CSR and Responsible Business Conduct
CSR and Responsible Business Conduct
This domain tests Section 135 mechanics - applicability, the 2% computation, committee governance, unspent amounts - and the wider ESG and BRSR expectations now placed on boards.
Core rules
- Applicability: net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more in the immediately preceding financial year.
- Spend at least 2% of the average net profit of the three immediately preceding financial years, computed on the Section 198 basis.
- CSR Committee: three or more directors with at least one independent director; where the obligation is Rs 50 lakh or less the board may discharge the function; unlisted companies not required to appoint an independent director may use two directors.
- Administrative overheads are capped at 5% of CSR spend; impact assessment applies to large projects (average obligation of Rs 10 crore or more, project outlay of Rs 1 crore or more).
- Unspent amount: ongoing project - transfer to the Unspent CSR Account within six months and spend within three financial years; otherwise - transfer to a Schedule VII fund within six months. Non-compliance attracts penalties under Section 135(7).
- Disclosure: Section 134(3)(o) board's report and the annual report on CSR (Form CSR-2); listed companies file a BRSR under LODR Regulation 34.
Worked example
Average net profit of Rs 200 crore gives a Rs 4 crore obligation. The company spends Rs 2.6 crore, of which Rs 1.4 crore relates to a multi-year project. The independent director on the CSR committee must confirm that the Rs 1.4 crore moves to the Unspent CSR Account within six months and is monitored for three financial years. Had the project not been an ongoing one, the shortfall would go to a Schedule VII fund instead.
Traps
- Using a single year's profit rather than the three-year average.
- Booking employee time or donations in kind as CSR without checking Schedule VII and the Rule 2(1)(c) exclusions.
- Assuming unspent money can be parked indefinitely in the company.