Changes in CSR regulations merit attention

Significant regulatory changes are round the corner in respect of CSR, strongly signaling that CSR is no longer a nudge, but mandatory, with serious repercussions for non-compliance. The regulatory changes proposed are quite prescriptive, not only on what needs to be done but also on who should do it. Roles and responsibilities have been specified for the Board, the CSR Committee and the CFO.

The Board is required to set the tone in the form of a CSR Policy, not merely a list of activities to do. The CFO has to certify that CSR funds have been actually spent for the purpose they were allocated. The Board has to appoint a CSR Committee and has to publish on its website the composition of the committee and the CSR Policy. These changes are far-reaching and companies have to chalk out a strategic programme for CSR activity.

One of the key changes deals with the consequences of not spending the mandated amount on CSR, bringing in an approach that says “Use it or Lose it’. Moneys unspent needs to be kept in designated accounts and spent within a permissible timeframe, beyond which the unspent funds would have to be transferred to a government CSR pool.

CSR lifecycle management needs to follow the same rigour that we would put on businesses: CSR is now a more ‘serious business’ than ever before and needs expert attention.

Here are the top changes that merit attention.

CSR Policy: Based on recommendations of the CSR Committee, the Board is required to publish a comprehensive CSR Policy that articulates the approach and direction rather than merely approve a list of CSR activities.

Annual Plan: The CSR Committee has to recommend to the Board an Annual CSR Plan that includes execution strategies and details of CSR projects, money outlays, manner of execution and monitoring mechanism in line with the policy laid down by the Board.

CSR Impact Assessment: Companies that have CSR spend above a threshold, currently Rs 5 crore, need to conduct a CSR Impact Assessment, which should be discussed in the Company’s Annual Report. Unless the government relaxes the start date, come April 2021, we will see companies scrambling to get an Impact Assessment carried out.

Unspent amounts: Any amount unspent and carried forward as on March 31 2021 has to be transferred to an earmarked account and expended within three years, at the end of which amounts still unspent have to be transferred to a government fund. If you can’t spend on CSR, the government will do it for you. If there are multi-year projects, one can earmark funds and spend it within four years.

Board responsibility, CFO certification: The Board has to ensure that CSR funds have been spent for the purpose prescribed by it. There is also a provision for certification by the CFO to that effect.

Capital Expenditure: Any capital asset procured from CSR budgets cannot be held in the name of the company, probably intended to bring in an element of irrevocability of the CSR spend.

Disclosure on company website: The composition of CSR Committee, the CSR Policy and a list of CSR projects are required to be disclosed on the company website

Ceiling on administrative expenses: Administrative expenses in running CSR is capped at 5%.

Annual CSR Report: This report now needs to contain greater details in order to reflect the above changes.

There will be endless debates on the Yin and Yang of these provisions, perhaps leading to some relaxations, perhaps some time extensions. But the intent of the government is clearly spelt out and it is a timely reminder for corporates to get their act together with respect to CSR.

Several of these changes are strategic in nature. Mandating the Board to make a policy pronouncement forces the Board to think long-term and strategic. Creating the need for CSR Impact Assessment reinforces the need to take a programmatic approach rather than transactional.

Requiring the CFO to certify that funds earmarked for CSR have actually been spent for that purpose, brings in specific fiduciary responsibility. Finally, the “Use it or Lose it” approach to unspent moneys sends out a strong signal for the need to actively manage CSR like any other business activity from planning to execution.

Companies that want to make a difference to the society they operate it have a long-term view of their CSR activity and run those programmes with the same efficacy as they run businesses. The current changes underscore the need for CSR specialists either inhouse or leveraging external professionals in order to comply with the true spirit of the law.

(The writer is a Founding Partner of NxtPractice Growth Partners LLP)