Do you run CSR programs at your company?
If yes, then we’re sure you know about the new rules mandating impact assessment for specific CSR projects.
Impact assessment, also known as impact evaluation, helps companies and organizations evaluate the social and environmental impacts of their actions. With the new CSR guidelines in place, impact assessment is more important than ever as it allows companies to quantify with accuracy how their programs are working, what success looks like, and what sustainability actually means for a business.
Mandating Impact Assessment
The Ministry of Corporate Affairs' recent revisions to the corporate social responsibility guidelines, which make CSR Impact Assessment mandatory, have significantly influenced the CSR landscape in India.
The new requirement of CSR Impact Assessment has brought credibility and accountability to both the development sector and stakeholders. CSR is slowly coming off age with a shift in the approach from philanthropy to creating sustainable impact.
The new CSR law amendments bring significant changes to the CSR policy, including:
i) an increased focus on impact assessment,
ii) decriminalization of offenses through alternate redressal mechanisms, and
iii) new guidelines for managing excess CSR funds.
The updated rules bring forth a slew of changes to how companies conduct their CSR programs – right from design and implementation to reporting of the CSR activities.
We’re here to provide a little bit of help. This brief guide will walk you through CSR impact assessment under the new rules and how it can help your company make well-informed decisions about its CSR efforts.
Amendments in CSR provisions of Companies Act, 2013 and CSR Rules, 2014
Considering Covid-19 and its implications, there was a general expectation of an amendment in the Schedule in the CSR ecosystem, to facilitate additional funds for pandemic control. Corporate India, from its trade and industry bodies, has been in talks with the Ministry to aid them in their fight against Covid-19, through relaxation in the CSR laws.
Subsequently, the Government came up with a set of amendments on August 24, 2020, based on the special recommendations made by pharmaceutical and medical device manufacturers and government departments such as the department of pharmaceuticals and health ministry. Let’s take a look at the approved amendments:
- Item (ix) of Schedule VII shall include contributions to:
Contribution to incubators or research and development projects in the field of science, technology, engineering, and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central or State Government.
- Contributions to public-funded universities:
Indian Institute of Technology (IIT), National Laboratories and autonomous bodies established under the Department of Atomic Energy (DAE), Department of Biotechnology (DBT), Department of Science and Technology (DST), Department of Pharmaceuticals, Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha, and Homoeopathy (AYUSH), Ministry of Electronics and Information Technology and other bodies, namely Défense Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering, and medicine aimed at promoting Sustainable Development Goals (SDGs).
But what do these changes mean for the corporates? Let’s take a look.
- The amendments are beneficial as they look to remove the provision of erstwhile excluded "activities undertaken in pursuance of its normal course of business" from being considered as CSR activities, albeit temporarily. They will now be eligible to avail CSR benefits for their R&D work related to activities for Covid-19 products, provided the work is “in collaboration with” any of the institutes or organizations under item (ix) of Schedule VII.
- It is reiterated that CSR funds cannot be utilized for any other purpose than R&D activities conducted as a normal course of business. Any activities apart from these would still need to be beyond the normal course of business to qualify as CSR under Schedule VII.
- CSR funds can be diverted towards R&D for Covid-19 only for three years i.e, from FY21 to FY23.
- Companies that have already spent the funds on Covid-19 R&D will not be burdened with the task of finding alternate opportunities for spending on CSR.
- The details of activities must be disclosed under a separate head in the annual report on CSR included in the Board’s report, as per the stipulated format.
- The Board of Directors undertaking such research are not bound to ensure that the expenses incurred thereon be mentioned in their CSR Policy as an item of expenditure mandatorily made within the purview of Schedule VII.
- The R&D must be conducted in collaboration with one of the agencies prescribed under item (ix) of Schedule VII.
- Item (ix) of Schedule VII has been amended to include incubators or research and development projects in the field of science, technology, engineering, medicine, and National Laboratories.
- As CSR funds do not qualify as business expenditures, the 2% funds diverted towards the R&D expenditure will not be eligible for tax deductions.
CSR Amendment 2021: Impact assessment
The CSR amendment has thrown a focus on the need for companies to define and measure the impact of their larger CSR programs. Here are the most important points you must know:
- Impact assessment is only mandatory for companies with CSR obligations of INR10 crore with projects of INR1 crore or more.
- Companies can set aside a maximum of 5% of the CSR spent or INR 50 Lakh – whichever is lesser – for impact assessment.
- Impact assessment needs to be done before the completion of one year since the end of the project. For example, if your CSR project was completed in April 2020, your impact assessment process for the same should begin in May 2021.
- The assessment report which will be produced at the end of the process will be annexed to the company’s annual report on CSR.
- The impact assessments must be undertaken by an independent agency.
