Corporate Social Responsibility and Business Ethics
The exam tests the Section 135 thresholds, the 2% computation, treatment of unspent amounts, and the distinction between ethics and mere legality.
Applicability and obligation
- Section 135 applies if, in the immediately preceding financial year, the company has net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more.
- Such a company must spend 2% of the average net profits of the three immediately preceding financial years.
- A CSR Committee of three or more directors, with at least one independent director for listed companies, recommends the policy and the spend.
- Schedule VII activities include education, health, sanitation, environment, gender equality, sports, culture and the Prime Minister's relief fund.
Unspent amounts
- Ongoing project: transfer to the Unspent CSR Account within 30 days of the financial year end and spend within three financial years; any balance then goes to a Schedule VII fund within 30 days.
- Other than ongoing projects: transfer to a Schedule VII fund within 6 months of the financial year end.
Business ethics
Ethics goes beyond compliance: a code of conduct, a whistleblower policy, avoidance of conflict of interest, and compliance with the Prevention of Corruption Act 1988 and the SEBI (Prohibition of Insider Trading) Regulations 2015.
Worked example
Average net profit of three years is ₹20 crore, so the obligation is 2% = ₹40 lakh. If ₹30 lakh is spent and ₹10 lakh is earmarked for a three-year project, the ₹10 lakh goes to the Unspent CSR Account within 30 days. If instead the ₹10 lakh had no ongoing project, it would go to a Schedule VII fund within 6 months.
Traps
- Taking 2% of turnover or net worth - the base is average net profit.
- Counting political contributions or staff welfare as CSR.
- Assuming every profitable company must form a CSR Committee.