In the Report of the High-Level Committee on Corporate Social Responsibility dated August 7, 2019, the Committee had given many recommendations. In its recommendation the committee recommended the following:
The reporting for CSR needs to be strengthened, with enhanced disclosures for better information dissemination with respect to selection of projects, locations, implementing agencies to facilitate better monitoring.
In view of the recommendation of the Committee, the Ministry of Corporate Affairs introduced Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021. The said rules came into effect on January 22, 2021. Rule 8 of the said rules, makes it mandatory for companies to annex to the Board’s Report an annual report on CSR containing disclosures specified in Annexure I (for Board Report of FY 2019-2020) or Annexure-II (for Board Report of FY 2020-2021 and onwards).
In this article, we are going to discuss the contents of the annual report on CSR which is a mandatory annexure of the Board’s Report. Annexure-II is a format for the Annual Report on CSR Activities to be included in the Board’s Report for Financial Year commencing on or after the 1st day of April 2020.
1. A brief outline on the CSR Policy of the Company.
In this segment of the report, companies are expected to elaborate on the philosophy behind the CSR Policy implemented by the Company. CSR activities undertaken by the company are expected to be in line with the philosophy which the management of the company follows which encompasses holistic community development, institution-building, and sustainability-related initiatives.
2. Composition of CSR Committee
As per Rule 5 of the amended rules, companies eligible for CSR expenditure shall form a CSR committee with at least two directors, one of whom shall be an Independent Director (where ID is appointed in the Company under Section 149 of the Act).
However, as per Section 135(9), where the CSR obligation of the company is less than 50 lakhs then the constitution of the CSR Committee is not mandatory and the function of the CSR committee should be discharged by the Board of such company.
HLC in its report has suggested the inclusion of a CSR Expert in the CSR Committee constituted by companies.
In this section, companies are required to mention the composition of the CSR committees along with other details such as the name and designation of directors, number of CSR committee meetings held during the year, and attendance of each director in committee meetings.
In the case where a company has not constituted a CSR Committee (where CSR obligation is less than 50 lakhs) disclosure to that effect may be made in this section of the report.
3. web-link where the Composition of the CSR committee, CSR Policy, and CSR projects approved by the board are disclosed on the website of the company.
According to Rule 9 of the amended CSR Rules, if the Company has a website, it should disclose the following on the website of the Company:
i. the composition of the CSR Committee
ii. CSR Policy approved by the Board
iii. Projects approved by the Board.
Weblink, where the above—mentioned data is uploaded, shall be disclosed in this section of the report.
If the Company does not have a website, then disclosure to that effect may be made in this section.
4. the details of Impact Assessment of CSR projects, if applicable
Companies having the average obligation of at least 10 crores in the three immediately preceding years shall carry out Impact Assessment of their CSR Projects through an Independent Agency. It may be noted that such assessment of only the following projects needs to be carried out:
i. projects having an outlay of a minimum of 1 Crore and
ii. projects which are completed at least 1 year before undertaking the impact study.
The condition for qualifying for impact assessment for projects is dual.
Also, Impact Assessment Report is required to be placed before the Board and annexed to the annual report on CSR. A company carrying Impact Assessment may book expenditure towards CSR for that financial year, not exceeding 5 percent of total CSR expenditure for that financial year or 50 lakhs whichever is lower.
E.g. If the Company has a CSR obligation of 12 crores and expenditure on carrying Impact Assessment is 65 lakhs. Then maximum permissible expenditure for carrying Impact Assessment would be 50 lakhs being lower than 60lakhs ( 5% of 12 crores) and 50 lakhs.
5. Details of the amount available for set off and the amount required for set off for the financial year, if any
Rule 7(3) of the amended rule enables companies who have spent an excess of CSR obligation, such excess amount may be set off against the CSR obligation of immediate succeeding three financial years subject to the following conditions:
Conditions:
i. If the company accrues any income from the CSR activity, then such accrued income shall not form part of business profit but shall be used for performing CSR activities. Further, the accrued income spent by the company as a CSR shall not be eligible for set off from the future obligation of CSR.
ii. Board Resolution to be passed by the Board.
6. Average net profit of the company as per section 135(5).
A Company eligible under Section 135(1) shall spend at least 2 percent of the average net profits of the company made during the three immediately preceding FY (during such period of time after the incorporation where three years have not elapsed after its incorporation).
It should be noted the net profit should be calculated as per Section 198 of the Companies Act, 2013.
7. Total CSR obligation of the company
While calculating CSR obligation credit shall be given for the following:
7(a). Two percent of the average net profit of the company as per section 135(5)
7(b). Income accrued from CSR Activity undertaken by the Company
The following shall be deducted from the above CSR obligation:
7(c). Set off available from the excess amount spent by the company during the three preceding financial years.
Formula for calculating CSR Obligation= 7(a) + 7(b) – 7(c)
8. CSR amount spent or unspent for the financial year:
In this section of report reporting company is required to disclose the following:
i. Total CSR amount spent for the financial year under section 135(5)
ii. The amount remaining to be spent and transferred to Unspent CSR Account as per Section 135(6) or Amount transferred to any fund specified under Schedule VII as per the second proviso to section 135(5).
iii. Details of CSR amount spent against other than ongoing projects for the financial year:
iv. Amount spent on Administrative Overheads
v. Amount spent on Impact Assessment, if applicable
vi. Total amount spent for the Financial Year (8b+8c+8d+8e)
vii. Excess amount for set-off, if any
Treatment of unspent CSR amount:
the amount is remaining to spend on an account of on-going projects
If the Company has contributed to a project which may take more than one year to complete and require funding in multiple phases and any amount is due for funding after the end of the financial year then such unspent amount which due for funding shall be transferred to a special account opened by the Company to be called Unspent Social Responsibility Account, within a period of thirty days from the end of the financial year.
e.g. If ABC Limited decides to contribute Rs. 50 crores in the FY 2020-2021 for construction of multipurpose hospital which is going to take 3 years to complete and requires funding in 3 years i.e. 20 crores in FY 20-21, 20 crores in FY 21-22 and 10 crores in FY 22-23.
