Unpacking India’s CSR Law
The rules and regulations on corporate social responsibility in India are constantly changing. Companies must keep pace to understand these updates and amend their CSR programs accordingly.
India’s Ministry of Corporate Affairs released new guidance on their corporate social responsibility (CSR) law, which legally mandates that companies spend two percent of their average net profit for the past three years on CSR activities. The CSR rules in Section 135 of India’s Companies Act, 2013 provide a broad framework for companies to undertake CSR activities. While the Ministry has passed several amendments to clarify these rules, including the Companies (CSR Policy) Rules, 2014, Amendment Act 2019, Amendment Act 2020, and Amendment Act 2021 many companies have continued to struggle with vague and irregular provisions around CSR implementation, unspent funds, and administrative overheads, among other provisions.
In August 2021, the Ministry of Corporate Affairs published an annexure on Frequently Asked Questions (FAQs) on Corporate Social Responsibility (CSR) to further clarify the CSR provisions and reduce any ambiguity. The new guidelines may have a substantial impact on CSR programs across India. It is particularly important for companies to understand these updates and amend their CSR programs accordingly to comply with the new requirements. Additionally, nonprofits acting as implementing agencies should work closely with companies to ensure their CSR spending and reporting requirements are satisfied.
1. Clarifying ‘Administrative Overheads’
The 2021 amendment introduced ‘Administrative Overheads’ as a new term defined as ‘general management and administration’ of CSR functions in the company. The definition excludes expenses directly incurred for designing, implementation, monitoring, and evaluation of a particular CSR project. The FAQ Annexure clarifies this definition with examples of costs that qualify as administrative overheads including employee costs, utilities, office supplies, legal expenses, etc. Notably, administrative expenses incurred by implementing agencies are not considered administrative overheads. The maximum limit for administrative overheads is 5% of the total CSR expenditure of the company for the financial year.
2. There are three approved ways that a company can incur its CSR expenses.
- Activities - Companies can undertake CSR projects or programs directly or through an implementing agency. The full list of approved activities including eradication of poverty, gender equality, education, etc. is outlined in Schedule VII of the Companies Act, 2013.
- Contribution to a fund - Companies can make a contribution to an approved fund set up by the Central Government. The full list of approved funds is outlined in Schedule VII of the Companies Act, 2013.
- Contribution to incubators and Research and Development (R&D) projects - Companies can make a contribution to an institution or organization engaged in research and development, including publicly funded universities. The full list of approved R&D activities is outlined in Schedule VII of the Companies Act, 2013.
3. A company can implement CSR programs directly or through an implementing agency
Under the 2021 amendment, a company is allowed to undertake its CSR implementation either by itself or through another company established under Section 8 of the Companies Act, a registered public trust or a registered society established by the company itself, by the Central Government or State Government, or registered under section 12A and 80G of the Income Tax Act, 1961.
4. Every implementing agency must be registered with the Central Government
All implementing agencies intending to undertake CSR activities must register themselves with the Central Government by filing form CSR-1 electronically. Approved agencies are listed on the MCA21 portal, a database aimed to improve accountability and transparency of CSR activities. International organizations are not permitted to serve as implementing agencies.
5. Simply disbursing funds to an implementing agency does not fulfill CSR requirements
This guideline is perhaps the most consequential update to India’s CSR rules. CSR compliance is fulfilled when a company spends 2% of its average net profit over the past three financial years. They can do this directly or engage with an implementing agency. The implementing agency acts on behalf of the company and must utilize the full amount in order to comply with CSR requirements. If a company and/or implementing agency has not spent the required amount, the Board must specify the reason in a report and transfer the unspent amount to a bank account earmarked for CSR spending or make a contribution to an approved fund within 6 months from the end of the financial year.
6. Impact assessments are mandatory for companies over a certain net profit threshold
Starting in January 2021, companies with an average CSR requirement of Rs. 10 crore or more must undertake an impact assessment of their CSR projects. The assessment must be conducted by an independent agency and any administrative expenses incurred fall outside of the 5% administrative overhead cap.
7. CSR reporting and disclosure is mandatory
Companies must report CSR activities and impact assessments in their annual Board Report. Additionally, companies must disclose the composition of their CSR Committee, CSR Policy, and projects approved by the Board on their company website for public access. This also applies to foreign companies!
The rules and regulations on corporate social responsibility in India are constantly changing. Beyond keeping up to date with the latest regulations, it is important for companies to evaluate their current CSR programs and work closely with implementing agencies, if applicable, to ensure appropriate spending, monitoring, and reporting occurs. CAF America works to ensure we maintain full legal compliance with Indian laws and we keep abreast of the ever-changing regulatory environment impacting Indian nonprofits. If you have any questions about navigating these rules or building your CSR programs, CAF America and our partner, CAF India, remain at your service to help bring your philanthropic vision to life.
About the authors:
Jessie Krafft serves as the Senior Vice President of External Affairs. She is a leading expert in international grantmaking from the U.S. and Canada as well as in local country laws on foreign funding.