Corporate Social Responsibility (CSR)

Our implementation & Customer Success teams were constantly receiving queries from our users related to CSR initiatives, its applicability, what’s covered and many other practical challenges. Mr. Sachin Bishnoi has years of experience in managing large CSR budget is his group companies and have addressed many scenarios related to same. On our request, he agreed to share his practical understanding on subject.

This article is a great read for Company Secretaries, Compliance Officers, Finance, HR & CSR professionals to understand the nuances on this subject.

APPLICABILITY OF CSR

Section 135 of Companies Act, 2013

• Every company having net worth of Rs. 500 Crore or more, or turnover of Rs. 1000 Crore or more or a net profit of Rs. 5 Crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of 3 or more directors, out of which at least 1 director shall be an independent director. 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 2 or more directors.
• The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee. The Corporate Social Responsibility Committee shall-
  • 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; recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
  • recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
  • monitor the Corporate Social Responsibility Policy of the company from time to time.
  “CSR Policy” means a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan; Where the amount to be spent by a company under sub-section (5) does not exceed Rs. 50 lakhs, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company Explanation.
  For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.
• The Board of every company shall 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, 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 and also ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

RESPONSBILITIES OF CSR COMMITTEE

• formulate and recommend the CSR policy to the Board
• recommend the amount of expenditure to be incurred on CSR activities
• monitor the CSR policy of the corporate from time to time; and
• formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the items as mentioned in rule 5(2) of the Companies (CSR Policy) Rules, 2014.
  In the annual action plan, the CSR Committee of the company is required to provide for modalities of utilisation of funds. The CSR Committee shall recommend to the Board on budget allocation for any CSR project including modalities of utilisation of funds in every project.

RESPONSBILITIES OF BOARD OF DIRECTORS

• approve the CSR policy
• disclose contents of such policy in its report and also place it on the corporate’s website, if any
• ensure that the activities included in the CSR policy are undertaken by the corporate
• ensure that the corporate spends, in every financial year, at least 2% of the average net profits of the corporate made during the 3 immediately preceding financial years
• satisfy itself regarding the utilisation of the disbursed CSR funds; and
• if the corporate fails to spend at least 2% of the average net profits of the corporate, 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 and transfer the unspent CSR amount as per provisions of sections 135(5) and 135(6) of the Act.
• In case of ongoing projects, the major responsibilities of the Board, inter-alia, include:
  • identification of the ongoing projects
  • year-wise allocation of funds
  • transferring the unspent money to a separate bank account as prescribed under sub-section (6) of section 135
  • monitoring the implementation of the projects with reference to the approved timelines and year-wise allocation and
  • making modifications, if any, for smooth implementation of the projects within the overall permissible time period.
• Further, as per rule 4(5) of the Companies (CSR Policy) Rules, 2014, the Board of a company shall satisfy itself that the funds so disbursed have been utilised for the purposes and in the manner as approved by it and the Chief Financial Officer or the person responsible for financial management shall certify to the effect.
• Accordingly, the CSR Committee and Board should ensure that CSR fund should be disbursed to implementing agencies, partially or wholly, in such a manner so that they can be utilised by them during the financial year. Mere disbursal of funds for implementation of a project does not amount to spending unless the implementing agency utilises the whole amount.

