to rise
• More impactful projects will be undertaken
• Greater collaboration between companies and NGOs

This will lead to sustainable and inclusive growth across the country.

Conclusion

In conclusion, section 135 of companies act 2013 represents a landmark step in integrating social responsibility into corporate strategy. It has transformed the way companies operate by making them accountable not just to shareholders but also to society at large.

From defining eligibility criteria to mandating CSR spending and ensuring transparency, section 135 of companies act 2013 provides a comprehensive framework for responsible business conduct. While challenges remain, continuous improvements and stricter enforcement are helping bridge gaps in implementation.

Companies that embrace CSR not as a legal obligation but as a strategic opportunity are likely to achieve long-term success. By contributing to social and environmental causes, businesses can create a positive impact while building trust and goodwill among stakeholders.