India has come a long way since its independence in terms of social, political and economic development. However, it continues to grapple with issues of inclusiveness, equity and sustainable growth; this has a strong underlying impact on the country’s business environment. In light of this, the Indian Government amended the Companies Act to mandate companies to make investments for the cause of the betterment of society. With this, India became the first country in the world to legislate Corporate Social Responsibility.
Section 135 of the Companies Act, 2013 (henceforth, the Act) requires every company, public or private, with net worth of INR5 billion/turnover of INR10 billion or net profit of INR50 million, to spend, in every financial year, at least 2% of its average net profits made during three immediately preceding financial years on CSR, in pursuance of its stated CSR policy.
Although CSR is a familiar concept in India, this Act brings it to the top of our boardroom agendas. The Act not only stresses on constructive intervention in CSR, but also creates a platform for companies to gain a competitive edge through CSR and sustainability.
According to the Indian Institute of Corporate Affairs, about 6,000 Indian companies will be required to undertake CSR projects to comply with the new guidelines. Also, since most of the companies are undertaking CSR initiatives for the first time, it is imperative for them to understand the nuances of the Act. To begin with, they need to ascertain whether CSR compliance requirement is applicable to them or not. If applicable, they need to set up a CSR Committee of the Board, develop a CSR policy and implementation framework, undertake CSR projects as per stated CSR policy and submit an annual CSR report in the prescribed format to the Indian Ministry of Corporate Affairs.
The key requirements relating to CSR under the Act and under the Companies (Corporate Social Responsibility Policy) Rules, 2014 are:
- Specified company to form a CSR Committee of the Board consisting of three or more directors out of which at least one director shall be an independent director;
- Board’s report under section 134(3) to disclose the composition of the CSR Committee;
- CSR Committee required to:
- Formulate and recommend to the Board a CSR policy indicating activities specified in Schedule VII;
- Recommend the amount of expenditure to be incurred on activities in the CSR policy;
- Institute transparent monitoring mechanism for CSR implementation
- Board of the company required to:
- Approve the CSR policy recommended by CSR Committee and disclose the contents of the policy in its reports and on company website;
- Ensure that activities as included in CSR policy are undertaken by the company;
- Ensure that company spends its annual CSR budget or specify the reasons for not spending in its report.
In the current scenario, the role of Internal Audit (IA) teams becomes vital. This legislation can help us achieve real-time sustainable growth only if IA departments ensure that the Act is implemented in its true spirit. These teams must ensure normal business activities are not classified as CSR. Further, the CSR activities are undertaken in a “project or program mode”, i.e., they have defined objectives, measurable outcome and demonstrable impact on communities. One-off events such as marathons/awards/charitable contribution/advertisement/sponsorships of TV programs would not be considered part of the CSR expenditure. In addition, if companies decide to rope in NGOs, they will need to undertake adequate due diligence to ensure that NGOs are appropriately registered and have a track record of three years in undertaking similar projects.
IA teams must also endorse that the CSR implementation framework includes well-defined processes for partner selection, proposal evaluation, financial and programmatic monitoring of projects, annual reporting of CSR spend, and assessment of the impact of CSR spend on the community. It is imperative to put a transparent monitoring mechanism in place to monitor the implementation of CSR projects/programs/activities and ensure the appropriate use of funds, as per the stated CSR policy.