Corporate Social Responsibility (CSR) has evolved into a critical component of corporate governance in India. It serves as an avenue for companies to contribute to the welfare of society, while also ensuring transparency and accountability in their operations. The Companies Act, 2013 mandates CSR activities for certain categories of companies. Over time, the Ministry of Corporate Affairs (MCA) has refined the regulations surrounding CSR, addressing ambiguities and introducing amendments to streamline the process. In this article, we explore the key provisions, recent amendments, and the management of unspent CSR funds, while ensuring compliance with the latest rules.
Applicability of CSR: Understanding the Criteria
As per Section 135 of the Companies Act, 2013, CSR provisions apply to companies that meet any of the following criteria during the immediately preceding financial year:
- Net Worth: ₹500 Crores or more
- Turnover: ₹1000 Crores or more
- Net Profit: ₹5 Crores or more
Key Considerations:
Annual Assessment: The applicability of CSR is determined annually based on the financials of the immediately preceding year. If a company fulfills any of the aforementioned criteria in that year, CSR provisions become applicable for the current year.
Three-Year Rolling Average: The CSR obligations are typically assessed using the three-year average net profit, ensuring that companies consistently meeting the thresholds over multiple years continue their CSR activities.
Exemption: Companies failing to meet any of the criteria in a given year are not required to fulfill CSR obligations for that year, but they must reassess their status in subsequent years.
Recent Amendments (2023-2024)
Several significant amendments were introduced to CSR rules in 2023-2024 to enhance clarity, efficiency, and transparency. These amendments address various issues, including the filing of CSR forms, impact assessments, and eligibility of implementing agencies.
1. Extension of CSR-2 Filing Deadline (2024):
- The MCA extended the deadline for filing Form CSR-2 to December 31, 2024, allowing companies more time to comply with CSR reporting requirements. This extension ensures that companies can present accurate disclosures without compromising on compliance standards.
2. Rule 12(1B) Amendment (2024):
- A new amendment mandates that companies submit Form CSR-2 separately, with a deadline of December 31, 2024, after filing their annual financial statements. This update helps in streamlining the process and avoids discrepancies between financial reporting and CSR compliance.
3. Impact Assessment for Large CSR Projects:
- The MCA has made it compulsory for companies spending over ₹1 Crore on a CSR project to conduct an impact assessment by an independent third-party agency. The cost of the assessment may be included as part of the CSR expenditure, subject to a cap of 2% of total CSR obligations or ₹50 Lakhs, whichever is higher.
4. Widening the Scope of Eligible Implementing Agencies:
- The eligibility criteria for implementing agencies have been expanded to include Section 8 Companies, public trusts, and societies with at least three years of experience in similar CSR activities. This expansion increases the avenues available to companies for collaboration on CSR initiatives.
Impact of Rule 3(2) Deletion (2022)
A significant change introduced in September 2022 was the deletion of Rule 3(2), which previously created ambiguity in CSR applicability.
Before the Amendment:
- Rule 3(2) previously stated that companies failing to meet CSR criteria for three consecutive years could discontinue CSR activities. However, this rule conflicted with Section 135(1), which determines CSR applicability on an annual basis, creating confusion on whether CSR obligations should continue after a temporary dip in profits or turnover.
Post-Amendment (September 2022):
- The deletion of Rule 3(2) clarified that CSR provisions now depend solely on the financials of the immediately preceding year. If a company fails to meet the CSR criteria in a given year, it is exempt from CSR obligations for that year.
- This ensures that CSR applicability is assessed annually based on the financials of the immediately preceding year, making CSR compliance more fluid and responsive to changing business conditions.
Example:
- Company XYZ, which had a net profit of ₹6 Crores in FY 2021-22, would be required to fulfill CSR obligations for FY 2022-23. If its net profit drops to ₹4 Crores in FY 2022-23, the company would be exempt from CSR requirements in FY 2023-24. However, if the company’s net profit increases to ₹5 Crores in FY 2023-24, CSR provisions would apply again for FY 2024-25.
Management of Unspent CSR Funds
Proper management of unspent CSR funds is crucial for maintaining compliance and ensuring that CSR objectives are achieved. The key guidelines for managing unspent CSR funds are as follows:
Unspent CSR Funds Account:
- If a company has unspent CSR funds at the end of the financial year, these funds must be transferred to an Unspent CSR Account within six months of the financial year’s conclusion.
Utilization of Unspent Funds:
- Funds in the Unspent CSR Account should be utilized for CSR activities in the subsequent year. However, if these funds remain unspent after three years, they must be transferred to a Separate Unspent CSR Fund or to approved government funds like the Prime Minister’s National Relief Fund.
Provision for Ongoing Projects:
- For ongoing CSR projects, funds allocated in previous years can be utilized for the project’s completion, even if they span multiple financial years. There is no requirement to transfer funds to the Unspent CSR Account in such cases.
Impact Assessment:
- For CSR projects with a budget exceeding ₹1 Crore, companies must conduct an impact assessment by an independent third-party agency. The cost of conducting this assessment can be included in the CSR expenditure, subject to a cap of 2% of total CSR obligations or ₹50 Lakhs, whichever is higher.
Conclusion: Best Practices for CSR Compliance
The amendments introduced in 2023 and 2024 provide clearer guidelines for companies to manage their CSR obligations and activities. By focusing on impact assessments, transparent reporting, and proper management of unspent funds, companies can ensure they meet their CSR obligations effectively.
To avoid any defaults, companies should:
- Reassess their CSR obligations annually based on the preceding year's financials.
- Ensure all unspent CSR funds are transferred to the Unspent CSR Account within six months.
- Prioritize projects that align with the company’s CSR strategy and ensure compliance with the new guidelines on impact assessments.
By staying proactive and compliant with the latest rules, companies not only fulfill their legal obligations but also contribute meaningfully to society, making CSR an integral part of their corporate ethos.
