Corporate Social Responsibility: How India’s CSR rules ensure strict compliance

By Anand Subramanian and Pratiq Shah

Corporate Social Responsibility or CSR has been a talking point for many countries, governments, and corporates. There is no doubt about the acceptability and the general agreement that leading brands and corporate houses need to ensure that CSR is integrated in their actions. While almost all leading companies have their own CSR practices and policies, absence of strict regulations and laws around CSR that are mandatory, makes the application varied, inconsistent and not comparable.

To counter this challenge and demonstrate leadership at a global platform, on April 1, 2014, India became the first country to mandate rules around CSR. These rules were incorporated in the Companies Act to ensure strict compliance and cover a large population. While the provisions were mandatory, the applicability of the various sub sections was spread over few years providing the companies adequate time to absorb and implement the new rules.

The rules under Section 135 of Companies Act, 2013 made it mandatory for companies with certain net worth, turnover or profitability during the immediately preceding financial years, to spend two percent of their average net profit for the past three years on CSR. Initially, till April of 2021, companies that were scoped in based on either net worth, turnover or profitability, were required to spend the amounts but were only required to disclose the unspent amount and not make any provisions. However, post-April 2021, the Act requires the companies to make provisions for the unspent amount and any unspent amount is required to be transferred to specified funds after a particular period.

The CSR rules in India came with many guiding principles and requirements around constitution and functions of CSR committees, responsibilities of the board of directors and around utilisation of the CSR funds and certification by CFOs. These rules, that are explained below, provide detail guidance around the implementation of the CSR requirements as mandated by the Companies Act. 

Constitution of the CSR Committee: 

Every Company to which CSR is applicable is required to constitute a CSR Committee of the Board consisting of:

• 3 or more directors, out of which at least one director shall be an independent director. However, if a company is not required to appoint an independent director, then it shall have 2 or more directors in the Committee;
• 2 directors in case of a private company having only two directors on its Board; and
• At least 2 persons in case of a foreign Company of which one person shall be its authorised person and resident in India and another nominated by the foreign company.

Functions of CSR Committee:

The CSR Committee shall—

• Formulate and recommend to the board, a CSR Policy which shall indicate the activities to be undertaken by the Company;
• Recommend the amount of expenditure to be incurred on the activities referred to the above;
• Monitor the CSR Policy of the company from time to time; and
• Institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.

Responsibility of Board of Directors (BoD):  

The BoD of every company on which CSR is applicable shall:

• After considering the recommendations made by the CSR Committee, approve the CSR Policy for the Company and disclose contents of such Policy in Board report;
• Ensure that the activities included in the CSR Policy of the company are undertaken by the Company;
• Shall disclose the composition of the CSR Committee in Board Report; and
• 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, in pursuance of its CSR Policy. The CSR projects/programs/activities undertaken in India only shall amount to CSR expenditure.

While the law has been applied and made mandatory, the effectiveness of its application is to be seen. There are many corporations that are handling CSR activities through their foundations while some other companies are setting up internal teams to supervise projects carried out by their implementing partners. Many companies have also grabbed the easier solutions by investing in the government’s priorities or investing money into the Prime Minister’s National Relief Fund.

CSR and the increasing importance of ESG and Climate change related actions and disclosures also have significant areas in common and interwoven. The use of resources for a sustainable future is an area that will come to the forefront, if not already there. 

As the new rules have been recently introduced, the application of these over the immediate future will be one of the top agenda items for corporates and boards.

(Anand Subramanian is a Chartered Accountant at Deloitte Haskins & Sells LLP. Pratiq Shah is a Chartered Accountant at Deloitte Haskins & Sells LLP. Views expressed by the authors are their own.)