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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice

Corporate Social Responsibility (CSR) for CS Professional ESG Paper

CSR is the duty of larger companies under Section 135 of the Companies Act, 2013 to form a CSR Committee, adopt a CSR Policy and spend at least 2% of average net profit of the three preceding financial years on Schedule VII activities. You solve questions by testing applicability, computing net profit, then applying unspent-amount and penalty rules.

What this chapter covers

This chapter covers how Indian law turns corporate social responsibility from a voluntary idea into a compliance duty. You begin with the concept and its evolution, then move to Section 135 of the Companies Act, 2013: who must comply, how the CSR Committee works, what the policy and annual action plan contain, how much must be spent, and where it can be spent under Schedule VII.

The second half is about what happens when money is not spent. You study the Unspent CSR Account for ongoing projects, transfer to a Schedule VII Fund, the penalty under Section 135(7), and the reporting and impact assessment duties. Net profit is calculated under Section 198, so you must be comfortable with its inclusions and exclusions.

In the ESG paper, CSR is the social and governance link. It connects to board committees and governance in the first part of the paper, and to sustainability reporting at the end. Answers here are case-based: state the provision, apply it to the facts, and conclude.

CSR sits in the largest part of the paper, Governance and Sustainability, and its provisions are precise, so marks go to students who state the rule and apply it to numbers. Thresholds, the 2% computation, time limits and penalty caps are easy to score on if you know them exactly, and easy to lose if you mix them up. The same knowledge also helps in practice, where a Company Secretary advises the Board on CSR compliance and drafts the related disclosures.

Corporate Social Responsibility (CSR): topics in the order to study them

  1. 1Concept and Evolution of CSRIt gives the background and vocabulary, so the later legal rules make sense.
  2. 2Applicability of Section 135 and CSR CommitteeEvery question starts by asking whether the company is covered, and who forms the committee.
  3. 3CSR Policy and Annual Action PlanThe Committee's duties flow from applicability, and the policy drives all spending decisions.
  4. 4CSR Expenditure and Computation of Net ProfitThis is the numerical core; it needs Section 135(5) and Section 198 together.
  5. 5Schedule VII Activities and Implementation ModesOnce you know how much to spend, you learn where and through whom it can be spent.
  6. 6Unspent CSR Amount and PenaltiesIt builds on the spending rule and tests ongoing versus other projects, time limits and penalties.
  7. 7CSR Reporting, Impact Assessment and DisclosureIt closes the cycle with what the Board must report and disclose, and ties to sustainability reporting.

How to prepare Corporate Social Responsibility (CSR)

Treat this chapter as a sequence: applicability, governance, money, spending, default, reporting. Learn the Act first, then practise short case answers.

  1. Read Section 135 line by line and note every threshold, time limit and amount in a one-page table.
  2. Learn the three applicability tests: net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more in the immediately preceding financial year. Meeting any one is enough.
  3. Practise the 2% computation: take net profit under Section 198 for each of three years, average it, then take 2%. Redo each example without looking at the solution.
  4. Memorise the unspent-amount routes: ongoing project goes to the Unspent CSR Account within thirty days from the end of the financial year and must be spent within three financial years; otherwise a Schedule VII Fund within six months of the year's expiry.
  5. Learn the Section 135(7) penalty formula for the company and for officers in default, including both caps.
  6. Write three or four case answers in the provision, analysis, conclusion format, and check that each states the section before applying it.
  7. Revise Schedule VII by themes rather than word for word, and be ready to judge whether a given activity fits.

Common mistakes in Corporate Social Responsibility (CSR)

  • Requiring all three applicability tests to be met.

    Fix: Remember the word "or": satisfying any one threshold in the immediately preceding financial year brings the company under Section 135.

  • Computing 2% on the current year's profit.

    Fix: Always use the average net profit of the three immediately preceding financial years, each computed under Section 198.

  • Using accounting profit without Section 198 adjustments.

    Fix: Exclude items such as capital profits and unrealised or notional gains, and do not deduct income-tax, before averaging.

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

    Fix: Ask first whether the project is ongoing. If yes, the Unspent CSR Account within thirty days; if no, a Schedule VII Fund within six months.

  • Applying the penalty cap to the wrong person or giving one flat figure.

    Fix: State both limbs: the company pays twice the amount or ₹1 crore, whichever is less; each officer in default pays one-tenth or ₹2 lakh, whichever is less.

  • Writing general CSR essays without applying the provision to the facts.

    Fix: Open with the section, test each fact against it, and end with a clear conclusion in the case-based format.

Last-day revision: Corporate Social Responsibility (CSR)

  • CSR applies if net worth is ₹500 crore or more, turnover ₹1,000 crore or more, or net profit ₹5 crore or more in the immediately preceding financial year.
  • The CSR Committee has three or more directors, including 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.
  • If the CSR amount does not exceed ₹50 lakh, no committee is needed and the Board performs its functions.
  • The Committee formulates the policy, recommends the expenditure and monitors the policy; the Board approves the policy.
  • Spend at least 2% of the average net profit of the three immediately preceding financial years.
  • A company not yet three years old uses the immediately preceding financial years it has completed.
  • Net profit is calculated under Section 198; capital profits and unrealised or notional gains are not credited.
  • Preference must be given to the local area and areas around where the company operates.
  • Unspent amount for an ongoing project goes to the Unspent CSR Account within thirty days of the financial year end; spend it within three financial years.
  • Other unspent amounts go to a Schedule VII Fund within six months of the expiry of the financial year, and the Board report must give reasons.
  • Penalty on the company is twice the amount to be transferred or ₹1 crore, whichever is less; on each officer in default it is one-tenth of that amount or ₹2 lakh, whichever is less.

Corporate Social Responsibility (CSR) practice questions

Corporate Social Responsibility (CSR) in other exams

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

Corporate Social Responsibility (CSR): frequently asked questions

Does every company have to constitute a CSR Committee?

No. Only companies meeting the net worth, turnover or net profit thresholds in the immediately preceding financial year are covered. Even a covered company need not form a committee if its CSR amount does not exceed ₹50 lakh; the Board then performs the committee's functions.

How is the 2% CSR amount calculated?

Compute net profit for each of the three immediately preceding financial years under Section 198, take the average, and multiply by 2%. A company that has not completed three years uses the preceding years it has completed.

What happens to unspent CSR money?

If it relates to an ongoing project, it goes to the Unspent CSR Account within thirty days from the end of the financial year and must be spent within three financial years. Otherwise it goes to a Schedule VII Fund within six months of the expiry of the financial year, and the Board report must give the reasons.

How should I answer a CSR case question in the exam?

State the relevant provision, apply it to the facts and figures given, and then give a clear conclusion. Show every step of any calculation so that marks are awarded even if one figure goes wrong.