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Chapter XII - CSR Compliance and Role of NPOs as CSR Implementing Agencies

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Made publicly available in the spirit of open access by its author, Noshir Dadrawala (CEO, Centre for Advancement of Philanthropy), and collaborators CAP and Forbes Marshall.

Corporate Social Responsibility (CSR) is a compliance under Section 135 of the Indian Companies Act 2013 for every company (whether public, private, or foreign) which is registered under the Indian Companies Act (1956 or 2013) and which has net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore or more during the immediately preceding financial year.

Such a company is required to appoint a CSR Committee of the board consisting of three or more directors, out of which at least one director should be an independent director. However, where a company is not required to appoint an independent director (e.g. in a Private Company), it may have in its CSR Committee two or more directors.

Role of the CSR Committee:

  1. To formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII;

  2. To recommend the amount of expenditure to be incurred on the CSR activities; and

  3. To monitor the CSR Policy of the company from time to time.

Further, as per Rule 5, the CSR Committee shall formulate and recommend to the Board an annual action plan in pursuance of its CSR policy, which shall include the following, namely:

  1. The list of CSR projects or programmes that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act

  2. The manner of execution of such projects or programmes as specified in sub-rule (1) of rule 4

  3. The modalities of utilisation of funds and implementation schedules for the projects or programmes

  4. Monitoring and reporting mechanism for the projects or programmes, and

  5. Details of need and impact assessment, if any, for the projects undertaken by the company

Provided that Board may alter such plan at any time during the financial year, as per the recommendation of its CSR Committee, based on the reasonable justification to that effect.

Role of the board of directors

CSR is a board driven process and hence, after considering the recommendations made by the CSR Committee, the board of such company is required to approve the CSR Policy for the company and disclose contents of such Policy in its report, place it on the company's website, and ensure that the activities as are included in CSR Policy of the company are undertaken by the company.

The board of a company shall satisfy itself that the CSR funds 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.

The board of every such company must 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, or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its CSR Policy.

The law also requires that the company should give preference to the local area and areas around where it operates, for spending the amount earmarked for CSR activities. However, preference to local area as stated under the Act is only directory and not mandatory in nature and companies need to balance local area preference with national priorities.

Specified CSR activities

Schedule VII of the Indian Companies Act 2013 lists the 'specified CSR activities. These include:

  1. Eradicating hunger, poverty, and malnutrition, promoting health care including preventive health care and sanitation, including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water

  2. Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and differently abled and livelihood enhancement projects, Har Ghar Tiranga campaign (activities aimed at mass scale production & supply of the National Flag, outreach and amplification efforts, and other related activities)

  3. 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

  4. 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

  5. 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 arts and handicrafts

  6. 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

  7. Training to promote rural sports, nationally recognised sports, Paralympics sports and Olympic sports

  8. 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 Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities, and women

  9. Contribution to incubators funded by Central Government or State Government or any agency or Public Sector Undertaking of Central Government or State Government, and contributions to public funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies (established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defence Research and Development Organisation (DRDO), Department of Science and Technology (DST), Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs)

  10. Rural development projects

  11. Slum area development ('slum area' shall mean: "any area declared as such by the central government or any state government or any other competent authority under any law for the time being in force")

  12. Disaster management, including relief, rehabilitation, and reconstruction activities

How CSR activities can be implemented

CSR activities can be undertaken by the company by itself with the help of its staff or through:

  1. A company established under Section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80 G of the Income Tax Act, 1961, established by the company, either singly or along with any other company, or

  2. A company established under Section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government; or

  3. Any entity established under an Act of Parliament or a State legislature; or

  4. 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.

Thus, the company has the option to carry out CSR activities:

  1. On its own, or

  2. Through a corporate foundation established by the company either singly or along with any other company (having both 12A and 80G registration with income tax but which does not necessarily require an established track record of at least three years in undertaking similar activities), or

  3. A trust, society or Section 8 company established by the Central Government or State Government (which need not necessarily be having both 12A and 80G registration with Income Tax nor the necessity to have an established track record of at least three years in undertaking similar activities), or

  4. Any entity established under an Act of Parliament or a State legislature (which need not necessarily be having both 12A and 80G registration with income tax nor the necessity to have an established track record of at least three years in undertaking similar activities), or

  5. A trust, society or a Section 8 company 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 activities would not qualify as CSR?

