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Special Situations:

Newly Incorporated Companies: If a company has not completed three financial years since incorporation but satisfies the threshold criteria, CSR provisions apply. The spending requirement is calculated based on average net profits during the financial years actually completed.

Section 8 Companies: Companies registered for charitable purposes under Section 8 are not exempt. If they meet the financial thresholds, they must comply with CSR provisions despite their non-profit orientation.

CSR Committee Requirements

Committee Constitution:

Every company to which Section 135 applies must constitute a Corporate Social Responsibility Committee of the Board. The committee composition requirements are:

Standard Composition:

• Minimum three directors
• At least one director must be an independent director

Exception for Certain Companies: Companies not required to appoint independent directors under Section 149(4) may constitute a CSR Committee with two or more directors.

Unlisted Companies with Lower Paid-up Capital: For unlisted companies with paid-up share capital below ten crore rupees or turnover below one hundred crore rupees, committee constitution is not mandatory. The Board of Directors itself may discharge CSR Committee functions.

Committee Functions

The CSR Committee shoulders three primary responsibilities:

1. Policy Formulation: Develop and recommend to the Board a Corporate Social Responsibility Policy indicating activities the company will undertake as specified in Schedule VII.
2. Budget Recommendation: Suggest the expenditure amount to be incurred on CSR activities.
3. Monitoring: Continuously monitor the implementation and effectiveness of the company’s CSR Policy.

Board’s Role and Responsibilities

The Board of Directors holds ultimate responsibility for CSR implementation. Their duties include:

Policy Approval and Disclosure:

After considering CSR Committee recommendations, the Board must:

• Approve the Corporate Social Responsibility Policy
• Disclose policy contents in the Board’s report under Section 134(3)
• Place the policy on the company’s website, if available

Activity Oversight:

The Board must ensure that activities included in the CSR Policy:

• Fall within the purview of Schedule VII activities
• Are actually undertaken by the company as planned
• Align with the company’s CSR objectives

Spending Mandate:

The Board must ensure that the company spends, in every financial year, at least two percent of the average net profits made during the three immediately preceding financial years, pursuant to its CSR Policy.

Mandatory Spending Requirement

Two Percent Obligation:

Companies must spend at least two percent of their average net profits during the three immediately preceding financial years on CSR activities. For companies that have not completed three financial years since incorporation, the calculation is based on the actual number of financial years completed.

Local Area Preference:

The law provides that companies should give preference to local areas and areas around where they operate for spending the earmarked CSR amount. However, this preference is directory rather than mandatory, especially for companies with dispersed or virtual operations like e-commerce or IT services businesses.

Ongoing Projects:

The statute recognizes that certain CSR initiatives require multi-year implementation. Special provisions govern unspent amounts related to ongoing projects.

Treatment of Unspent CSR Amounts

For General CSR Obligations:

If a company fails to spend the prescribed two percent amount on activities not related to ongoing projects, it must:

Transfer the unspent amount to specified funds within six months from the end of the financial year. These specified funds include:

• Prime Minister’s National Relief Fund
• Swachh Bharat Kosh
• Clean Ganga Fund
• Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund
• Any other fund specified in Schedule VII for CSR purposes

For Ongoing Projects:

When unspent amounts relate to ongoing projects under the company’s CSR policy:

The company must transfer the unspent amount to an exclusive account called the ‘Unspent Corporate Social Responsibility Account’ in any scheduled bank within thirty days from the end of the financial year.

The company must utilize these funds toward its CSR policy obligations within three financial years from the date of transfer.

If the company fails to utilize the funds by the end of three financial years, it must transfer them to a specified fund within thirty days after completing the third financial year.

Set-off for Excess Spending

Companies spending amounts exceeding the two percent requirement may set off such excess against future CSR spending requirements for up to three immediately succeeding financial years, subject to compliance with prescribed conditions.

