Discuss the policy guidelines regarding Quantum of Corporate Social Responsibility (CSR) spending and transfer of the unspent amount in a particular year.

Q. Discuss the policy guidelines regarding Quantum of Corporate Social Responsibility (CSR) spending and transfer of the unspent amount in a particular year.

Corporate Social Responsibility (CSR) has emerged as a significant area of focus for businesses, particularly in India, where CSR regulations were formalized under the Companies Act, 2013. The law stipulates mandatory CSR spending for certain categories of companies, thus transforming CSR from a voluntary act to a legal obligation. However, there has been considerable debate and discussion surrounding the quantum of CSR spending and the treatment of unspent CSR funds. The Ministry of Corporate Affairs (MCA) has introduced various guidelines to govern these aspects, aiming to ensure transparency, accountability, and effective utilization of funds. In this discussion, we will delve into the policy guidelines that define the quantum of CSR spending, the reporting requirements, and the treatment of unspent CSR amounts, as outlined by the Indian government and regulatory authorities.

1. Overview of CSR Regulations under the Companies Act, 2013

The Companies Act, 2013, introduced a landmark provision by mandating that certain categories of companies in India must allocate a portion of their profits toward CSR activities. Section 135 of the Act specifies the conditions under which a company is obligated to undertake CSR. These conditions apply to companies meeting any of the following criteria during a financial year:

A company with a net worth of ₹500 crore or more.
A company with an annual turnover of ₹1,000 crore or more.
A company with a net profit of ₹5 crore or more.

For such companies, CSR is no longer an optional activity; they are legally required to contribute to activities that benefit society. The Act also established the CSR Committee, which is tasked with overseeing the implementation of CSR policies, planning, and allocation of funds. The total quantum of CSR expenditure is defined as 2% of the average net profit of the company during the three immediately preceding financial years.

The Companies (Corporate Social Responsibility Policy) Rules, 2014, which were notified under the Companies Act, provide a more detailed framework regarding the quantum of CSR expenditure and the use of unspent funds, while also outlining how companies can track their compliance with CSR requirements.

2. Quantum of CSR Spending

The quantum of CSR spending is determined by calculating 2% of the average net profit made by a company during the three preceding financial years. To calculate the average net profit, the company must consider the profit before tax (PBT) as per its financial statements. Net profit is calculated after accounting for taxes, as specified under the Income Tax Act, 1961. The calculation process is important because it ensures that the CSR spending is directly proportional to the company’s profitability, reflecting its ability to contribute to societal welfare.

For the calculation of net profit, the following items are excluded from the profit calculation:

Any profits from activities carried out outside India.
Any income from overseas sources.
Dividend income from subsidiary companies.
Any other profit or loss arising from unusual or non-operating activities.

If the company is unable to spend the entire amount prescribed for CSR activities, it is required to provide an explanation in the Board Report. Additionally, the company must clearly state the reasons why the CSR amount was not fully utilized during the financial year. However, the mandatory spending requirement applies only to those companies that fall within the specific financial thresholds, as mentioned earlier.

3. CSR Expenditure Allocation and Eligible Activities

Once the quantum of CSR spending is determined, the company is required to allocate funds for activities that align with the prescribed Schedule VII of the Companies Act, which outlines eligible CSR activities. These activities broadly encompass the following areas:

Eradicating hunger, poverty, and malnutrition.
Promoting education, including technical education.
Promoting gender equality, empowering women, and the welfare of marginalized communities.
Ensuring environmental sustainability, conservation of natural resources, and promoting biodiversity.
Protecting national heritage, promoting cultural diversity, and supporting the preservation of monuments and artifacts.
Health and sanitation services, including the provision of affordable medical treatment.
Supporting rural development projects, infrastructure development, and providing safe drinking water.
Promoting animal welfare and animal husbandry.
Research and innovation in science and technology.
Contribution to government funds aimed at disaster relief.

The policy guidelines also stress that the CSR expenditure should not be directed toward activities that the company is required to undertake by law, nor should it include any political donations or personal benefits to the company’s stakeholders. Therefore, companies must ensure that their CSR activities have a clear societal or environmental benefit.

