Ever since the Corporate Social Responsibility (CSR) gained statutory recognition for the first time in the Companies Act, 2013, the compliance and disclosure framework around it in India have only enhanced over the years.

From being a voluntary obligation in 2013 where companies fulfilling prescribed criteria [1] did not face any consequences for not being able to spend on CSR activities and the only requirement was to cite reasons in their Board Report for not being able to do so, to later making it mandatory in 2019 for companies to comply with CSR obligations or pay penalty [2], the provisions pertaining to CSR have seen a momentous change in India. Further, effective 2022 onwards, a new reporting framework i.e. Form CSR-2 is given effect to further strengthen the disclosure requirements around CSR. This requirement mandates companies to furnish a comprehensive report on corporate social responsibility in Form CSR-2 from FY 2020-2021 onwards to the Registrar of Companies (“RoC”) in addition to the Annual Report on CSR Activities which is annexed as a part of the Board Report. For the financial year 2020 -2021, Form CSR-2 must be filed by 30th June, 2022.

This apart, the CSR provisions have also seen significant changes in the way the funds are being spent. From initially seeking information about the amount of CSR spend to now requiring companies to transfer the unspent amount to any funds specified under Schedule VII within a period of 6 months from the expiry of the financial year or in case where such unspent amount relates to any ongoing project transferring the unspent amount to a special account i.e. Unspent CSR Account which must then be spent within 3 financial years from the date of such transfer failing which will require such unspent amount to be transferred to any of the Funds specified in Schedule VII within a period of 30 days from the date of completion of the third FY, the direction of the Regulator today is headed towards ensuring CSR funds are deployed in the right initiatives and the spend is effectively monitored.

In this blog we will be focusing on the various reporting obligations cast upon companies which are mandated to fulfil CSR obligations.

The key reporting obligations in respect of Corporate Social Responsibility are as follows:

• Annual CSR Report which forms a part of the company’s Annual Board Report.
• Impact Assessment Report to be included in Annual CSR Report.
• Report on Corporate Social Responsibility (Form CSR-2)
• Report on CSR projects undertaken by the Top 1000 listed companies, as a part of their Business Responsibility and Sustainability Report (BRSR).
• A company undertaking CSR activities through some other non-profit making entities must ensure that the implementing agency registers themselves with the Central Government by filing the Form CSR-1 electronically with the Registrar.

A thought which most certainly crosses one’s mind today is the reason why an additional filing is introduced in the form of Report on Corporate Social Responsibility i.e. Form CSR-2 [3] when CSR disclosures are already being made in the Annual Report on CSR activities which companies are filing as a part of their Board Report.

It is interesting to note that while there seems to be apparent commonalities as far as information sought across the reports is concerned, what is worth noting is that through Form CSR-2 regulators will not only be able to assess the compliance obligations discharged by a company but will also be able to gain insights/datapoints to be able to monitor the CSR ecosystem in an organization. This self-regulated model is expected to bring about transparency in CSR undertaken by the companies.

Form CSR-2 looks more like a verification report where companies are required to update the actual status of ongoing projects, amount of CSR spend, amount unspent and funds to which the unspent amounts are being transferred.

Let us take you through the aspects in which the disclosures required in the Annual Report on CSR Activities (Annexure) which is a part of the Board Report differ from the details being sought in Form CSR-2.

While the Annexure seeks details of the Composition of the CSR Committee, Form CSR-2 on the other hand seeks additional information such as number of meetings of CSR Committee held during the year, name of directors, No. of meetings of CSR Committee attended by them during the year.

The Annexure seeks reasons for not spending the amount in its Board report, in case the company has failed to spend the two per cent of the average net profit of the last three financial years or any part thereof, Form CSR-2 on the other hand seeks further details such as transfer of Unspent CSR amount for the financial year, details of the transfer to Unspent CSR account such as the amount to be transferred, amount actually transferred, date of transfer and deficiency, if any, details of transfer to Fund [4] specified in Schedule VII such as amount to be transferred, amount actually transferred, date of transfer and deficiency, if any.

The Annexure seeks information on the average net profit of the company for last three financial years, Form CSR-2 seeks profit before tax in the F.Y 1, F.Y 2 and F.Y 3 separately, net profit computed u/s 198 in the F.Y 1, F.Y 2 and F.Y 3 separately, total amount adjusted as per rule 2(1)(h) of the CSR Policy Rules 2014 in the F.Y 1, F.Y 2 and F.Y 3 separately, total net profit for section 135 in the F.Y 1, F.Y 2 and F.Y 3 separately and Average net profit of the company as per section 135(5).

The Annexure seeks information whether the amount has been spent directly or through an implementing agency, Form CSR-2 further seeks details of the implementing agency, if any.

While the Annexure requires companies to give a brief outline of the company’s CSR policy, including overview of projects or programs proposed to be undertaken, Area where the projects have been undertaken budget of the project, cumulative expenditure up to the reporting period, Form CSR-2 seeks complete information on the amount spent on Ongoing and other than ongoing projects) such as number of such projects undertaken, name of the project, whether undertaken in local area or not, location where the project has been undertaken, amounts spent, whether the project has been undertaken directly or not, details of the implementing agency, if any, amount spent in administrative overheads, amount spent on impact assessment, if applicable, total amount spent for the financial year, amount to be transferred to fund specified in Schedule VII for the financial year (if total unspent for the financial year is greater than unspent for ongoing projects).

