1. 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 any 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.
2. The Board's report under sub-section (3 ) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
3. The Corporate Social Responsibility Committee shall,
a. formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
b. recommend the amount of expenditure to be incurred on the activities referred to in clause (a ); and
c. monitor the Corporate Social Responsibility Policy of the company from time to time.
4. The Board of every company referred to in sub-section (1 ) shall,
a. after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and
b. ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
5. The Board of every company referred to in sub-section (1 ), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:
Provided that: the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:
Provided further that: if the company fails to spend such amount, the Board shall, in its report made under clause (o ) of sub-section (3 ) of section 134, specify the reasons for not spending the amount.
Explanation.- —For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.
Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. 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.
Legal Commentary & Landmark Judgments: Section 135
Section 135 establishes India's landmark statutory Corporate Social Responsibility (CSR) regime, mandating profitable companies to spend 2% of average net profits on Schedule VII social development initiatives.
Sub-sections (5) and (6) mandate that unspent amounts relating to ongoing projects must be transferred within thirty days to a special 'Unspent CSR Account' in a scheduled bank and spent within three financial years, failing which they transfer to a Schedule VII national fund.
India became the first nation in the world to mandate CSR spending by statute under Section 135. Amendments to Section 135 transformed CSR from a 'comply-or-explain' framework into a mandatory spending regime with penal consequences for default. Companies failing to transfer unspent CSR funds face statutory penalties of up to one crore rupees on the company and two lakh rupees on every defaulting officer.