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CMA Final · Corporate and Economic Laws

Corporate Governance and Social Responsibility and Sustainability

This chapter covers how companies are directed and controlled (corporate governance), and how large companies must plan, spend and report on CSR under Section 135 of the Companies Act, 2013. To solve questions, test the thresholds first, then the committee, then the 2% spend, then unspent amount rules and penalties.

What this chapter covers

This chapter has two linked halves. The first half is corporate governance: the principles behind it and the Companies Act, 2013 provisions that put it into practice, such as the Nomination and Remuneration Committee and the Stakeholders Relationship Committee under Section 178. The second half is corporate social responsibility (CSR) under Section 135, and then sustainability and business responsibility reporting.

Section 135 is the core of the chapter. It tells you which companies must act, who sits on the CSR Committee, what the Board must approve, how much must be spent, and what happens to unspent money. Most numerical and rule-based questions come from here.

The chapter connects to the rest of Paper 13. Board committees, directors' duties, the Board's report and independent directors all appear elsewhere in company law. Net profit for CSR is calculated under Section 198, so your knowledge of profit computation helps. Treat this chapter as an application chapter: you are given a company's facts and asked what it must do.

Section 135 is precise, with clear thresholds, time limits and penalties, so it suits both 2-mark MCQs and case-based written answers. A student who knows the exact conditions can score full marks on a short question. Governance and sustainability topics also let you write well-structured descriptive answers that link law to practice. Because the rules are specific, small slips in numbers or conditions cost marks, and careful preparation here pays off directly.

Corporate Governance and Social Responsibility and Sustainability: topics in the order to study them

  1. 1Corporate Governance: Concept and PrinciplesStart with the idea and principles, so every later provision makes sense as a way of putting them into effect.
  2. 2Corporate Governance Framework under Companies Act, 2013Next, see how the Act builds governance through committees such as the Nomination and Remuneration Committee and the Stakeholders Relationship Committee in Section 178.
  3. 3Applicability of CSR under Section 135Before any CSR rule, you must know which companies are covered: the net worth, turnover and net profit tests.
  4. 4CSR Committee, CSR Policy and Board ResponsibilitiesOnce applicability is clear, learn who forms the Committee, what it recommends and what the Board must approve and ensure.
  5. 5CSR Expenditure, Schedule VII Activities and Unspent AmountThis is the heaviest topic, covering the 2% spend, Schedule VII, set-off, the Unspent CSR Account and penalties, so study it after the structure is in place.
  6. 6CSR Implementation, Impact Assessment and ReportingThen learn how projects are carried out, assessed and disclosed, which builds on the policy and spending rules.
  7. 7Sustainability and Business Responsibility ReportingFinish with the wider reporting view, which links governance and CSR to broader environmental, social and governance disclosure.

How to prepare Corporate Governance and Social Responsibility and Sustainability

Prepare this chapter in two layers: first understand the logic, then memorise the exact numbers and time limits of Section 135 and Section 178.

  1. Read the principles of corporate governance once and write each principle in one line of your own words.
  2. Make a table on paper for Section 178: who must form each committee, minimum members, independent director share, who may chair, and the penalty.
  3. Learn the Section 135(1) thresholds: net worth ₹500 crore or more, turnover ₹1,000 crore or more, or net profit ₹5 crore or more in the immediately preceding financial year. Any one is enough.
  4. Build a Section 135 flow: Committee recommends the policy and the amount, the Board approves the policy and ensures activities are undertaken, then the company spends, then it reports or transfers any unspent amount.
  5. Practise the 2% calculation using the average net profit of the three immediately preceding financial years, and work through unspent amount cases for ongoing projects and non-ongoing projects.
  6. Solve MCQs on numbers and time limits, then write short case answers that name the rule, apply it to the facts and state the consequence.
  7. Revise the sustainability and reporting topic through its purpose and main disclosures, linking it to the Board's report.