This apart, Form CSR-2 additionally requires details of the capital assets created or acquired through CSR spent in the financial year, if any such as:

• Particulars of the property or asset(s) [including complete address and location of the property]
• Pin code of the property or asset(s)
• Date of creation
• Amount of CSR spent
• Name, address and CSR registration number of the of entity/ Authority/ beneficiary of the registered owner

As per the details given above, we observe that CSR-2 seeks granular information on CSR spending by companies, the CSR projects undertaken by companies, information on the CSR Implementing Agencies, financial insights on spending / non-spending and most importantly provides details for enabling Regulators to monitor the unspent CSR amount.

Further, companies having average CSR obligation of more than Rs. 10 crores, in the three immediately preceding financial years, must undertake an impact assessment of its CSR projects. Provided that the worth of such projects must be 1 crore or more and has been completed not more than 1 year ago from the date of such impact study. The purpose of impact assessment is to assess the social impact of a particular CSR project. The intent is to encourage companies to take considered decisions before deploying CSR amounts and assess the impact of their CSR spending. This not only serves as feedback for companies to plan and allocate resources better but will also deepen the impact of CSR. The provisions for impact assessment have come into effect from 22nd January, 2021. Accordingly, the company is required to undertake impact assessment of the CSR projects completed on or after January 22, 2021. However, as a good practice the Board may undertake impact assessment of completed projects of previous financial years. Impact assessment must be conducted by an independent agency. The Board has the prerogative to decide on the eligibility criteria for selection of the independent agency for impact assessment. In case two or more companies choose to collaborate for the implementation of a CSR project, then the impact assessment carried out by one company for the common project may be shared with the other companies for the purpose of disclosure to the Board and in the annual report on CSR. The sharing of the cost of impact assessment may be decided by the collaborating companies subject to the limit as prescribed in the Companies (CSR Policy) Rules, 2014 for each company.

The Top 1000 Listed entities are additionally required to reflect the following details in the Business Responsibility and Sustainability Reporting [5] (BRSR) Report

• Details of beneficiaries of CSR Projects project-wise
• of persons benefitted from CSR Projects
• Percentage of beneficiaries from vulnerable and marginalized groups
• Information regarding the CSR projects undertaken in the designated aspirational districts as identified by government bodies such as the State and the Aspirational District in which the projects have been undertaken along with the amount spent.

Therefore, it is evident that the CSR provisions in India has gone through such significant changes over the years from being a voluntary requirement to now a mandatory requirement. Although it cast additional compliance obligations on the part of companies, it will facilitate the companies to create long term assets as there is a significant association between CSR and sustainable shareholder value. Further, with the increasing deterioration in the environment, CSR obligations are necessary to impose environmental, social and corporate governance and strike the right balance between people, planet and profit and paving the way for a promising tomorrow.

 

Written by: Zunaid Akhtar Sarkar

Co-Authored by: Antara Dasgupta

 

Disclaimer

All material included in this blog is for informational purposes only and does not purport to be or constitute legal or other advice. This blog should not be used as a substitute for specific legal advice. Professional legal advice should be obtained before taking or refraining from an action as a result of the contents of this blog. We exclude any liability (including without limitation that for negligence or for any damages of any kind) for the content of this blog. The views and opinions expressed in this blog are those of the author/(s) alone and do not necessarily reflect the official position of Lexplosion Solutions. We make no representations, warranties or undertakings about any of the information, content or materials provided in this blog (including, without limitation, any as to quality, accuracy, completeness or reliability). All the contents of this blog, including the design, text, graphics, their selection and arrangement are the intellectual property of Lexplosion Solutions Private Limited and/or its licensors.

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Note 1:

Every company, including its holding or subsidiary company in India, as well as, foreign companies having branch office or projects in India, which satisfies any of the following criteria during the immediately preceding financial year is required to comply with CSR provisions

• net worth of Rs. 500 crore or more, or
• turnover of Rs. 1000 crore or more, or
• net profit of Rs. 5 crore or more.

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Note 2

Penalty for non-compliance under Companies Act 2013:

In case a company fails to comply with the obligations under the Companies Act, 2013 i.e., spending of 2 % of the avg net profit earned during the immediately preceding 3 financial years on any CSR activity and failing of which requires the company to transfer such unspent amount to the prescribed funds or unspent CSR account, as the case may be:

1. The company must pay a fine which is equivalent to twice the unspent amount which was required to be transferred to the prescribed Funds or Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less
2. The officer in default must pay a fine which is equivalent to one-tenth of the amount required to be transferred by the company or two lakh rupees, whichever is less

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Note 3

Companies (Accounts) Amendment, Rules 2022 effective 11th February, 2022.

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Note 4

Contributions to the following Funds shall be admissible as CSR expenditure:

1. Swachh Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water
2. Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga
3. Prime Minister’s National Relief Fund (PMNRF)
4. Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)
5. Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.

The Act does not recognize any contribution to any other fund, which is not specifically mentioned in Schedule VII, as an admissible CSR expenditure.

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Note 5

Securities and Exchange Board of India has recently introduced a reporting requirement i.e., Business Responsibility and Sustainability Reporting (“BRSR”) with a view to enable the investors to have access to standardized disclosures on Environment, Social and Governance (“ESG”) parameters to facilitate them to identify sustainability-related risks and opportunities of companies for better investment decisions. The reporting requirement is applicable to the Top 1000 listed entities. However, it is voluntary for FY 2021-22, but mandatory from FY 2022-23 onwards.

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