Legal Requirements for CSR (Corporate Social Responsibility) Activities

Corporate Social Responsibility (CSR) has undergone a significant transformation in recent years. What was once considered a voluntary practice has now become an integral part of a company’s operations, particularly in India.

This shift is largely attributed to the legal framework governing CSR, which is embedded within the Companies Act, 2013. Specifically, Section 135 of the Act outlines the responsibilities and scope of CSR activities that certain corporations must undertake.

The provision, along with related rules and amendments, provides a clear framework for corporates to adhere to, including reporting mechanisms that ensure transparency and accountability. Understanding the intricacies of this framework is crucial for companies to ensure compliance and make a meaningful impact through their CSR initiatives.

Applicability of CSR Provisions

The CSR mandate applies to companies that meet specific financial thresholds. According to Section 135 of the Companies Act, 2013, CSR provisions are applicable if a company meets any of the following criteria during the preceding financial year:

1. Net Worth: INR 500 crore or more.
2. Turnover: INR 1,000 crore or more.
3. Net Profit: INR 5 crore or more.

Subsidiaries of multinational corporations (MNCs) operating in India must assess their financials annually to determine if they fall within these parameters. The assessment ensures compliance and avoids potential legal repercussions.

CSR Committee Constitution and Roles

Companies that meet the above criteria are required to constitute a CSR Committee of the Board. This committee plays a pivotal role in formulating, recommending, and monitoring CSR activities. The composition typically includes:

1. Minimum of Three Directors, with at least one being an independent director.
2. In the case of unlisted and private companies, the committee can consist of two directors.

The committee’s responsibilities include:

• Formulating and recommending a CSR Policy.
• Approving the CSR expenditure.
• Monitoring the implementation of CSR projects.

CSR Policy Formulation

The CSR Policy is a cornerstone document that outlines the company’s approach to CSR activities. It must include:

1. Defined CSR Objectives: Aligned with the company’s business strategy and societal needs.
2. Approved Projects and Programs: Focused on areas like education, poverty alleviation, healthcare, gender equality, and environmental sustainability.
3. Expenditure Framework: Details on the annual budget and allocation across different projects.
4. Monitoring and Reporting Mechanisms: Ensuring transparency and accountability in CSR activities.

Permissible CSR Activities

Schedule VII of the Companies Act provides a broad spectrum of permissible activities that qualify as CSR. These include but are not limited to:

1. Eradicating Hunger, Poverty, and Malnutrition
2. Promoting Education
3. Ensuring Environmental Sustainability
4. Protection of National Heritage
5. Promoting Gender Equality and Women Empowerment
6. Rural Development Projects
7. Measures for the Benefit of Armed Forces Veterans

CSR Expenditure

Companies are mandated to spend at least 2% of their average net profit of the preceding three financial years on CSR activities. Key considerations include:

1. Surplus from CSR Projects: Should not be added to business profits but reinvested into CSR activities.
2. Unspent Amount: Needs to be transferred to a specified fund or spent on CSR within a stipulated timeline.
3. CSR Spend Disclosure: Detailed in the annual board report, including reasons for unspent amounts.

Reporting and Compliance

Companies are required to ensure transparency in CSR activities through meticulous reporting. The Board’s report must include:

1. Annual CSR Report: Detailed disclosure of the composition of the CSR Committee, the content of the CSR Policy, and a report on CSR activities.
2. Independent Audit: Ensuring the financial accuracy and impact assessment of CSR projects.

Non-compliance can result in penalties, including fines for the company and defaulting officers.

Amendments and Notifications

The CSR legal landscape is dynamic, with periodic amendments to the Companies Act and notifications from the Ministry of Corporate Affairs (MCA). Recent amendments include:

1. Introduction of Penalties for Non-compliance: Strengthening the enforcement mechanism.
2. Mandatory Impact Assessment: For larger CSR projects to evaluate the social impact.
3. Expansion of CSR Activities: Inclusion of more sectors and activities under Schedule VII.

Challenges and Best Practices

As companies navigate the complex landscape of Corporate Social Responsibility (CSR), they face numerous challenges that can impact the effectiveness and sustainability of their CSR initiatives. In this article, we will explore the common challenges faced by companies in implementing CSR and provide best practices to overcome these challenges.

Challenges:

1. Strategic Alignment: One of the primary challenges in CSR implementation is aligning CSR activities with core business objectives. Companies often struggle to integrate CSR into their overall business strategy, leading to a lack of focus and direction.
2. Stakeholder Engagement: Balancing the interests of diverse stakeholders, including shareholders, employees, customers, and the community, is another significant challenge. Companies must navigate competing demands and expectations while ensuring that their CSR initiatives meet the needs of all stakeholders.
3. Monitoring and Evaluation: Establishing robust systems to track CSR performance is essential to measure the impact and effectiveness of CSR initiatives. However, companies often struggle to develop and implement effective monitoring and evaluation frameworks.

Best Practices:

1. Integrated CSR Strategy: Embedding CSR into the corporate strategy is critical to ensuring that CSR initiatives are aligned with business objectives. Companies should develop a comprehensive CSR strategy that is integrated into their overall business plan.
2. Partnerships: Collaborating with NGOs, government bodies, and other corporates can help companies leverage resources, expertise, and networks to amplify the impact of their CSR initiatives. Partnerships can also help companies access new markets, technologies, and innovations.
3. Transparency and Communication: Regular updates and stakeholder engagement are essential to maintaining trust and credibility. Companies should establish transparent communication channels to keep stakeholders informed about their CSR initiatives, progress, and impact.
4. Employee Engagement: Engaging employees in CSR initiatives can help build a sense of purpose and ownership. Companies should encourage employee volunteering, provide training and development opportunities, and recognize and reward employee contributions to CSR.
5. Impact Measurement: Measuring the impact of CSR initiatives is critical to understanding their effectiveness and identifying areas for improvement. Companies should develop robust impact measurement frameworks that track outcomes, outputs, and inputs.
6. Supply Chain Management: Companies should extend their CSR initiatives to their supply chain partners, ensuring that they adhere to similar social and environmental standards. This can help mitigate risks, improve supply chain resilience, and enhance the overall sustainability of the business.
7. Innovation and Technology: Leveraging innovation and technology can help companies amplify the impact of their CSR initiatives. Companies should explore new technologies, business models, and partnerships to address social and environmental challenges.

Achieving CSR Success with Finsmart Accounting

As companies navigate the complexities of CSR and strive to maintain a strong reputation, it’s essential to have a reliable partner to support their compliance and accounting needs. 

At Finsmart Accounting, we specialize in providing end-to-end compliance solutions and accounting outsourcing services that can help companies streamline their operations, reduce costs, and focus on their core business objectives. 

By outsourcing compliance and accounting functions to Finsmart Accounting, companies can ensure that they are meeting their regulatory requirements, maintaining accurate financial records, and upholding the highest standards of corporate governance. 

With our expertise and support, companies can confidently navigate the complexities of CSR and focus on creating a positive impact on society.

Partner with Finsmart Accounting today for a worry-free compliance experience tailored to your specific needs.

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Shalaka Joshi

Founder & Director

Shalaka Joshi, a Chartered Accountant passionate about outsourcing and problem-solving, brings over 20 years of extensive experience in accounting, payroll, and MIS reporting to her professional endeavors