The corporate social responsibility (CSR) regime was introduced in India as a part of the new Companies Act, 2013, specifically under Section 135 therein read with the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules). Since then, Section 135 of the Companies Act and the CSR Rules have undergone several amends, resulting in a CSR regime which now stands to penalise non-compliant corporates with a much-extended net of CSR obligations.

The threshold for triggering the mandatory CSR compliance and the minimum CSR spending requirement remain constant. The CSR obligations apply to all companies, which in the preceding financial year have a net worth of at least INR 5 billion; turnover of at least INR 10 billion; or net profit of at least INR 50 million. All such companies are mandatorily required to set up a CSR Committee and spend in a given financial year, at least 2% of their average net profits made during 3 immediately preceding financial years.

The key amendments which reshaped the CSR regime have been made by the Companies (Amendment) Act, of 2019 and 2020 and very recently notified Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021. These amendments cast substantially increased obligations on the companies which need to be CSR compliant and responsibilities on the board of directors of such companies.  The corporates have been working to upgrade their CSR set up to meet the new compliance requirements.


Eligibility Criteria and Registration of an Implementation Agency

Companies are permitted to undertake CSR obligations by themselves or through an implementation agency. It is no more a prerogative for the board of directors of a company, but a mandatory norm to ensure that an implementation agency is an entity established under section 8 of the Companies Act, or a registered public trust or a registered society, registered under section 12A and 80 G of the Income Tax Act, 1961. Such entity could be either (i). established by the company singly or with another company, or (ii). a third-party establishment, in which case it should have track record of at least 3 years in undertaking activities similar to the intended CSR initiatives. Other entities that could be engaged as an implementation agency are those established by the Central Government or State Government or those established under an Act of Parliament or a State legislature.

An implementation agency also needs to mandatorily register with the Central Government and obtain a CSR registration number with effect from April 1, 2021. But this is not applicable to CSR projects and programmes approved prior to April 1, 2021.

Companies will have to now re-assess the status and form of the implementation agencies based on the new compliance requirements and ensure all such agencies seek registration with the Central Government before undertaking new CSR activities.

Scope of CSR Activities and CSR Policy

CSR Activities

Besides activities benefitting employees and contributions made to political parties, activities undertaken in the normal course of business and statutory responsibilities have now been excluded from the definition of CSR. A specific exception has been made for those companies which are engaged in research and development of vaccines, drugs and medical devices related to COVID 19. It is likely that exception will also be made for CSR expenditure to include large size procurement of COVID 19 vaccine by many corporates for employee health and welfare.

CSR Policy

The amended CSR Rules call upon companies to rework on the CSR Policy by outdating the existing documented policy. As required under the erstwhile CSR Regime, a CSR Policy was formulated by corporates as a detailed scheme of CSR projects and programmes with specific modalities of execution, implementation schedule and monitoring process formulated and recommended by the CSR Committee. However, the amended CSR Rules contemplate the CSR Policy to be a high-level statement containing the approach and direction given by the board of a company (taking into account the recommendations of its CSR Committee) and shall include only the guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan by the CSR Committee.

To enhance the accountability of the CSR Committees, the said committees are now required to formulate and recommend to the board, an annual action plan in pursuance of its CSR policy. The annual action plan has been envisaged to include niche details pertaining to the project or programmes that are approved to be undertaken, manner of execution, modalities of utilisation of funds and implementation schedules, monitoring and reporting mechanism and details of impact assessment, if any, for the projects undertaken by the company.

CSR Expenditure & Budgeting

Accounting of Unspent CSR Amounts

Any unspent CSR amount in a particular financial year is now required to be transferred to a fund specified in Schedule VII of the Companies Act, 2013 within a period of 6 months from the end of the financial year.  These funds include the Prime Minister's National Relief Fund and the PM CARES fund.

In case such unspent amount is related to an on-going project, then such amounts are required to be transferred within 30 days of the expiry of a financial year to the Unspent CSR Account (a special account to be opened for this purpose). Such amounts are to be utilised as per CSR policy within next 3 financial years, failing which such amount is also to be transferred to a fund prescribed under Schedule VII of the Companies Act, 2013.

The new compliance requirements around the unspent amount bounds a company with CSR mandate. Previously, if a company did not spend its CSR amount in a given financial year, the board of directors had the flexibility to provide reasons for failing to spend the CSR amount in its report for that financial year. But mandatorily requiring a company to transfer unspent amounts to funds and accounts that are beyond company's control takes the CSR regime closer to that of tax or cess.

A good breather is the newly introduced relaxation that provides if a company spends an amount in excess of its prescribed CSR obligations in a particular financial year, such a company can now set off the excess CSR expenditure against its CSR obligations over the next 3 financial years.

Creation of Capital Asset

CSR expenditure will cover amounts spent by a company on creation or acquisition of a capital asset if such a capital asset is held by: (i) a company established under section 8 of the Act, a registered public trust or a registered society, having charitable objects and a CSR registration number; (ii) beneficiaries of the CSR project such as self-help groups or collectives; or (iii) a public authority.

In respect of capital assets created prior to the amendment of CSR Rules, a timeline of 180 days from the date of amendment has been granted to corporates to attain alignment with the above new compliance requirement. Practically, this could be a challenging requirement, but companies are re-working on CSR agreements and arrangements in order to be compliant within the tight timeline.

CSR Budget

While drawing CSR expenditure and budgets, companies now have to be mindful to ensure that expenses incurred for 'general management and administration' of CSR functions (defined as "administrative expenses") do not exceed 5% of the total CSR expenditure of the company for the financial year.

CSR Expenditure/Fund Utilisation

The board of a company is under an express obligation to 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.

Disclosures & Reporting Requirements

The composition of the CSR Committee, the CSR policy and CSR projects approved by the board are mandatorily now required to be disclosed on company's website.

The board's annual report on CSR for each financial year is now required to be in the new prescribed form, which requires detailed disclosures, including those on unspent amounts, amounts available for set off and administrative overheads.

Further, a company having average CSR obligation of INR 100 million or more in 3 immediately preceding financial years is required to undertake impact assessment of CSR projects through an independent agency. Details on the impact assessment are to be reported in the annual report on CSR.


The recent amends undoubtedly cast substantially increased obligation on the companies and their respective board of directors in terms of commitment towards CSR expenditure, monitoring and implementation of CSR projects and programmes and transparency on the CSR front. But given that these have been introduced gradually, it can be hoped that corporates are better placed now to accept these. Practically, the new norms set up a CSR regime which is likely to burden the corporates with an immediate task of reworking and reassessing some key CSR related aspects in order to meet the new compliance requirements. Given the extent of formalities and compliances that a company needs to observe in the new regime, it is likely that corporates will be reaching out for professional legal, accounting and management assistance in planning and implementation of CSR initiatives.

Originally published by Lexology.

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