Ensuring CSR Compliance: Timely Review and Year-End Planning

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 Author: CS Pradeep Kumar Parakh

Executive Summary

As the financial year draws to a close, companies must ensure compliance with CSR regulations under India’s Companies Act, 2013. Failure to meet CSR obligations can lead to financial and reputational risks. This article outlines the key areas for CSR review and financial year-end planning.

1. Why CSR Compliance Matters

Timely CSR review ensures:

•               Compliance with Section 135 of the Companies Act, 2013.

•               Proper utilization of allocated CSR funds.

•               Avoidance of penalties for unspent or misallocated funds.

•               Transparent reporting and documentation of CSR activities.


2. Key Review Areas for CSR Compliance

Utilization of CSR Funds

✅ Assess project progress and impact.

✅ Ensure alignment with approved CSR policies.

✅ Verify expenditure documentation.

Unspent CSR Funds

✅ Identify unspent CSR amounts and plan for their transfer.

✅ Ensure compliance with deadlines for fund allocation.

Excess CSR Spending

✅ Review past CSR expenditures exceeding the 2% requirement.

✅ Plan set-offs for future years, ensuring proper documentation.

Documentation & Reporting

✅ Prepare annual CSR reports.

✅ Ensure alignment with MCA guidelines.

✅ Maintain transparency for board approvals and stakeholder communication.


3. Best Practices for CSR Year-end Planning

✅ Conduct periodic CSR audits.

✅ Develop a fund utilization strategy.

✅ Ensure timely transfers of unspent CSR funds.

✅ Keep comprehensive records for compliance reporting.

✅ Seek expert guidance on regulatory updates.

 

4. Summary of Penalty Provisions for CSR Non-Compliances

Sr. No.

Compliance Obligation

Section/Rule

Prescribed Penalty for Non-Compliance

1

Applicability: Determine if the company falls under the ambit of Section 135 based on net worth, turnover, and net profit thresholds.

Section 135(1)

Not Applicable (This is a threshold for applicability, not a specific compliance obligation)

2

Constitution of CSR Committee: Appoint a CSR Committee comprising of three or more directors, with at least one independent director.

Section 135(5)

Section 134(8): Company: ₹3 lakh; Officer in Default: ₹50,000; Section 450: General penalty may also apply.

3

Formulation of CSR Policy: Draft a CSR Policy outlining the company's approach to social and environmental responsibility.

Section 135(4)(a)

Section 134(8): Company: ₹3 lakh; Officer in Default: ₹50,000; Section 450: General penalty may also apply.

4

Spend 2% of Average Net Profits: Allocate at least 2% of the average net profit of the preceding three financial years towards CSR activities.

Section 135(5)

Section 135(7): Company: Twice the unspent amount or ₹1 crore, whichever is less; Officer in Default: 1/10th of the unspent amount or ₹2 lakh, whichever is less.

5

CSR Activities: Undertake CSR activities specified in Schedule VII of the Companies Act, 2013.

Schedule VII

Section 134(8): Company: ₹3 lakh; Officer in Default: ₹50,000; Section 450: General penalty may also apply.

6

Monitoring and Evaluation: Track the progress and impact of CSR projects.

Section 135(5)

Section 134(8): Company: ₹3 lakh; Officer in Default: ₹50,000; Section 450: General penalty may also apply.

7

Disclosures: Disclose CSR activities in the Board's Report with links to the CSR Policy, CSR Committee Composition, Annual Action Plan and Impact Assessment Report uploaded on the company's website.

Section 135(8)

Section 134(8): Company: ₹3 lakh; Officer in Default: ₹50,000; Section 450: General penalty may also apply.

8

Record Keeping: Maintain proper records of all CSR activities, including agreements, invoices, and impact reports.

Rule 4 of Companies (CSR Policy) Rules, 2014

Section 134(8): Company: ₹3 lakh; Officer in Default: ₹50,000; Section 450: General penalty may also apply.


5. Regulatory References

•           Companies Act, 2013, Section 135

•           Companies (Corporate Social Responsibility Policy) Rules, 2014

•           MCA Circulars on CSR Compliance

 

Conclusion

Indian corporations are proving that climate action is not just a responsibility but an opportunity for innovation and long-term value creation. Their commitment to sustainability is setting benchmarks for responsible business practices.

 

*****

Copyright: This note is the sole property of the Author and no part of it can be copied, reproduced or distributed in any manner without prior approval of the Author.

Disclaimer: This note is based on the research and contains the views of the author on the above subject. This information is intended to initiate sharing of knowledge only and shall not be construed to be any professional or legal advice. In no event the author shall be held liable for any direct, indirect, specific or incidental damages resulting or arising out of or in connection with the use of this information.

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