Permissible CSR Activities – Schedule VII

The Board must ensure that CSR activities fall within Schedule VII of the Act. The Schedule specifies various categories of activities that companies may include in their CSR policies

CSR Reporting and Disclosure

Annual Reporting:

The Board’s report under Section 134(3)(o) must include a comprehensive annual report on CSR containing:

• A brief outline of the company’s CSR policy, including overview of projects or programs undertaken
• Composition of the CSR Committee
• Average net profit for the preceding three financial years
• Prescribed CSR expenditure (two percent of average net profit)
• Details of CSR spent during the financial year
• Reasons for not spending the entire prescribed amount, if applicable
• Details regarding unspent CSR amounts and their treatment
• Manner in which surplus arising from CSR projects has been dealt with

MCA Portal Filing:

Companies covered under Section 135 must furnish a report on Corporate Social Responsibility in Form CSR 2 to the Registrar for the preceding financial year and as an addendum to Form AOC-4 /AOC4 XBRL/AOC 4 NBFC (Ind AS) as the case may be to the Registrar. This ensures regulatory monitoring of CSR compliance. (Rule 12(1B) of the Companies (Accounts) Rules 2014) as:

For FY 2020-21, Form CSR-2 must be filed separately on or before 30 June 2022, after filing the AOC-4 or AOC-4 XBRL or AOC-4 NBFC (Ind AS), as the case may be.

For FY 2021-22, Form CSR-2 must be filed separately on or before 31 March 2023, after filing the relevant AOC-4 or AOC-4 XBRL or AOC-4 NBFC (Ind AS), as the case may be

For FY 2022-23, Form CSR-2 must be filed separately on or before 31 March 2024, after filing Form No. AOC-4 or Form No. AOC-4-NBFC (Ind AS), as specified in these rules or Form No. AOC-4 XBRL as specified in the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015 as the case may be

For FY 2023-24, Form CSR-2 must be filed separately on or before 30 June 2025, after filing Form No. AOC-4 or Form No. AOC-4-NBFC (Ind AS), as specified in these rules or Form No. AOC-4 XBRL as specified in the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015 as the case may be.

Website Disclosure:

Companies should place their CSR Policy on their websites for public transparency and stakeholder access.

Implementation Modes

Companies have flexibility in implementing CSR activities:

Direct Implementation:

Companies may execute CSR projects directly through their own employees, departments, and resources.

Through Implementing Agencies:

Companies may partner with:

• Registered trusts or societies
• Non-Governmental Organizations (NGOs)
• Section 8 companies
• Registered public trusts
• Any other entity with established track records in undertaking similar activities

Collaborations:

Companies may collaborate with other companies for undertaking CSR projects, provided each company individually reports on such collaborative efforts.

Impact Assessment Report

Every company having average CSR obligation of ten crore rupees or more in pursuance of subsection (5) of section 135 of the Act, in the three immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of one crore rupees or more, and which have been completed not less than one year before undertaking the impact study.

A Company undertaking impact assessment may book the expenditure towards Corporate Social Responsibility for that financial year, which shall not exceed two percent of the total CSR expenditure for that financial year or fifty lakh rupees, whichever is higher

Impact Assessment Report to be annexed to Annual Report on CSR

Surplus from CSR Activities

Surplus arising from CSR activities—such as revenue generated from CSR projects, interest income earned by implementing agencies on funds provided, disposal or sale of materials used in CSR projects, and similar income sources—must be utilized only for CSR purposes. Such surplus cannot be added to general company profits or used for non-CSR business activities.

Exemptions and Special Provisions

Specified IFSC Companies:

Section 135 does not apply to Specified International Financial Services Centre (IFSC) public and private companies for five years from commencement of business. This exemption aims to promote ease of doing business in IFSCs.

Administrative Overheads:

Companies may include administrative overheads within CSR expenditure, but these should not exceed specified limits. Administrative overheads mean expenses for general management and administration of CSR functions but exclude expenses directly incurred for designing, implementing, monitoring, and evaluating specific CSR projects or programs.

The Board to ensure that in every F.Y., the company spends at least 2% of the average Net Profits of the Company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy