Corporate social responsibility (CSR) is not just a voluntary initiative, but a legal obligation for certain companies in India. The Companies Act, 2013, introduced a mandatory CSR framework for companies that meet certain criteria. According to the Act, these companies have to spend at least 2% of their average net profits of the preceding three financial years on CSR activities.
But what exactly are CSR activities? How can you comply with the CSR provisions under the Companies Act, 2013? And what are the benefits of doing so? In this blog, we will show you how to comply with CSR provisions under the Companies Act, 2013 simply and effectively.
Step 1: Check your Eligibility
The first step of complying with CSR provisions is to check whether your company is eligible for CSR. According to Section 135 of the Companies Act, 2013, a company is subject to CSR if it fulfills any of the following criteria in any financial year:
- It has a net worth of Rs. 500 crore or more; or
- It has a turnover of Rs. 1000 crore or more; or
- It has a net profit of Rs. 5 crore or more.
If your company meets any of these criteria, then you have to comply with the CSR provisions under the Act. If not, then you are exempted from CSR, but you can still voluntarily undertake CSR activities if you wish.
Step 2: Form a CSR Committee
The second step of complying with CSR provisions is to form a CSR committee within your company. The CSR committee is responsible for overseeing and guiding the CSR activities of your company. According to the Act and the CSR Rules, the CSR committee should consist of the following members:
- At least three directors, out of which at least one should be an independent director;
- The chairperson of the CSR committee, who should be appointed by the board of directors;
- The chief executive officer or the managing director of the company, who should act as the secretary of the CSR committee.
The CSR Committee has the following Roles and Responsibilities:
- To formulate and recommend a CSR policy to the board of directors;
- To identify and approve the CSR projects or programs to be undertaken by the company;
- To monitor and evaluate the implementation and impact of the CSR activities;
- To report and disclose the CSR performance and expenditure to the board of directors and the stakeholders.
Step 3: Develop a CSR Policy
The third step of complying with CSR provisions is to develop a CSR policy for your company. A CSR policy is a document that outlines the vision, mission, objectives, and strategy of your company's CSR activities.
It also specifies the budget, governance, and reporting mechanisms for CSR.
According to the Act and the CSR Rules, the CSR policy should include the following elements:
- A list of CSR projects or programs that the company plans to undertake, by the Schedule VII of the Act;
- The modalities of execution and implementation of the CSR projects or programs, such as through direct involvement, collaboration with other entities, or outsourcing to external agencies;
- The monitoring and evaluation process and criteria for the CSR projects or programs, such as through periodic reviews, audits, surveys, or impact assessments;
- The reporting and disclosure format and frequency for the CSR activities, such as through annual reports, websites, social media, or newsletters.
The CSR policy should be formulated and recommended by the CSR committee and approved by the board of directors. The CSR policy should also be displayed on the company's website and made available to the public.
Step 4: Implement the CSR Policy
The fourth step of complying with CSR provisions is to implement the CSR policy by the Act and the CSR Rules. This involves selecting, executing, and monitoring the CSR projects or programs that are aligned with the CSR policy and Schedule VII of the Act.
The Schedule VII of the Act Provides a List of Activities that Qualify as CSR, such as:
- Eradicating hunger, poverty, and malnutrition;
- Promoting health care, education, and skill development;
- Ensuring environmental sustainability and biodiversity conservation;
- Promoting gender equality and women empowerment;
- Supporting rural development and social welfare;
- Contributing to disaster relief and rehabilitation;
- Preserving heritage, art, and culture;
- Enhancing sports and recreation facilities;
- Promoting national and international peace and harmony;
- Supporting technology and innovation for social good.
The company can choose any of these activities or any other activity that is beneficial to society and the environment, as long as it is not related to the normal business operations of the company or the benefit of its employees or shareholders.
The Company can Implement the CSR Projects or Programs in any of the Following Ways:
- Through its own foundation, trust, society, or section 8 company;
- Through a registered non-governmental organization (NGO) or a non-profit organization (NPO) that has a track record of at least three years in undertaking similar activities;
- Through a collaboration or partnership with other companies, NGOs, NPOs, government agencies, or international organizations;
- Through a third-party agency that specializes in CSR consultancy, management, or implementation.
The company should ensure that the CSR projects or programs are executed and implemented in a transparent, accountable, and efficient manner and that they adhere to the CSR policy and Schedule VII of the Act.
The company should also monitor and evaluate the progress and impact of the CSR projects or programs regularly, using the process and criteria specified in the CSR policy. The company should collect and analyze data and feedback from the beneficiaries, stakeholders, and partners involved in the CSR activities.
The company should also conduct periodic reviews, audits, surveys, or impact assessments to measure the outcomes and outputs of the CSR activities.
Step 5: Report and Disclose the CSR Activities
The fifth and final step of complying with CSR provisions is to report and disclose the CSR activities to the board of directors and the stakeholders. This involves preparing and filing an annual report on CSR, as per the Act and the CSR Rules.
According to the Act and the CSR Rules, the Annual Report on CSR should Include the Following Information:
- A brief overview of the CSR policy and the CSR committee;
- A detailed description of the CSR projects or programs undertaken during the financial year, along with their objectives, locations, budgets, beneficiaries, and partners;
- A statement of the CSR expenditure incurred during the financial year, along with the breakup of the amount spent on various CSR activities, administrative overheads, and surplus or unspent funds;
- A comparison of the actual CSR expenditure with the prescribed CSR expenditure, along with the reasons for any shortfall or excess;
- A declaration by the board of directors that the CSR policy has been implemented and monitored in compliance with the Act and the CSR Rules.
The annual report on CSR should be signed by the chief executive officer or the managing director, and the chairperson of the CSR committee. The annual report on CSR should also be attached to the board's report, which is filed with the Registrar of Companies (ROC) and the Ministry of Corporate Affairs (MCA).
In addition to the annual report on CSR, the company should also disclose the CSR activities on its website and other public platforms, such as social media, newsletters, or press releases. The company should use these platforms to communicate the vision, mission, objectives, and strategy of its CSR activities, as well as the achievements, challenges, and learnings from its CSR activities. The company should also engage with its stakeholders and solicit their feedback and suggestions on its CSR activities.
By reporting and disclosing the CSR activities, the company can demonstrate its accountability, transparency, and commitment to CSR, and also showcase its positive impact on society and the environment.
To comply with CSR provisions under the Companies Act, 2013, you need to follow these five steps: check your eligibility, form a CSR committee, develop a CSR policy, implement the CSR policy, and report and disclose the CSR activities.
By complying with CSR provisions, you can not only fulfill your legal obligations, but also enhance your business performance and reputation, and make a positive impact on society and the environment. So, what are you waiting for? Start your CSR journey today!