Comprehensive Guide for CSR Managers, Decision-Makers, and Companies in India

This guide is designed to assist CSR managers, decision-makers, and companies in navigating the complex landscape of Corporate Social Responsibility (CSR) in India, with a particular focus on compliance, year-end reporting, and planning for the next financial year. Given the legal implications and compliance requirements, this document provides an elaborate FAQ format, enriched with recent data and insights to ensure companies meet their obligations while maximizing social impact.

Introduction to CSR in India

CSR, as mandated by Section 135 of the Companies Act, 2013, and the Companies (Corporate Social Responsibility Policy) Rules, 2014, is a statutory obligation for eligible companies to contribute to social and economic development. This shift from voluntary to mandatory CSR, first implemented in 2014, makes India a pioneer in legally enforcing corporate contributions to societal welfare. The framework has evolved, with significant amendments in 2021 and 2022, reflecting the government’s commitment to sustainable development and transparency.

Recent updates, such as the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022, notified on September 20, 2022, have introduced changes to enhance compliance and accountability. These amendments are crucial for year-end reporting and planning, ensuring companies stay aligned with current regulations.

Legal Framework and Applicability

The CSR provisions apply to companies meeting any of the following criteria in the preceding financial year:

• • Net worth of ₹500 crore or more

• • Turnover of ₹1,000 crore or more

• • Net profit of ₹5 crore or more

This includes Indian companies, including holding and subsidiary entities, and foreign companies with branch or project offices in India, provided they meet the thresholds. Companies ceasing to meet these criteria for three consecutive years are exempt from constituting a CSR committee and complying with certain subsections until they qualify again, offering flexibility for smaller or newly compliant entities.

The 2022 amendments, detailed in the notification G.S.R. 715(E), mandate CSR committee formation for companies with unspent CSR funds, ensuring oversight even for those below usual thresholds.

CSR Committee: Composition and Roles

The CSR committee is pivotal for compliance, with the following composition and roles:

• • Composition: Must consist of at least three directors, with at least one independent director, unless exempt under Section 149(4). For foreign companies, it includes at least two persons, one resident in India authorized for notices and another nominated by the company. The 2022 amendments clarify that companies with unspent CSR funds must have a committee, regardless of spending thresholds.

• • Roles: Formulate and recommend the CSR policy, propose expenditure, monitor implementation, and ensure transparency through a robust monitoring mechanism. The committee’s oversight is critical for year-end reporting and planning, ensuring funds are utilized effectively.

For year-end, CSR managers should verify committee composition and document all activities to prepare for reporting. For planning, consider committee recommendations to align future projects with strategic goals.

CSR Policy: Formulation and Implementation

The CSR policy is the backbone of a company’s CSR strategy, requiring:

• • Content: List of Schedule VII-aligned projects, execution modalities, schedules, and monitoring processes.

• • Formulation: Recommended by the CSR committee and approved by the Board, considering committee inputs.

• • Disclosure: Must be included in the Board’s report and displayed on the company’s website, ensuring transparency.

• • Surplus Handling: Any surplus from CSR activities must be reinvested into the same project or transferred to a specified fund within six months of the financial year-end.

• • Annual Action Plan: Includes detailed projects, timelines, and allocations, with provisions for Board modifications.

For year-end, ensure the policy is updated and disclosed as per regulations. For planning, develop an action plan that reflects recent amendments, such as handling unspent funds under the 2022 rules.

CSR Activities: What Qualifies and What Does Not?

CSR activities must align with Schedule VII, including:

• • Poverty eradication, healthcare, sanitation.

• • Education, vocational skills, especially for marginalized groups.

• • Gender equality, environmental sustainability, rural development.

• • Contributions to specified relief funds like the Prime Minister’s National Relief Fund.

Excluded activities include normal business operations, political contributions, and one-off events like marathons or sponsorships. The exclusion of normal business activities ensures CSR delivers genuine social impact, a critical consideration for year-end impact assessments and planning.

For year-end, document all qualifying activities to meet reporting requirements. For planning, focus on projects with measurable social benefits, aligning with Schedule VII and recent regulatory clarifications.

CSR Expenditure: Calculation and Spending

Companies must spend at least 2% of their average net profit over the three preceding financial years, calculated as per Section 198, excluding overseas branch profits and dividends from non-CSR compliant companies. Key details include:

• • Spending includes all approved CSR activities, with administrative overheads capped at 5%.

• • Unspent funds must be transferred to a Schedule VII fund within six months, with reasons disclosed.

