Key Takeaways
- Legal Requirement: Companies meeting specific financial thresholds must spend 2% of average net profits on CSR
- Board Responsibilities: Policy approval, financial allocation, reporting compliance
- Committee Duties: Policy formulation, implementation, monitoring, impact assessment
Are you struggling to navigate the complex requirements of Corporate Social Responsibility under the Companies Act 2013? This comprehensive guide breaks down exactly what your Board and CSR Committee need to do to ensure full compliance while creating meaningful social impact.
Who Needs a CSR Committee in India?
Under Section 135 of the Companies Act 2013, your company must constitute a CSR Committee if it meets any of these financial thresholds during the preceding financial year:
- Net worth of ₹500 crore or more
- Turnover of ₹1,000 crore or more
- Net profit of ₹5 crore or more
This requirement affects thousands of companies across India, making CSR governance a critical compliance matter for corporate leaders.
Board of Directors: Legal CSR Responsibilities
Committee Formation Requirements
The Board must constitute a CSR Committee with specific composition requirements:
- Minimum three directors with at least one independent director
- For Companies having no independent director requirement, minimum two directors
Policy and Financial Obligations
Your Board holds ultimate responsibility for:
- Policy Approval: Reviewing and approving the CSR Policy recommended by the Committee and updation of same on website of Company
- Financial Allocation: Ensuring expenditure of at least 2% of average net profits from the three immediately preceding financial years
- Annual Action Plan: Board shall approve the Annual Action Plan as recommended by CSR Committee or alter such plan as per recommendation of CSR Committee, with justification.
- Local Area Preference: Giving priority to the company’s operational areas when allocating CSR funds
- Justification for Shortfalls: Providing explanations in the Board’s Report if the company fails to spend the required amount
- Administrative overheads: It shall not exceed 5% of total CSR expenditure
- Set off: If the Company spends amount in excess of the requirement, Board may pass a resolution to set off the excess amount upto 3 FY.
- Appointment of Independent Agency for undertaking Impact Assessment: Board shall approve the appointment as recommended by the CSR Committee.
Compliance and Reporting Duties
The Board must ensure:
- Disclosure of CSR Committee composition in the Board’s Report
- Publication of the CSR Policy on the company website
- Annual reporting on CSR activities in the prescribed format
- Activities in CSR Policy are undertaken by the Company itself or through Section 8 Company or registered public trust or registered society, having prescribed registrations or through any entity established under an Act of Parliament or a State legislature
- Transfer of unspent amounts to designated accounts or funds within statutory timeframes
- Funds so disbursed have been utilised for the purposes and
in the manner as approved by it - Monitor the implementation of the ongoing project and make modifications for smooth implementation
- Proper handling of capital assets created through CSR projects
CSR Committee: Implementation Responsibilities
Strategic Planning Requirements
The Committee must develop and present to the Board:
- CSR Policy: A comprehensive policy document outlining the company’s CSR approach and activities to be undertaken
- Annual Action Plan: Detailed implementation roadmap including:
- Project list aligned with Schedule VII activities
- Execution methodology
- Fund utilization protocols
- Implementation schedules
- Monitoring mechanisms
- Impact Assessment for the project
Budget and Project Management
The Committee is responsible for:
- Recommending appropriate CSR expenditure amounts
- Monitoring CSR Policy
- Defining project timelines (maximum three years excluding commencement year)
- Recommending transfer of unspent amount
- Suggesting modifications to initiatives when necessary
Impact Assessment and Reporting
Company having average CSR obligation of 10 crore rupees or more in 3 immediately preceding FY, shall undertake impact assessment of their projects having outlay of Rs. 1 crore or more. The Committee must:
- Commission independent impact assessments
- Incorporate findings into future planning
- Report assessment results to the Board and stakeholders
Common Compliance Challenges and Solutions
Challenge: Unspent CSR Funds
Solution: Establish clear procedures for transferring unspent amounts to:
- Special Unspent CSR Account (for ongoing projects) within 30 days of fiscal year end
- Schedule VII funds (for other unspent amounts) within six months
Challenge: Administrative Overhead Limits
Solution: Implement accounting systems to track administrative expenses, ensuring they remain below the 5% cap of total CSR expenditure.
Challenge: Surplus Funds Management
Solution: Create protocols for reinvesting surplus into the same project or transferring to appropriate statutory accounts.
Meetings of CSR Committee
It is recommended to conduct atleast 2 meetings of CSR Committee:
- 1st Meeting (recommended to be held in first quarter): Review the annual report on CSR for the FY ended {___} and recommend the activities (annual action plan) and expenditure to be undertaken for the FY, to the Board. Place before the Committee the Certificate by CFO certifying that the funds disbursed by the Company towards CSR activities have been utilised for the purpose and in the manner as approved by the CSR Committee and Board.
- 2nd Meeting (recommended to be held in last quarter): Review the activities undertaken by the Company as per annual action plan and approve a tentative budget for next FY till finalisation of Annual Accounts.
Expert Tips for Effective CSR Governance
- Document Everything: Maintain comprehensive records of all CSR decisions, expenditures, and impact metrics
- Integrate with Business Strategy: Align CSR initiatives with core business competencies for maximum effectiveness
- Stakeholder Engagement: Regularly consult with community beneficiaries to ensure relevance of programs
- Transparent Reporting: Go beyond compliance with detailed disclosure of outcomes and challenges
- Board-Committee Synergy: Establish clear communication channels between Board and CSR Committee
Conclusion
Effective CSR governance under the Companies Act 2013 requires careful delineation of roles between the Board and CSR Committee. By understanding these distinct yet complementary responsibilities, your company can not only achieve compliance but also create meaningful social impact while enhancing corporate reputation.
Frequently Asked Questions
Q: Is impact assessment mandatory for all companies?
A: Impact assessment is required only for companies with average CSR obligation of ₹10 crore or more in the preceding three financial years.
Q: Can unspent CSR amounts be carried forward?
A: Unspent amounts must be transferred to special accounts or designated funds within specified timeframes, not simply carried forward.
Q. Can Company undertaking impact assessment book the expenditure towards CSR?
A. Company may book expenditure upto 2% of the total CSR expenditure for that FY or Rs. 50 Lacs, whichever is higher.
Q: Can CSR projects extend beyond three years?
A: Ongoing projects must be completed within three years excluding the financial year of commencement.
Q. Can a Company collaborate with other companies for undertaking CSR activities?
A. Company may collaborate in such a manner that the CSR committees of respective companies are in a position to report separately on such projects.
Call to Action
- It is the time to conduct your Company’s first CSR Committee Meeting of the Financial Year
- Get a Certificate on compliance of CSR from your CFO
- Prepare Annual Report on CSR
- Finalise the activities and amount of expenditure to be undertaken in the Financial Year 2025-26
Disclaimer: This article provides general information about CSR requirements under the Companies Act 2013 and should not be construed as legal advice. Companies should consult qualified legal professionals for specific guidance on compliance matters.
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