Managing CSR Obligations in India: Company Best Practices

Posted by Written by Dezan Shira & Associates Reading Time: 7 minutes

Adopting certain best practices help companies not only meet their corporate social responsibility (CSR) obligations but also build a positive reputation, foster goodwill, and contribute to meaningful social and environmental change and ESG goals.

Company best practices for your India CSR strategy

Here are some best practices for companies managing their CSR obligations effectively:

Align CSR with core business strategy

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Integrate CSR into business goals: A well-aligned CSR strategy should connect with the company’s core business activities, ensuring that CSR efforts complement the company’s overall mission and values. For example, a technology company might focus its CSR on digital literacy programs, while a healthcare company could prioritize public health initiatives. When CSR initiatives align with business goals, they not only enhance social impact but also strengthen the company’s brand identity and competitive advantage.

Sustainable impact focus: Rather than pursuing one-off initiatives, companies should focus on long-term projects that create lasting change. For instance, investing in education, environmental sustainability, or economic empowerment can produce sustainable results over time, benefiting both the community and the business. Such projects are more likely to yield meaningful outcomes and offer the company the opportunity to be seen as a responsible and forward-thinking entity.

Comprehensive stakeholder engagement

Engage with stakeholders: Effective CSR requires collaboration with key stakeholders, including employees, customers, local communities, government bodies, and investors. Engaging with these groups helps companies better understand societal needs and expectations, thereby creating CSR initiatives that resonate with the community. For instance, involving local leaders in CSR planning can help the company design programs that address community-specific issues, leading to higher engagement and success.

Understand local needs: Tailoring CSR efforts to the specific needs of the community where the company operates is crucial. For example, in a rural area, a focus on clean water initiatives might be more impactful than funding a technology lab. Conducting surveys or consultations with the community can help identify pressing issues, ensuring that CSR investments address real and relevant problems.

Transparent CSR reporting

Regular disclosure: Transparency is essential for building trust with stakeholders. Companies should regularly disclose their CSR activities, including detailed reports on the funds spent, the projects supported, and the outcomes achieved. Transparent reporting not only builds credibility but also helps the company stay compliant with regulatory requirements, such as India’s mandate to file CSR-1, CSR-2, and AOC-4 forms. Regular updates through annual reports, company websites, and press releases can help keep the public informed of CSR initiatives.

Use technology for reporting: Leveraging digital tools and platforms can enhance the accuracy and efficiency of CSR reporting. For instance, using online dashboards or CSR management software can help companies track the progress of their initiatives, ensuring that they are on track to meet their goals and making reporting more streamlined.

Create a dedicated CSR Committee

Form a CSR Committee: A dedicated CSR committee within the company ensures that CSR activities are given the necessary focus and resources. This committee should include senior executives who can provide strategic oversight and align CSR with the company’s broader vision. The committee can also ensure that CSR initiatives meet compliance requirements and that funds are being used appropriately.

Board-level oversight: Involving the board of directors in CSR governance is critical to demonstrating the company’s commitment to social responsibility. Board oversight ensures that CSR is not just a side activity but an integral part of the company’s strategy. A CSR policy approved by the board can lead to better decision-making, resource allocation, and strategic alignment with the company’s goals.

READ: A Guide to Corporate Social Responsibility in India

What is the composition of the CSR Committee?

The composition of the CSR Committee varies based on the type of company:

  • Listed companies: Three or more directors, with at least one being an independent director.
  • Unlisted public companies: Three or more directors, with at least one being an independent director. If the company is not required to have an independent director, the CSR Committee can consist of two or more directors.
  • Private companies: Two or more directors. Independent directors are not required as per the proviso under Section 135(1).
  • Foreign companies: At least two persons:
    • One as specified under clause (d) of sub-section (1) of Section 380 of the Companies Act, 2013.
    • Another nominated by the foreign company (refer to rule 5(1) of the Companies (CSR Policy) Rules, 2014).

If a company is required to spend INR 5 million or less on CSR, constituting a CSR Committee is optional. In such cases, the Board of Directors discharges the CSR Committee’s functions.

What are the functions of the CSR Committee?

The CSR Committee is responsible for the following functions:

  1. Formulating and recommending the CSR policy to the Board.
  2. Recommending the amount of expenditure for CSR activities.
  3. Monitoring the CSR policy of the company regularly.
  4. Formulating and recommending an annual action plan to the Board in line with the CSR policy, including items mentioned in rule 5(2) of the Companies (CSR Policy) Rules, 2014.

For companies that are not required to have a CSR Committee under Section 135(9) of the Act, these functions are performed by the Board itself.

What are the responsibilities of the Board regarding CSR provisions?