Now, the Company should transfer a total of 30 crores to Unspent CSR Account, which is to be funded/spent in 21-22 and 22-23 before 30th April 2021.
In any other case, the amount is remaining to be spent
If any amount is remaining to spend on CSR, not because of ongoing projects, then such unspent CSR amount shall be transferred to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
e.g. If ABC fails to spend Rs. 1 crore out of its total CSR obligation for FY 2020-21, then such unspent CSR amount should be transferred to any Fund specified in Schedule VII before 30th September 2021.
Funds specified in Schedule VII of the Companies Act, 2013.
i. Swachh Bharat Kosh
ii. Clean Ganga Fund
iii. Prime Minister’s National Relief Fund (PMNRF)
iv. Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)
v. Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities, and women.
Administrative overheads:
As per Rule 7(1) of the amended CSR Rules, administrative overheads on CSR activities undertaken by the company shall not exceed 5 percent of the total CSR expenditure of the company for the financial year.
Impact Assessment:
Already discussed in point 4.
The total amount spent on CSR for the FY shall be equal to
Total amount spent on ongoing projects
(Plus) total amount spent on other than ongoing projects
(Minus) admin overheads
(Minus) the cost incurred on Impact Assessment.
Calculation of excess amount for set-off
The amount of set-off from the CSR obligation can be calculated as under
| Particulars | Amount | |
| Statutory CSR obligation of the company as per section 135(5) | X | |
| Minus (-) | Total amount spent on CSR for the FY, as explained above | Y |
| Total | Excess amount spent for the FY (X-Y) | Z |
| Minus (-) | Income earned out of CSR activities undertaken by the Company | P |
| Total | The amount available for set off in succeeding FY (Z-P) | Q |
9. Details of preceding years regarding ongoing projects and amount lying in Unspent CSR Account:
In this section of the report, the following two things need to be disclosed
i. Details of Unspent CSR amount for the preceding three financial years
Previously, comply or explain was the basis of CSR Compliance. Under the earlier framework Directors of the Company were to explain in Board’s Report reasons for non-spending of entire CSR Obligation by the Company for the Financial Year. As per the amended Rules along with the reason for non-spending companies are also liable to transfer such unspent amount to funds specified in Schedule VII.
If the Company fails to spend amount lying in Unspent CSR Account within 3 years of transfer to such account shall mandatorily transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
It may be noted that companies having unspent amounts before FY 2020-2021 need not be mentioned as the same was not required to be compulsorily transferred to Schedule VII funds. However, companies that have created provisions for CSR spending during the FY before 2020-21, need to transfer such provisions to the Schedule VII funds.
ii. Details of CSR amount spent in the financial year for ongoing projects of the preceding financial year(s)
If the Company has transferred unspent CSR amount relating to Ongoing projects to Unspent CSR Account, then such amount needs to be spent within 3 years of such transfer.
Details of the amount spent on ongoing projects shall be given in this section of the Report.
Also, a company may allocate numbers to Identify projects which may be called Project ID.
10. Details of Capital Assets acquired by the company through CSR spent in the Financial Year:
As per Rule 7(3) of amended CSR Rules, a company may spend an amount out of the CSR obligation for the FY on acquisition or creation of capital assets subject to the following conditions:
Conditions:
A capital asset may be created in the name of the following:
i. Section 8 company, a Registered Public Trust or Registered Society
The above entities should have a charitable object and CSR Registration Number. The CSR Registration Number is issued by the MCA.
ii. beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
iii. a public authority.
It may be noted that any asset created by the company out of its CSR obligation before January 22, 2021, should comply with the above conditions before six months from commencement of the amended CSR Rules i.e. before September 17, 2021.
Further, a capital asset owned by the company may be transferred after September 17, 2021, but before December 16, 2021, subject to the following condition:
Condition:
i. The Board shall pass a Board Resolution to extend the timeline of 6 months prescribed in the amended Rules.
ii. Justification for extension of the time limit should be given in the said Board Resolution.
In this section of the report, the company is required to give asset-wise details.
11. Justification for non-spending of entire CSR obligation during the Financial Year:
As per the second proviso to Section 135(5), the Board of the Company shall mandatorily give justification for non-spending of entire CSR obligation during the Financial Year.
12. Singing of Annual Report on CSR:
The annual report on CSR shall be signed by the following:
i. Chief Executive Officer or Managing Director or Director
ii. Chairman CSR Committee
In the case of a Foreign Company, the report shall be signed by a resident individual who is nominated by such Foreign Company under Section 380(1) of the Companies Act, 2013.
Download format for the Annual Report on CSR
******
Although reasonable care is taken in drawing the above analysis, nothing mentioned above shall be considered as the legal opinion of the author. The author is an Associate Member of the Institute of Company Secretaries of India (ICSI). In case any further assistance is needed, the author can be contacted at waghabhi2@gmail.com or +919702908418.
Author Bio
Very informative article.
Thank you Sarvesh.