• • Excess spending can be set off against future requirements for up to three years.

• • The 2022 amendments reduced the impact assessment expenditure cap from 5% to 2% of total CSR spending or Rs. 50 lakh, whichever is higher, affecting year-end budgeting.

For year-end, calculate expenditure accurately and document all transactions. For planning, budget for impact assessments within the new cap and ensure funds are allocated efficiently.

Reporting and Disclosure: Ensuring Transparency

Reporting is crucial for compliance, with the annual CSR report included in the Board’s report, containing:

• • Policy outline and web link.

• • Committee composition.

• • Average net profit and prescribed expenditure.

• • Details of spending, including amounts, projects, locations, and implementing agencies.

• • Reasons for non-spending, if applicable.

• • A responsibility statement from the Chairman/CEO/Managing Director.

Foreign companies must include the report in their balance sheet under Section 381(1)(b). The policy must be displayed on the company’s website, ensuring public access. The 2022 amendments, detailed in CSR Amendment Rules, 2022, rationalize reporting formats, simplifying year-end processes.

For year-end, prepare detailed reports and verify compliance. For planning, ensure reporting aligns with updated formats and stakeholder expectations.

Penalties for Non-Compliance: Legal Consequences

While no direct penalties exist for not spending, companies must disclose reasons for shortfalls. Non-compliance in forming the committee or reporting may attract fines or legal action under the Companies Act, 2013. The Central Government can issue directions, and non-compliant companies may face scrutiny, emphasizing the importance of year-end compliance checks.

For year-end, ensure all governance requirements are met to avoid penalties. For planning, prioritize committee formation and reporting to mitigate risks.

Best Practices and Case Studies: Enhancing Impact

To maximize impact, adopt best practices such as:

• • Aligning CSR with business goals and values.

• • Engaging stakeholders, including communities and NGOs, for relevance.

• • Maintaining transparency through audits and public reporting.

• • Collaborating with other entities for larger-scale projects, ensuring separate reporting.

• • Regularly assessing project outcomes using impact assessments, within the new 2% cap.

Case studies, like Tata Group’s focus on education and healthcare, and Reliance Industries’ rural development initiatives, offer benchmarks for year-end evaluations and planning. For year-end, review past impacts to identify successes and areas for improvement. For planning, leverage these practices to enhance future initiatives.

Year-End and Planning: Specific Considerations

For year-end reporting, CSR managers should:

• • Calculate the required expenditure based on the last three years’ net profit, excluding non-qualifying profits.

• • Document all CSR activities, ensuring alignment with Schedule VII.

• • Prepare the annual report, including all mandated details, and verify with the committee and Board.

• • Ensure the report is included in the Board’s report and policy is publicly disclosed.

For planning the next financial year, consider:

• • Assessing the impact of previous projects to identify priority areas.

• • Developing an annual action plan with clear objectives, timelines, and budgets.

• • Aligning activities with company values and recent regulatory changes, such as handling unspent funds.

• • Establishing partnerships and monitoring mechanisms to ensure effectiveness.

Recent data from the CSR portal CSR Legislation highlights trends in spending, with companies increasingly focusing on education and healthcare, informing year-end strategies and future planning.

Additional Insights for CSR Managers

• • Tax Implications: While no general tax exemptions exist, certain activities like contributions to relief funds may qualify for deductions under the Income Tax Act, 1961, as noted in CSR in India & its implications.

• • Mergers and Acquisitions: In mergers, transfer CSR obligations and funds to the surviving company, ensuring ongoing projects are managed, as advised in legal consultations.

• • Collaboration: Partner with NGOs or other companies, but report contributions separately, ensuring compliance with Unpacking India’s CSR Law.

This guide, informed by recent amendments and data, ensures CSR managers and companies are equipped for compliance and strategic planning, reflecting the evolving regulatory landscape.

Table: Summary of Recent CSR Amendments (2022)

Aspect	Change	Impact on Year-End/Planning
CSR Committee	Mandatory for unspent funds, regardless of thresholds	Ensures oversight, affects committee formation
Impact Assessment Cost	Cap reduced to 2% of CSR spending or Rs. 50 lakh	Affects budgeting for evaluations
Reporting Format	Rationalized, less detailed project specifics	Simplifies year-end reporting, enhances clarity

 A well-structured CSR framework ensures not only legal compliance but also maximizes social impact. Companies can integrate CSR into their core business strategy, focusing on long-term sustainable development. By leveraging structured policies, impact-driven projects, and transparent reporting, businesses can enhance their corporate reputation and contribute meaningfully to society.