The following would not be considered as CSR expenditure:

  1. Activities undertaken in pursuance of normal course of business of the company

  2. 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;

  3. Contribution of any amount, directly or indirectly, to any political party under section 182 of the Act;

  4. Activities benefitting employees of the company

  5. Activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services

  6. Activities carried out for fulfilment of any other statutory obligations under any law in force in India

Failure to spend CSR funds

If the company fails to spend at least two per cent of its pre-tax profits on specified CSR activities, the board shall, in its report made under section 134(3)(0) specify the reasons for not spending the amount and, unless the unspent amount relates to any 'ongoing project,' transfer such unspent amount to a Central Government Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

However, any amount remaining unspent, pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its CSR Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the 'Unspent CSR Account', and such amount shall be spent by the company in pursuance of its obligation towards the CSR Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Central Government Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

What this means

Under Companies (CSR Policy) Amendment Rules 2021, 'Ongoing Project' means a multi-year project undertaken by a company in fulfilment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include 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.

'Other than ongoing project' would mean a single-year project undertaken by a company in fulfilment of its CSR obligation having timeline up to the end of the financial year.

In other words, if a company is required to spend 100 during the financial year 2024-25, it must ensure that 100 is fully spent and shown as utilised by 31st March 2025. If only 80 is utilised and the project is 'other than ongoing', the company must transfer the unspent 20 to a Central Government Fund specified in Schedule VII (e.g., Swach Bharat Kosh or Clean Ganga Fund or Prime Minister's National Relief Fund or PMCARES fund) within a period of six months of the expiry of the financial year (i.e., by 30th September 2025).

However, if it is an 'ongoing project' the company must, within a period of thirty days from the end of the financial year (i.e., by 30th April 2025), transfer the unutilised 20 to a special bank account to be opened by the company in that behalf for that financial year (i.e. 2024- 25) in any scheduled bank to be called the 'Unspent CSR Account', and such amount shall be spent by the company in pursuance of its obligation towards the CSR Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Central Government Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

In case the company is not carrying out the CSR activity on its own but through a CSR implementing agency (which may be the company's own corporate foundation having CSR-1 registration or an NPO having CSR- 1 registration), the company is required to ask the CSR implementing agency to return the unutilised amount and comply with the same procedure laid down in the case of an ongoing project or other than ongoing project.

Penalty for the company

If a company defaults in complying with the above requirement of either ensuring that the two per cent of the CSR amount is fully utilised or in case of an ongoing project, fails to transfer the CSR funds that are not utilised to the 'Unspent CSR Bank Account', the company would 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 CSR Account, as the case may be, or Rs 1 crore, whichever is less, and every officer of the company who is in default would 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 CSR Account, as the case may be, or Rs 2 lakhs whichever is less.

Thus, one can see that failure to utilise the CSR funds fully could lead to hefty penalties for the company and its officers.

Excess CSR spends may be set off

Where a company spends an amount more than the required two per cent, such excess amount may be set off against the requirement to spend under section 135(5) up to the immediately succeeding three financial years, subject to the conditions that the excess amount available for set off shall not include the surplus arising out of the CSR activities and the board of the company shall pass a resolution to that effect.

Thus, excess CSR spend in any particular year can be set off against CSR expenditure over the immediate succeeding three financial years and the Board of the company passing a resolution to that effect.

Surplus arising out of the CSR activities

Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

This means in case the project is income generating by way of fees etc., such income should be ploughed back into the same project but not form part of the business profit of the company.

Acquisition of capital assets

CSR funds may be spent by a company for creation or acquisition of a capital asset, which shall be held by:

  1. A company established under Section 8 of the Act, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number under Rule 4(2); or

  2. Beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or

  3. A public authority

Provided that any capital asset created by a company prior to the commencement of the Companies (Corporate Social Responsibility)

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