Understanding CSR Law and Obligations
Legal Foundation: CSR under the Companies Act, 2013, mandates certain companies to allocate funds for social and environmental initiatives. The Act specifies that companies meeting any of the following criteria must comply:
- Net worth of more than ₹500 crore
- Turnover of more than ₹1000 crore
- Net profit of more than ₹5 crore
Mandatory Spending: Eligible companies are required to spend at least 2% of their average net profits (from the previous three years) on CSR activities each financial year. For newer companies, this calculation is based on the average net profits since their incorporation.
Formulating and Implementing a CSR Strategy
CSR Committee Formation: Companies must establish a CSR Committee consisting of three or more directors, with at least one independent director. This committee is responsible for recommending and monitoring the CSR policy.
CSR Policy Development: The CSR Committee drafts a policy detailing the company’s chosen CSR activities, aligned with Schedule VII of the Act, budget allocations, and the implementation and monitoring mechanisms.
Selecting CSR Activities: Activities should be chosen from those listed in Schedule VII, such as promoting education, gender equality, environmental sustainability, and national heritage.
Execution and Monitoring: CSR projects can be implemented directly by the company or through partnerships with NGOs, trusts, or Section 8 companies. Regular monitoring ensures alignment with objectives and allows for necessary adjustments.
Financial Management and Reporting
Budget Allocation and Tracking: Allocate the required budget (2% of average net profits) and maintain detailed records of CSR expenditures. Companies falling short of their spending obligation must explain the reasons in their annual report.
Annual CSR Reporting: The Board's annual report must include a comprehensive CSR section detailing the CSR policy, activities undertaken, expenditure, and justifications for any unspent funds.
Handling Unspent CSR Funds
For ongoing projects, unspent amounts must be transferred to a special 'Unspent Corporate Social Responsibility Account' within 30 days from the end of the financial year and utilized within three years. If not used within this timeframe, these funds should be transferred to a fund specified in Schedule VII.
Avoiding Defaults and Penalties
Ensure Compliance: Adherence to the Act's provisions, including CSR policy development, spending, and reporting, is non-negotiable.
Maintain Documentation: Keeping thorough records of all CSR activities and decisions is crucial for substantiating compliance efforts.
Stay Updated: Regularly review legal updates in CSR regulations to adjust practices and policies accordingly.
By carefully navigating the legal requirements, planning strategic CSR activities, and ensuring transparent reporting and utilization of funds, companies can fulfill their CSR obligations under the Companies Act, 2013, while significantly contributing to societal and environmental well-being. This holistic approach not only aids in compliance but also enhances corporate image, stakeholder trust, and long-term sustainability.
