CSR Compliance and Impact Assessment under the Companies Act

CSR Compliance and Impact Assessment under the Companies Act#

The Mandatory CSR Framework#

Under Section 135 of the Companies Act, 2013, Corporate Social Responsibility (CSR) is not philanthropy—it is a statutory obligation. Companies meeting certain thresholds (Net Worth > Rs. 500 Cr, OR Turnover > Rs. 1000 Cr, OR Net Profit > Rs. 5 Cr) must spend at least 2% of their average net profits of the preceding three years on CSR activities.

Recently, the Ministry of Corporate Affairs (MCA) has completely overhauled the CSR rules, shifting from a "comply or explain" approach to a strict penal regime.

Treatment of Unspent CSR Funds#

Previously, if a company failed to spend its 2% quota, it simply stated the reasons in the Board's Report. That is no longer allowed.

Now, at the end of the financial year, unspent CSR funds must be categorized:

1. Ongoing Projects: If the unspent amount relates to an ongoing multi-year project, it must be transferred to a special bank account called the "Unspent CSR Account" within 30 days of the financial year-end. It must then be spent within the next three financial years.
2. Other Unspent Funds: If there is no ongoing project, the unspent amount must be transferred to a government fund specified in Schedule VII (like the Prime Minister's National Relief Fund) within 6 months of the financial year-end.

The Rule of Impact Assessment#

To ensure that CSR funds are actually creating social value rather than just ticking a compliance box, the MCA introduced mandatory Impact Assessments.

Who needs it? Any company with an average CSR obligation of Rs. 10 Crore or more in the preceding three financial years must undertake an independent impact assessment.

Which projects? The assessment must be conducted for all CSR projects that have an outlay of Rs. 1 Crore or more, and which have completed one year.

Who conducts it? The assessment must be conducted by an independent agency, not by the company's internal team or the implementing NGO. The impact assessment report must be placed before the Board and annexed to the annual report.

Implementing Agencies and Form CSR-1#

Companies rarely execute CSR projects themselves; they use implementing agencies (NGOs, Trusts, Section 8 Companies). To weed out fraudulent NGOs, the government mandated that every implementing agency must register with the MCA by filing Form CSR-1.

Companies can only disburse CSR funds to agencies that hold a valid CSR Registration Number.

Penalties for Default#

The penalties for CSR defaults are severe. The company is liable for a penalty of twice the unspent amount (capped at Rs. 1 Crore). Additionally, every defaulting officer (including Directors) is liable for a penalty of 1/10th of the unspent amount (capped at Rs. 2 Lakhs).

Robust CSR governance—from selecting the right implementing agency to tracking utilization—is now a critical board-level responsibility.

Who Is Covered by Section 135#

The applicability tests above are alternatives: a company that meets any one of the net worth, turnover or net profit thresholds is covered. How long coverage continues after a company stops meeting the tests is set by the Act and rules, so check that before deciding a company has fallen out of the net.

Coverage also brings in board-level governance. The Act and rules contemplate a CSR committee of the board, a CSR policy, and an annual action plan. For the exact composition of the committee and any special position for smaller boards, refer to the current Act and rules, since they have been amended more than once.

How the 2% Obligation Is Worked Out#

The obligation is 2% of the average net profit of the preceding three financial years, as stated above. A simple illustration, using made-up numbers:

• Net profit in year one: Rs. 8 Crore
• Net profit in year two: Rs. 10 Crore
• Net profit in year three: Rs. 12 Crore
• Average: Rs. 10 Crore
• 2% of the average: Rs. 20 Lakh

Net profit for this purpose is computed by the method the Act and rules prescribe, which is not necessarily the profit shown in the profit and loss account. Have the computation checked, including the treatment of items that are excluded.

Year-End Flow for Unspent Funds#

The unspent amount at year end follows one of the two routes already described.

1. Compute the required 2% and compare it with actual CSR spend.
2. Identify whether any shortfall relates to an ongoing project.
3. If it does, move the amount to the Unspent CSR Account within the period described above, and track its use over the following three years.
4. If it does not, transfer it to a Schedule VII fund within the period described above.
5. Record the position in the Board's Report, as the rules require.

Set a calendar reminder at each financial year end so neither deadline is missed.

Step-by-Step Implementation Plan#

1. Confirm applicability for the year by checking the thresholds.
2. Constitute the CSR committee and approve a CSR policy.
3. Approve an annual action plan listing projects, budget, implementation method and monitoring.
4. Choose implementing agencies and confirm each holds a valid CSR Registration Number under Form CSR-1.
5. Sign written agreements describing deliverables, timelines, reporting and use of funds.
6. Disburse in tranches tied to milestones, and collect utilisation reports and supporting invoices.
7. Monitor through site visits or third-party checks, especially for larger projects.
8. Assess impact where the Rs. 10 Crore and Rs. 1 Crore tests described above are met.
9. Report in the Board's Report and the annual filings.

Points Where the Position Needs Care#

• Ongoing versus other projects. Whether a project qualifies as "ongoing" can be a judgment call for multi-year work. Document why you classified it the way you did.
• Eligible activities. Only activities that fall within Schedule VII count. Where an activity sits at the boundary, get advice before spending.
• Impact assessment cost. How the cost of an assessment is treated is governed by the current rules. Check the provision rather than assuming.

Common Mistakes to Avoid#

• Paying an NGO before verifying its CSR registration.
• Leaving unspent funds to be explained in the Board's Report instead of transferring them.
• Missing the year-end transfer deadlines because no one owns the calendar.
• Basing the CSR computation on a rough profit figure instead of the prescribed method.
• Not keeping utilisation evidence, so the Board cannot show where the money went.

Practical Checklist#

• Applicability confirmed for the year.
• Committee and policy in place.
• Annual action plan approved by the board.
• Every implementing agency verified.
• Agreements and utilisation reports on file.
• Year-end unspent position classified and transferred on time.
• Impact assessment scheduled where required.

This article is general information on the Companies Act, 2013. CSR rules have been amended several times, so consult a qualified professional to confirm the current position for your company.