- Which companies qualify for CSR liability?
Provisions of section 135 of the Companies Act, 2013 provide the criteria based on which it is determined whether a company falls within the purview of mandatory compliance with the Corporate Social Responsibility related expenditure.
The compliance with respect to CSR spending in current financial year is based on the turnover, net worth, and net profit of the immediately preceeding financial year. Accordingly, CSR compliance is mandatory if any of the following parameters are met:
1. Net Worth >= Rs.500Crore or more
2. Turnover >= Rs.1000Crore or more
3. Net Profit >= Rs.5Crore or more
- Whether CSR provisions cover Section 8 companies?
Yes, the same is apparent from the wordings of Section 135(1) which reads as-
“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.” Use of the words “Every company” is indicative of its wide applicability”.
- Is CSR spending mandatory even though the company has not completed 3 financial years since its incorporation?
Yes, provided it meets the criteria laid out under Section 135(1), thereby being liable to comply with the CSR related provisions.
Sub-section (5) of Section 135 reads as-
“The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two percent of the average net profits of the company made during the three immediately preceding financial years, or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy”.
In such a case, if 3 financial years haven’t been completed, the CSR spending will be at least 2% of the average net profits of the immediately preceeding financial years. If only two years have been completed, then the average net profit for preceeding 2 financial years will be taken.
- If a company meets the criteria specified under Section 135(1), but its Holding/ Subsidiary doesn’t, will the holding/ subsidiary also become subject to CSR spending?
The answer is negative since the provisions of Section 135 are company specific. Hence, until the criteria under Section 135(1) is satisfied by the holding/ subsidiary, no liability exists to incur the CSR expenditure.