4. Transfer of Unspent CSR Funds

One of the most significant aspects of CSR spending is the treatment of unspent funds. The Companies Act and the CSR Rules provide guidelines on how unspent CSR funds should be handled, with the goal of ensuring that these funds are used for their intended purpose in a transparent and accountable manner.

Transfer to a Special Account or Fund

If a company fails to spend the full 2% of its average net profits during a financial year, it must transfer the unspent amount to a special account known as the CSR Unspent Account. This account is governed under Rule 8 of the Companies (Corporate Social Responsibility Policy) Rules, 2014. The rules stipulate that the company must transfer any unspent CSR funds from the current year to this account within six months from the end of the financial year in which the CSR funds were allocated. This amount should be carried forward and used for CSR activities in the subsequent year.

Reason for Non-Utilization

In cases where CSR funds are unspent, the company must provide an explanation in its annual report or Board Report. If the unspent amount is more than the prescribed 2% of the company’s average profits, the Board must offer a detailed justification for the non-expenditure. The report must outline why the CSR projects were not executed, and what actions are being taken to ensure the funds are utilized in the future.

Unspent Funds for Ongoing Projects

In instances where CSR funds have been allocated to a specific project but are unspent in a given year, the company can carry forward the unspent amount into the next financial year. The company is also permitted to use the funds for the same project in the following year, as long as the project continues to meet the objectives specified in the original CSR plan.

In the case of long-term projects that extend over multiple years, companies are permitted to budget CSR funds over the entire project period. As long as the company can demonstrate that the funds were allocated and utilized effectively over the period of the project, the unspent funds can be carried forward year over year.

Transfer to a Fund Specified by the Government

According to the revised CSR Rules issued by the MCA in 2021, companies that are unable to utilize the CSR funds for a particular year must transfer the unspent amount to any of the specified government funds. These funds include:

The Prime Minister’s National Relief Fund (PMNRF).
The Clean Ganga Fund.
The Swachh Bharat Kosh.
The National Fund for Control of Drug Abuse.

This provision ensures that any unspent CSR funds are directed toward critical areas of social welfare and disaster relief. The transfer of funds to government-managed relief or development programs can also help companies demonstrate their commitment to national causes while fulfilling their CSR obligations.

However, the company’s CSR committee must provide a reason for not utilizing the funds on its own projects and indicate that the transferred amount is being used in alignment with the company’s CSR objectives.

5. CSR Reporting and Disclosures

Companies are required to report their CSR activities and spending through their annual reports. The annual report should include details on CSR initiatives undertaken during the year, the financial outlay for each initiative, and the amount spent on each activity. The report should also include an explanation of any unspent CSR funds and a statement detailing how these funds will be used in the future.

Furthermore, the company must disclose whether the CSR expenditure has been in line with the board-approved CSR policy, including detailed information on any discrepancies. A comprehensive CSR policy document must also be available for public viewing, which contains the company’s CSR objectives, strategies, and guidelines for fund allocation and spending.

CSR Audits

In cases where the CSR spending crosses a threshold amount, companies may be required to undergo an external audit to assess whether the CSR funds were spent in accordance with the objectives set out in the CSR policy. These audits are designed to ensure the accuracy of CSR reporting and to prevent any misuse of CSR funds.

6. Penalties for Non-Compliance

If a company fails to comply with the CSR spending requirements or mismanages the funds, it may face penalties. Non-compliance can result in a fine, ranging from ₹50,000 to ₹25,00,000, along with imprisonment for the company’s officers responsible for the CSR activities. However, the law allows for significant flexibility in how companies can spend their CSR funds, so long as they adhere to the guidelines and meet the minimum required spending.

Conclusion

The CSR policy guidelines regarding the quantum of CSR spending and the transfer of unspent funds reflect the Indian government’s commitment to ensuring that businesses contribute meaningfully to social and environmental causes. The law has effectively increased corporate accountability and made CSR a more structured and formalized part of business operations. Companies are now required to spend a certain percentage of their profits on CSR activities, and the guidelines for unspent funds ensure that any unused amounts are not wasted but are directed toward important causes or carried forward for future use. By setting clear expectations and providing frameworks for reporting and compliance, these policy guidelines aim to make CSR activities more impactful and transparent, fostering a culture of corporate responsibility in India.