Corporate Social Responsibility (CSR) has become an essential component of corporate governance in India, mandating certain companies to allocate a portion of their profits to social, environmental, and economic initiatives. Under the Companies Act, 2013, CSR aims to integrate businesses with societal development, ensuring that they contribute positively to the welfare of the nation. This comprehensive article outlines the key provisions of CSR, the necessary filings with the Ministry of Corporate Affairs (MCA), compliance requirements for expenditure through trusts, and an audit checklist for CSR expenditure before the year-end.
1. Applicability of CSR Provisions
CSR regulations apply to companies meeting any of the following criteria in the immediately preceding financial year:
- Net Worth: ₹500 Crores or more
- Turnover: ₹1,000 Crores or more
- Net Profit: ₹5 Crores or more
These companies must allocate at least 2% of their average net profit from the last three years to CSR projects. It is imperative for such companies to comply with the CSR obligations under Section 135 of the Companies Act, 2013.
2. CSR Contribution Requirement
A company that falls under the CSR eligibility criteria is required to contribute at least 2% of its average net profit from the preceding three years towards CSR activities. This expenditure must be directed towards projects that align with the objectives laid out in Schedule VII of the Companies Act, such as education, healthcare, rural development, and environmental sustainability.
3. CSR Committee Composition
Companies meeting the CSR thresholds must form a CSR Committee, which must include at least one Independent Director. If the company is not required to have an Independent Director, the committee should consist of two or more directors. For companies with CSR obligations under ₹50 Lakhs, the committee is not mandatory, unless unspent CSR funds are carried forward, in which case the committee must be constituted.
4. CSR Policy
A company must formulate a CSR policy, approved by its Board of Directors, based on recommendations from the CSR Committee. This policy outlines the company’s approach to CSR, including the selection, implementation, and monitoring of CSR activities, and includes an Annual Action Plan for the use of funds.
5. Unspent CSR Account
A company must maintain an Unspent CSR Account in a scheduled bank, where unspent CSR funds should be deposited by April 30 of the following year. These funds must be used within the next three years; if unspent at the end of this period, they must be transferred to a designated fund under Schedule VII.
6. Timeline for CSR Expenditure
Ongoing Projects: If the company has ongoing CSR projects, it must ensure the funds are spent within the financial year. Any unspent amount must be transferred to the Unspent CSR Account within 30 days after the financial year ends (i.e., by April 30). The company has a maximum of three years to utilize these funds.
Non-Ongoing Projects: For non-ongoing projects, CSR funds must be spent within the same financial year. Any unspent funds must be transferred to a designated fund under Schedule VII within six months (by September 30 of the next financial year). The company must also disclose the reasons for not spending CSR funds in its Board Report.
7. CSR Activities
CSR contributions must be directed toward activities listed in Schedule VII, including:
- Education
- Health and wellness
- Environmental sustainability
- Rural development
The company must ensure that the projects align with these objectives to comply with the legal framework.
8. Carrying Forward Excess CSR Expenditure
If a company spends more than the required 2% of its net profits on CSR activities, it may carry forward the excess expenditure to offset its CSR obligations for the next three financial years.
9. Website Disclosures
To ensure transparency, companies must disclose the following on their official websites:
- Composition of the CSR Committee
- CSR Policy
- CSR Projects approved by the Board
10. Penalties for Non-Compliance
Companies failing to comply with CSR provisions, such as not transferring unspent CSR funds to the Unspent CSR Account or a designated fund, are liable to penalties:
- Company’s Liability: A penalty of twice the amount required to be transferred, or ₹1 Crore, whichever is less.
- Officers' Liability: A penalty of ₹2 Lakhs or one-tenth of the amount required to be transferred, whichever is less.
Forms for CSR Compliance with MCA
To ensure proper reporting, companies must file the following forms with the Ministry of Corporate Affairs (MCA):
- Form CSR-1: Registration of entities receiving CSR funds (required for NGOs and trusts).
- Form CSR-2: Annual CSR report submitted as part of the company’s annual financial filings.
- Form AOC-4: Financial statements, including CSR contributions.
- Form MGT-9: Extract of annual return, which includes CSR compliance details.
- Form CSR-3: Annual statement of CSR activities for companies involved in CSR projects.
CSR Expenditure Directed to Trusts: Compliance Requirements
When CSR funds are directed towards trusts, societies, or non-governmental organizations (NGOs), additional compliance requirements must be met:
- Entity Registration: Trusts and NGOs must register under Form CSR-1 to receive CSR funds.
- Verification of Activities: Ensure that the trust's activities align with the objectives set out in Schedule VII of the Companies Act, 2013.
- Monitoring Fund Utilization: Companies must establish proper monitoring mechanisms to track the use of CSR funds by trusts.
- Agreement with Trust: Formal agreements or memoranda of understanding (MoUs) should outline the terms and conditions for fund usage.
- Due Diligence: Conduct thorough due diligence on the trust’s financial health and CSR track record.
- Impact Assessment: For projects exceeding ₹10 Crores, companies must carry out an impact assessment to measure the effectiveness of CSR activities.
- Penalties: If CSR funds are misused, the company faces penalties for non-compliance, and unspent funds must be transferred to a designated fund under Schedule VII.
Audit Checklist for CSR Expenditure Before Year-End
To ensure compliance with CSR regulations and avoid penalties, companies should follow an audit checklist before the financial year-end. Below is a comprehensive CSR expenditure audit checklist:
- Verify CSR Eligibility: Confirm if the company meets the CSR thresholds (Net Worth, Turnover, Net Profit) for the current financial year.
- Ensure CSR Contribution: Ensure that 2% of average net profit is earmarked for CSR activities, based on the last three years' profits.
- Review CSR Committee: Check whether the CSR Committee is formed and properly constituted with the required number of directors (including an Independent Director if applicable).
- Monitor CSR Projects: Ensure that CSR activities are being implemented as per the CSR Policy and Annual Action Plan.
- Check Fund Transfer to Unspent CSR Account: Ensure that any unspent CSR funds are transferred to the Unspent CSR Account within 30 days from the end of the financial year (by April 30).
- Track Expenditure Against Commitments: Ensure CSR funds are utilized for the approved projects and meet the legal requirements under Schedule VII.
- Impact Assessment: For CSR projects exceeding ₹10 Crores, verify that an impact assessment is conducted.
- Ensure Timely Filings: Confirm that all necessary CSR forms (CSR-1, CSR-2, CSR-3) are filed with the MCA before deadlines.
- Ensure Transparency: Check that all CSR-related disclosures (Committee composition, Policy, Projects) are available on the company's website.
- Penalties: Ensure there are no penalties or compliance issues pending from previous years and that unspent funds are properly allocated as per Schedule VII.
Conclusion
CSR is a vital part of corporate governance, and it is imperative for companies to adhere to the legal framework to meet their obligations while contributing to social good. By aligning CSR activities with Schedule VII, maintaining proper documentation, and complying with the stipulated timelines, companies can not only avoid penalties but also make a meaningful impact on society. Strategic planning, particularly in the final months of the financial year, will help ensure that CSR funds are used effectively, that projects are completed on time, and that all forms and disclosures are submitted as required by the Ministry of Corporate Affairs (MCA).