OBLIGATION AND PENAL PROVISIONS

• The Board of every company shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the Company made during the 3 immediately preceding financial years, or where the company has not completed the period of 3 financial years since its incorporation, during such 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.
• Section 135(5) of the Act prescribes minimum spending obligation for the company. The company may fulfil its CSR spending obligation directly by itself or though engaging an implementing agency. The implementing agency acts on behalf of the company and mere disbursal of funds for implementation of a project does not amount to spending unless the implementing agency utilises the whole amount.
• As per rule 8(1) of the Companies (CSR Policy) Rules, 2014, the Board’s Report pertaining to any financial year, for a CSR-eligible corporate, shall include an annual report on CSR containing particulars specified in Annexure I or Annexure II of the rules, as applicable.
• As per Rule 9, the Board of Directors of the corporate shall mandatorily disclose the following on their website, if any, for public access:
  • Composition of the CSR Committee
  • CSR Policy and
  • Projects approved by the Board.
• If a company spends less than the amount required to be spent under their CSR obligation, the Board shall specify the reasons for not spending in the Board’s report and shall deal with the unspent amount in the following manner.
• If the Unspent amount pertains to ‘ongoing projects’, transfer such unspent amount to a separate bank account of the company to be called as ‘Unspent CSR Account’ within 30 days from the end of the financial year and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of 3 financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of 30 days from the date of completion of the third financial year.
• If the Unspent amount pertains to ‘other than ongoing projects’, transfer unspent amount to any fund included in Schedule VII of the Act, within 6 months from the end of the financial year.
• If the company spends an amount in excess of the requirements, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years.
• If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or Rs. 1 Crore, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or Rs. 2 lakhs, whichever is less.
• In case of non-compliance with any other provisions of the section or rules, the provisions of Section 134(8) or general penalty under section 450 of the Act will be applicable. Further, in case of non-payment of penalty within the stipulated period, the provisions of section 454(8) will be applicable.

ACTIVITIES PRESCRIBED UNDER SCHEDULE VII

• Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care” and sanitation including contribution to the Swach ganga Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
• promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.
• promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
• ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
• protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts.
• measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows.
• training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports.
• contribution to the prime minister’s national relief fund or Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women.
  • Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government.
  • Contributions to public funded Universities; Indian Institute of Technology (IITs), National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE), Department of Biotechnology (DBT), Department of Science and Technology (DST), Department of Pharmaceuticals, Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH), Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organisation (DRDO), Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).
• rural development projects.
• slum area development.
• disaster management, including relief, rehabilitation and reconstruction activities.

FUNDS ADMISSIBLE FOR CSR CONTRIBUTION

• Swachh Bharat Kosh
• Clean Ganga Fund
• Prime Minister’s National Relief Fund (PMNRF)
• Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) (v) 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.

ACTIVITIES NOT QUALIFY AS CSR

Rule 2(1)(d) of the Companies (CSR Policy) Rules, 2014 defines CSR and the following activities are specifically excluded from being considered as eligible CSR activity:

• Activities undertaken in pursuance of normal course of business of the corporate. However, exemption is provided for three financial years, till FY 2022-23, to corporates engaged in R&D activities for new vaccines, drugs, and medical devices in their normal course of business, related to COVID-19. This exclusion is allowed only in case the corporates are engaged in R&D in collaboration with organizations as mentioned in item (ix) of Schedule VII and disclose the same in their Board reports.
• Activities undertaken outside India, except for training of Indian sports personnel representing any State or Union Territory at national level or India at international level.
• Contribution of any amount, directly or indirectly, to any political party under section 182 of the Act.
• Activities benefitting employees of the corporate as defined in section 2(k) of the Code on Wages, 2019.
• Sponsorship activities for deriving marketing benefits for products/services.
• Activities for fulfilling statutory obligations under any law in force in India.

ENTITIES ELIGIBLE AS CSR IMPLEMENTING AGENCY

Rule 4(1) of the Companies (CSR Policy) Rules, 2014 provides the eligible entities which can act as an implementing agency for undertaking CSR activities. These are:

• Entity established by the company itself or along with any other company – a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961.
• Entity established by the Central Government or State Government – a company established under section 8 of the Act, or a registered trust or a registered society.
• Statutory bodies – any entity established under an Act of Parliament or a State legislature.
• Other bodies – a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.

WHAT IS ONGOING PROJECT

• Ongoing project has been defined under rule 2(1)(i) of the Companies (CSR Policy) Rules, 2014 as:
  • a multi-year project, stretching over more than one financial year.
  • having a timeline not exceeding three years excluding the year of commencement.
  • includes such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the Board based on reasonable justification.
  • The project should have commenced within the financial year to be termed as ‘ongoing’. The intent is to include a project which has an identifiable commencement and completion dates. After the completion of any ongoing project, the Board of the company is free to design any other project related to operation and maintenance of such completed projects in a manner as may be deemed fit on a case-to-case basis.
• When Ongoing Project be regarded as commenced?
  An ongoing project will have ‘commenced’ when the company has either issued the work order pertaining to the project or awarded the contract for execution of the project.
• Maximum Permissible time period for ongoing project?
  As per the definition of an ongoing project, the maximum permissible time period shall be three financial years excluding the financial year in which it is commenced i.e., (1+3) financial years. Under no circumstances shall the time period of an ongoing project be extended beyond its permissible limit.

SEPARATE UNSPENT CSR ACCOUNT?

• A company can open a single special account, called ‘Unspent Corporate Social Responsibility Account’, for a financial year in any scheduled bank, to transfer the unspent amount w.r.t ongoing project(s) of that financial year. A company needs to open a separate ‘Unspent CSR Account’ for each financial year but not for each ongoing project.
• The provisioning of a separate special account, namely the ‘Unspent CSR Account’, in any scheduled bank is to ensure that the unspent amount, if any, is transferred to this designated account and used only for meeting the expenses of ongoing projects, and not for other general purposes of the company. The special account cannot be used by the company as collaterals or creating a charge or any other business activity.

WHAT IS ADMINISTRATIVE OVERHEADS?

Administrative overheads are the expenses incurred by the corporate for ‘general management and administration’ of CSR functions. However, the expenses which are directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or programme, shall not be included in the administrative overheads. Administrative overheads generally comprise of items such as employee costs, utilities, office supplies, legal expenses, etc. However, expenses which are attributed to the project implementation shall be included in project cost only.

WHETHER CSR IS BUSINESS EXPENSE?

• The amount spent by a corporate towards CSR cannot be claimed as business expenditure. Explanation 2 to section 37(1) of the Income Tax Act, 1961 which was inserted through the Finance Act, 2014 provides that any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.
• Surplus refers to income generated from the spend on CSR activities, e.g., interest income earned by the implementing agency on funds provided under CSR, revenue received from the CSR projects, disposal/sale of materials used in CSR projects, and other similar income sources. The surplus arising out of CSR activities shall be utilised only for CSR purposes.

CAN CSR BE CONTRIBUTED IN KIND?

• The requirement comes from section 135(5) that states that “The Board of every corporate shall ensure that it spends…” Therefore, CSR contribution cannot be in kind and monetized.
• Also involvement of employees in CSR projects of a corporate cannot be monetized. Contribution and involvement of employees in CSR activities of the corporate will no doubt generate interest/pride in CSR work and promote transformation from Corporate Social Responsibility (CSR) as an obligation to Socially Responsible Corporate (SRC) in all aspects of their functioning. Corporates, therefore, should be encouraged to involve their employees in CSR activities.

IS IT MANDATORY TO CARRY OUT CSR IN LOCAL AREAS?

• The first proviso to section 135(5) of the Act provides that the company shall give preference to local areas and the areas around where it operates.
• Some activities in Schedule VII such as welfare activities for war widows, art and culture, and other similar activities, transcend geographical boundaries and are applicable across the country. With the advent of Information & Communication Technology (ICT) and emergence of new age businesses like e-commerce companies, process-outsourcing companies, and aggregator companies, it is becoming increasingly difficult to determine the local area of various activities.
• The spirit of the Act is to ensure that CSR initiatives are aligned with the national priorities and enhance engagement of the corporate sector towards achieving Sustainable Development Goals (SDGs). Thus, the preference to local area in the Act is only directory and not mandatory in nature and companies need to balance local area preference with national priorities.

CAN CSR ACTIVITIES BE UNDERTAKEN FOR EXCLUSIVE BENEFIT OF EMPLOYEES?

• Rule 2(1)(d)(iv) of the Companies (CSR Policy) Rules, 2014 states that any activity benefitting employees of the company shall not be considered as eligible CSR activity.
• As per the rule, any activity designed exclusively for the benefit of employees shall be considered as an “activity benefitting employees” and will not qualify as permissible CSR expenditure.
• The spirit behind any CSR activity is to benefit the public at large and the activity should be nondiscriminatory to any class of beneficiaries.
• Any activity which is not designed to benefit employees solely, but the public at large, and if the employees and their family members are incidental beneficiaries, then, such activity would not be considered as “activity benefitting employees” and will qualify as eligible CSR activity.

CAN CSR ACTIVITIES BE UNDERTAKEN FOR MARKETING BENEFITS OF COMPANY PRODUCTS OR SERVICES?

• Sponsorship activities of an event are done with an aim of deriving marketing benefits for a company’s product or services.
• The intent of CSR is to encourage companies to undertake the activities in a project or programme mode rather than as a one-off event. Companies shall not use CSR purely as a marketing or brand building tool for their business, but brand building as a collateral benefit does not vitiate the spirit of CSR.

IS IT PERMISSIBLE TO UNDERTAKE CSR ACTIVITIES OUTSIDE INDIA?

• Rule 2(1)(d)(ii) of the Companies (CSR Policy) Rules, 2014 clearly states that any activity undertaken by the company outside India shall not be an eligible CSR activity.
• The only exception is training of Indian sports personnel representing any State or Union Territory at national or international level.

WHAT IS IMPACT ASSESSMENT?

• The purpose of Impact Assessment is to assess the social impact of a particular CSR project. The intent is to encourage companies to take considered decisions before deploying CSR amounts and assess the impact of their CSR spending. This not only serves as feedback for companies to plan and allocate resources better but shall also deepen the impact of CSR.
• Rule 8(3) of the Companies (CSR Policy) Rules, 2014 mandates following class of companies to conduct impact assessment:
  • Companies with minimum average CSR obligation of Rs. 10 crore or more in the immediately preceding 3 financial years; and
  • Companies that have CSR projects with outlays of minimum Rs. 1 crore and which have been completed not less than 1 year before undertaking impact assessment.
• Impact assessment shall be carried out project-wise only in cases where both the above conditions are fulfilled. In other cases, it can be taken up by the company on a voluntary basis.
• The provisions for impact assessment have come into effect from 22nd January, 2021. Accordingly, the company is required to undertake impact assessment of the CSR projects completed on or after January 22, 2021. However, as a good practice the Board may undertake impact assessment of completed projects of previous financial years.
• Rule 8(3) of the Companies (CSR Policy) Rules, 2014 requires that the impact assessment be conducted by an Independent Agency. The Board has the prerogative to decide on the eligibility criteria for selection of the independent agency for impact assessment.
• The expenditure incurred on impact assessment is over and above the specified administrative overheads of 5%. Expenditure up to a maximum of 5% of the total CSR expenditure for that financial year or 50 lakh rupees (whichever is lower) can be incurred separately for impact assessment.
• Rule 8(3)(b) of the Companies (CSR Policy) Rules, 2014 provides that impact assessment reports shall be placed before the Board and shall be annexed to the report on CSR. It is clarified that web-link to access the complete impact assessment reports and providing executive summary of the impact assessment reports in the annual report on CSR, shall be considered as sufficient compliance of the said Rule.
• In case two or more companies choose to collaborate for the implementation of a CSR project, then the impact assessment carried out by one company for the common project may be shared with the other companies for the purpose of disclosure to the Board and in the annual report on CSR. The sharing of the cost of impact assessment may be decided by the collaborating companies subject to the limit as prescribed in rule 8(3)(c) of the Companies (CSR Policy) Rules, 2014 for each company.

National CSR Exchange Portal is an initiative by Ministry of Corporate Affairs, Government of India

• National CSR Exchange Portal is an initiative by Ministry of Corporate Affairs, Government of India to establish an interactive platform for CSR Stakeholders. The National CSR Exchange Portal shall serve as an e-marketplace hosting PAN India social welfare projects where stakeholders such as Implementing agencies can put up its ongoing projects and companies can select projects for CSR Spending as per their preferences and vice versa.
• Key Objectives of National CSR Exchange Portal –
  • To identify suitable Implementing Agency for your CSR Project
  • To identify suitable CSR Projects proposed by Implementing Agencies
  • To manage CSR Projects through the Portal
  • To apply to Corporates CSR Project Proposal
  • To list Projects to raise funds from Corporates
  • To manage CSR Projects through the Portal

Disclaimer

The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.