# Role of CSR Committee and CSR Expenditure

## Role/Functions of the CSR Committee

The CSR Committee shall:

1. Formulate and recommend a CSR Policy to the Board.

2. Recommend the amount of expenditure to be incurred on CSR activities.

3. Monitor the CSR Policy of the company from time to time.

4. Formulate and recommend an Annual Action Plan in pursuance of the CSR policy.

## CSR Expenditure Obligation

Mandatory Spend = 2% of average net profits of the company made during the 3 immediately preceding financial years.

### Special Case - Newer Companies

If a company has not completed 3 financial years since its incorporation, it shall spend 2% of the average net profits made during such immediately preceding financial years.

## Preference to Local Areas

The company shall give preference to local areas and areas around it where it operates, while spending the amount earmarked for CSR activities.

## Annual Action Plan

The CSR Committee shall formulate and recommend to the Board an Annual Action Plan in pursuance of its CSR policy, which shall include:

List of approved CSR projects/programmes.
Manner of execution.
Modalities of utilisation of funds and implementation schedules.
Monitoring and reporting mechanism.
Details of need and impact assessment, if any.

Worked example

### Example 1

Example: Net profits of LMN Ltd:

FY 2022-23: Rs. 8 crore
FY 2023-24: Rs. 10 crore
FY 2024-25: Rs. 12 crore

CSR obligation for FY 2025-26?

Answer: Average = (8+10+12)/3 = Rs. 10 crore. CSR spend = 2% of 10 cr = Rs. 20 lakh.

### Example 2

Example: A company incorporated in FY 2023-24 needs to spend CSR in FY 2025-26. Its profits are Rs. 6 cr (FY 23-24) and Rs. 9 cr (FY 24-25).

Answer: Since 3 FYs are not completed, take average of available preceding FYs = (6+9)/2 = Rs. 7.5 cr. CSR spend = 2% x 7.5 cr = Rs. 15 lakh.

⚠️ Common exam mistakes

Calculating CSR on current year's profit instead of average of last 3 years.
Forgetting that newer companies use average of available preceding FYs (not 3).
Ignoring the local area preference requirement.
Missing the requirement of an Annual Action Plan along with the CSR Policy.

Bare-Act text Section 135(5) · Companies Act, 2013 · click to expand

Section 135(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.

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Role of CSR Committee and CSR Expenditure Requirement

Worked example

⚠️ Common exam mistakes