Common mistakes in Corporate Governance and Social Responsibility and Sustainability

  • Thinking all three thresholds must be met for CSR to apply.

    Fix: Remember the test uses 'or'. Meeting any one threshold in the immediately preceding financial year is enough.

  • Using the current year's profit to compute the 2% spend.

    Fix: Use the average net profits of the three immediately preceding financial years, calculated under Section 198, and show the working.

  • Mixing up the two unspent amount routes and their deadlines.

    Fix: Link each to its project type: ongoing project goes to the Unspent CSR Account in 30 days; otherwise to a Schedule VII Fund within six months.

  • Stating the penalty as a flat amount.

    Fix: Write both parts: company pays twice the amount to be transferred or ₹1 crore, whichever is less; officer pays one-tenth or ₹2 lakh, whichever is less.

  • Confusing the roles of the CSR Committee and the Board.

    Fix: The Committee formulates, recommends and monitors. The Board approves, discloses the policy and ensures activities happen.

  • Mixing Section 135 and Section 178 committee rules.

    Fix: Keep separate notes. The Nomination and Remuneration Committee needs three or more non-executive directors, at least half independent; the Stakeholders Relationship Committee needs a non-executive chairperson.

Last-day revision: Corporate Governance and Social Responsibility and Sustainability

  • Section 135(1) applies if net worth is ₹500 crore or more, turnover is ₹1,000 crore or more, or net profit is ₹5 crore or more in the immediately preceding financial year.
  • The CSR Committee has three or more directors, with at least one independent director.
  • If a company need not appoint an independent director under Section 149(4), its CSR Committee needs two or more directors.
  • The Board's report must disclose the composition of the CSR Committee.
  • The Committee recommends the CSR Policy and the spend amount, and monitors the policy; the Board approves the policy and ensures activities are undertaken.
  • Minimum spend is 2% of the average net profits of the three immediately preceding financial years, with net profit worked out under Section 198.
  • Preference goes to the local area and areas around where the company operates.
  • Excess spend can be set off against the requirement of succeeding years, in the manner prescribed.
  • Unspent amount for an ongoing project goes to the Unspent CSR Account within 30 days of the financial year end, and must be spent within three financial years.
  • Other unspent amount goes to a Schedule VII Fund within six months of the financial year end, and the Board's report must give reasons.
  • If the CSR amount does not exceed ₹50 lakh, no Committee is needed and the Board performs its functions.
  • Section 135(7) penalty on the company is twice the amount to be transferred or ₹1 crore, whichever is less; on each defaulting officer it is one-tenth of that amount or ₹2 lakh, whichever is less.

Corporate Governance and Social Responsibility and Sustainability practice questions

Corporate Governance and Social Responsibility and Sustainability in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Corporate Governance and Social Responsibility and Sustainability: frequently asked questions

Which section of the Companies Act, 2013 deals with CSR?

Section 135 deals with Corporate Social Responsibility. It covers applicability, the CSR Committee, the policy, the 2% spend, unspent amounts and penalties. Activities are drawn from Schedule VII.

Is a CSR Committee compulsory for every company covered by Section 135?

No. Where the amount to be spent does not exceed ₹50 lakh, the Committee is not required. The Board of Directors then discharges the Committee's functions.

How is the minimum CSR spend calculated?

The Board must ensure the company spends at least 2% of the average net profits made during the three immediately preceding financial years. Net profit is calculated in accordance with Section 198, excluding such sums as are prescribed.

What happens if a company does not spend the CSR amount?

The Board must give the reasons in its report. Unless the amount relates to an ongoing project, it must be transferred to a Schedule VII Fund within six months. For an ongoing project it goes to the Unspent CSR Account within 30 days of the year end.

Does this chapter also cover Section 178 committees?

Yes, as part of the governance framework. Section 178 covers the Nomination and Remuneration Committee and the Stakeholders Relationship Committee, including their composition and functions.