The Board of Directors is responsible for overseeing CSR activities in CSR-eligible companies. Their key responsibilities include:

  1. Approving the CSR policy.
  2. Disclosing the policy in the company’s report and on its website (if applicable).
  3. Ensuring the company undertakes activities specified in the CSR policy.
  4. In every financial year, ensuring the company spends at least 2 percent of its average net profits made during the three immediately preceding financial years on CSR.
  5. Confirming the proper utilization of CSR funds.
  6. If the company fails to spend the required 2 percent, the Board must report the reasons and transfer the unspent amount as per Sections 135(5) and 135(6) of the Act.

Source: Ministry of Corporate Affairs

Measure and monitor impact

Set clear KPIs: Clear key performance indicators (KPIs) are essential to track the success of CSR initiatives. KPIs can include metrics such as the number of beneficiaries, environmental improvements, or financial returns on CSR investments. For instance, if a company is investing in education, KPIs might include the number of students reached, improvements in educational outcomes, or the number of scholarships awarded. Setting measurable goals allows companies to evaluate the effectiveness of their programs.

Continuous monitoring: Regularly monitoring the progress of CSR initiatives ensures that they stay on course and achieve the desired impact. This involves tracking both quantitative outcomes (e.g., number of trees planted) and qualitative outcomes (e.g., improved community relations). By reviewing progress regularly, companies can make necessary adjustments to ensure that projects remain effective and relevant.

Focus on compliance and legal adherence

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Stay compliant: Staying compliant with CSR regulations is crucial to avoid penalties and maintain the company’s reputation. In India, companies must comply with the CSR provisions of the Companies Act, 2013, which mandates that firms meeting certain criteria spend at least 2 percent of their average net profits on CSR activities. Companies must ensure they are fully compliant with the latest regulations, including timely filing of required forms, such as CSR-2. A dedicated legal or compliance team can help track changes in regulations and ensure the company remains on the right side of the law.

Maintain documentation: Proper documentation is key to demonstrating compliance with legal requirements. This includes keeping detailed records of CSR expenditures, project outcomes, and governance decisions. Properly maintained documentation is also essential for audits and ensures that the company can defend its CSR efforts if questioned by regulators.

READ: India Speeds up Deadline for Filing CSR-2 Return for FY2023-24: MCA Notification

Collaborate with external partners

Partner with NGOs and local experts: Collaborating with non-governmental organizations (NGOs) and local experts can significantly enhance the effectiveness of CSR programs. NGOs often have the expertise, infrastructure, and local knowledge needed to implement CSR projects successfully. For instance, a company looking to improve healthcare in rural areas might partner with a healthcare NGO to provide medical camps, distribute essential medicines, or build infrastructure.

Leverage public-private partnerships (PPP): Public-private partnerships can amplify the reach and impact of CSR initiatives. By collaborating with the government or other companies on large-scale projects, companies can pool resources, share knowledge, and achieve greater social impact. For example, in areas like infrastructure development or education, partnering with local governments can provide the necessary support and legitimacy for CSR projects.

Employee engagement in CSR

Encourage employee participation: Employees can be powerful advocates for a company’s CSR efforts. By creating opportunities for employee volunteering, companies can enhance employee engagement, boost morale, and increase the impact of CSR initiatives. For example, offering employees paid time off to volunteer for CSR projects can foster a culture of social responsibility within the organization.

CSR as a culture: CSR should be embedded in the company’s culture, with employees at all levels encouraged to contribute ideas and participate in CSR activities. By making CSR a part of everyday work life, companies can create a sense of shared purpose and pride among employees, which in turn boosts employee retention and attracts talent who value working for a socially responsible company.

Financial accountability

Ensure proper allocation of CSR funds: Companies need to ensure that CSR funds are allocated effectively to projects that provide the most value. Proper planning, budgeting, and execution are necessary to prevent waste and ensure that funds are used as intended. Regular financial reviews and audits can help track how CSR funds are spent and identify areas for improvement.

Audit CSR spending: Regular audits of CSR spending are crucial to maintain transparency and accountability. Audits can help detect discrepancies between reported CSR activities and actual spending, ensuring that funds are being used for their intended purposes. This also helps prevent mismanagement or misuse of CSR resources.

Innovate for social impact

Leverage technology and innovation: Companies can use innovative solutions and technologies to enhance the social impact of their CSR initiatives. For example, tech companies can develop digital platforms to improve education or healthcare access in remote areas, while energy companies can focus on renewable energy solutions that address environmental challenges.

Adapt CSR in crisis: Flexibility is key when responding to crises such as natural disasters, pandemics, or economic downturns. Companies should be prepared to adapt their CSR programs to meet urgent community needs. For instance, during the COVID-19 pandemic, many companies shifted their CSR focus to providing healthcare support, medical supplies, and financial relief to affected communities.

Summary

In conclusion, companies can maximize the effectiveness of their CSR efforts by embedding social responsibility into their core business strategies, engaging stakeholders, maintaining transparency, and focusing on compliance. By adopting these best practices, businesses can not only meet their legal obligations but also create positive social and environmental change, enhance their reputation, and build lasting value for their stakeholders.

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