Corporate Social Responsibility (CSR) has emerged as a vital component of Corporate Governance in India, reflecting a growing recognition of the role businesses play in addressing social and environmental challenges. With the implementation of the Companies Act, 2013, Section 135, CSR compliance has become a statutory requirement for eligible companies operating in India. This legislation has not only mandated a financial commitment to CSR but has also catalyzed a shift in corporate culture towards responsible and sustainable business practices.

These CSR activities are aimed at promoting social welfare, environmental sustainability, and economic development, aligning with the broader national development goals. This article aims to provide insights into the landscape of CSR compliance, its applicability, examining the regulatory framework, key requirements, implementation etc. By understanding the dynamics of CSR compliance in India, companies can navigate the regulatory landscape effectively, drive meaningful social impact, and contribute to sustainable development while enhancing their corporate reputation and stakeholder trust.

Applicability of CSR

CSR provisions mentioned under section 135(1) of the companies Act 2013 in conjunction with the Companies (CSR Policy) Rules, 2014, are applicable for companies which satisfy any of the below criteria.

1.  net worth of rupees five hundred crore or more, or
2. turnover of rupees one thousand crore or more, or
3. net profit of rupees five crore or more.

Section 135(1)  of the companies Act 2013 is applicable to Section  8 Company as well.

If the company has not yet completed three financial years since its establishment but meets any of the criteria specified in section 135(1), it is subject to CSR provisions, which include allocating at least two percent of the average net profits earned during the immediately preceding financial year(s).

CSR Committee

According to the Act, a CSR Committee needs to be formed. The structure of the CSR Committee for different categories of companies is outlined below:

• For Listed Companies, the CSR Committee must consist of three or more directors, with at least one being an independent director
• For Unlisted Companies, A minimum of three directors is required, with at least one being an independent director. However, if the company is not mandated to have an independent director, two or more directors may suffice.
• Private companies must have a CSR Committee consisting of two or more directors. Independent directors are not required, as specified in the proviso under section 135(1).
• For Foreign Companies must have  at least two people, including:
  • One person as required by clause (d) of subsection (1) of section 380 of the Act, and
  • Another person chosen by the foreign company.  (rule 5(1) of the Companies (CSR Policy) Rules, 2014)
    If a company’s CSR spending is less than fifty lakh rupees, forming a CSR Committee is not compulsory. In such instances, the Board of Directors will handle the responsibilities typically assigned to the CSR Committee.

The CSR committee’s responsibilities include:

1. Developing and suggesting the CSR policy to the Board;
2.  Recommending the amount to be spent on CSR activities;
3. Monitoring the company’s CSR policy regularly; and
4. Creating and proposing an annual action plan to the Board, aligned with the CSR policy, as outlined in rule 5(2) of the Companies (CSR Policy) Rules, 2014.

Responsibilities of the Board

1. Endorse the CSR policy;
2. Disclose the contents of the policy in the company’s report and, if applicable, on its website;
3. Ensure the company follows through with the activities outlined in the CSR policy;
4.  Ensure the company allocates at least two percent of its average net profits from the preceding three financial years for CSR expenditure each fiscal year;
5. Verify the proper utilization of disbursed CSR funds;
6. If the company fails to spend at least two percent of its average net profits on CSR, the Board must specify the reasons for this in its report under clause (o) of subsection (3) of section 134. Additionally, any unspent CSR funds should be transferred in accordance with sections 135(5) and 135(6) of the Act.

The average net profit used to decide how much to spend on CSR activities is figured out based on the rules in section 198 of the Act. It doesn’t include certain things listed in rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. Section 198 explains what should be added or subtracted when calculating a company’s profit, mainly leaving out things like capital payments/receipts, income tax, and losses from previous years. Profit Before Tax (PBT) is what’s used to figure out the net profit under section 135 of the Act.

Schedule VII of the Act specifies contribution to the following funds admissible as CSR expenditure:

1. Swachh Bharat Kosh
2. Clean Ganga Fund
3. Prime Minister’s National Relief Fund (PMNRF)
4. Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)
5. Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.

Modes of Implementation

In accordance with rule 4 of the Companies (CSR Policy) Rules, 2014, a company has the option to carry out CSR activities through three modes of implementation:

1. Direct implementation by the company itself
2. Implementation through eligible implementing agencies as specified in sub-rule (1) of rule 4.
3. Collaborative implementation with one or more companies as detailed in sub-rule (4) of rule 4

CSR Reporting & Disclosure

According to rule 8(1) of the Companies (CSR Policy) Rules, 2014, the Board’s Report for any financial year of a CSR-eligible company must incorporate an annual CSR report detailing the particulars outlined in either Annexure I or Annexure II of the aforementioned rules, depending on applicability.

Disclosure in the company website Under rule 9, the Board of Directors of the company is required to make the following disclosures, accessible to the public on their website, if available:

1. Composition of the CSR Committee;
2. CSR Policy; and
3. Projects approved by the Board

According to rule 9 of the Companies (CSR Policy) Rules, 2014, any CSR projects approved by the Board must be disclosed on the company’s website, if available, for public access.

Thus, the complexity of CSR compliance arises from the interplay of regulatory requirements, stakeholder expectations, the diverse nature of CSR issues, integration with business strategy, measurement and reporting challenges, supply chain complexity, and cultural and organizational dynamics. Effectively navigating these complexities requires a holistic approach, interdisciplinary collaboration, and a commitment to continuous improvement and responsible business practices.

BCL India serve as trusted partners in the journey towards CSR excellence. Our expertise, strategic guidance, impartial perspective, and regulatory insights contribute significantly to helping organizations achieve and maintain compliance with CSR principles. By leveraging our specialized knowledge and support provided, companies can unlock the full potential of CSR, driving positive impact and sustainable growth in the long run.