Impact assessment has been primarily focused upon for several reasons. Now that we have established this, here is what impact assessment assures for your business:
- Makes the CSR projects transparent and easily manageable.
- Instills trust in stakeholders and makes them accountable.
- Drives emphasis on minimizing negative outcomes.
- Results in either reduction or best utilization of costs.
The amendments on impact assessment have added strict responsibilities on companies to ensure that they strategize, execute and assess their CSR programs more effectively.
CSR Rules: To-Do List for Compliance to Section-135
The Ministry of Corporate Affairs issued the final rules that would apply to companies that bring in greater clarity on aspects relating to the formulation of the CSR committee, the need to effectively monitor the implementation of the CSR policy and the manner of undertaking CSR activities.
Here’s a closer look at some of the key developments that companies need to make note of:
- Net profits - As per Section 198
The calculation of net profits that determine the amount to be spent by companies under the ambit is to be done as per the requirements of Section 198 of the Act, as opposed to the concept of Profit-Before-Tax that was brought about in the interim draft rules.
- Build Capacity – Take no more than 5%
In order to ensure that companies are able to undertake CSR activities, the rules have created an allowance for them to make efforts to build capacities. However, this would need to be within the five percent allowed for all other expenditures.
While more such allowances and flexibilities in the legislation can usher a great deal of innovation, companies should also establish the right ground rules and systems so that they are safely compliant.
To-Dos for Companies
- Ensure that projects or programs that feature in your CSR policy are not undertaken in pursuance of normal course of business. This is a prominent CTA for companies to develop frameworks that will serve to define what would qualify as ‘Business-As-Usual’ for them.
- Efficient and transparent monitoring mechanisms to track the flow of funds across the chain of implementation.
- Embark on the formulation and implementation of their CSR policies, the results of which need to be disclosed publicly with their Annual Reports.
CSR Laws: Key Takeaways from the Circular
In this context, the Ministry of Corporate Affairs (MCA) issued a Circular on Corporate Social Responsibility (CSR) Activities and Disclosure Requirements, which brings together all related guidelines under one document. Let’s take a closer look at what this circular has to offer.
In its recent iteration, the circular recommended that businesses should adopt a ‘liberal interpretation’ approach towards CSR. The MCA circular draws our attention to the fact that a company may be able to pursue CSR activities at its own discretion even if they don't exactly fit in with Schedule VII's subjects.
The existence of these guidelines doesn't mean that a company can pursue CSR in any way they see fit, but these acts may still be recognized by shareholders as part of the overall duty to take care of the affairs of the company.
Inclusion of Employee Salaries in CSR Expenditure
As CSR expenditure is becoming a real priority for many companies and their stakeholders, it is important to be able to quantify the monetary value of employee volunteering as CSR expenditure. This is a welcomed step for companies with a huge and/or high-cost employee base, especially those with no identifiable local community as stakeholders (IT companies, investment banks).
Recognition of monetary value as a useful tool for organizations would further increase the level of voluntary initiatives within the company’s units. This expenditure will be calculated in proportion to employees’ time/ hours spent specifically on CSR activities.
Non-Inclusion of One-Off CSR Activities
The circular states that CSR activities have to be in the nature of projects/programs rather than one-off events such as marathons, awards, charitable contributions and advertisements and sponsorships given to TV programs. Such events shall not qualify as CSR expenditure.
Not Every Contribution to a Section 8 Company is CSR
The contribution to the corpus of trust/society/section 8 company will qualify as CSR expenditure, as long as it is created exclusively for a purpose that is directly relatable to a cause covered in Schedule VII of the Act.
CSR Spend of Foreign holding companies
Expenditure incurred by a foreign holding company for CSR activities in India qualifies as the CSR spending of its Indian subsidiary if, the CSR expenditures are routed through these subsidiaries (provided the Indian subsidiary falls under the mandate of Section 135 of the Act).
The Act will be beneficial for many Indian subsidiaries of foreign companies, because some large global companies fund social development programs in India directly. This will help ease the burden on their parent companies, which is usually required to undertake CSR expenditure according to the Act.
CSR Impact Assessment in India: All common questions answered
1. What is the purpose behind conducting an Impact Assessment?
Impact assessment assures that the CSR projects being undertaken by a company have projected measurable outcomes. It tells if the objectives set were actually met. Optimal usage of CSR expenditure is another motive of companies that conduct Impact assessments. Moreover, it has led to companies building stronger CSR programs as now they are bound to evaluate the projects they undertake.
2. Is it mandatory to conduct an Impact Assessment?
As per the amendment in January 2021, companies with an average CSR expenditure equal to or more than Rs. 10 Cr in the last three financial years must undertake an impact assessment for their CSR projects.
3. Who can conduct an Impact Assessment for my company?
Companies are required to hire independent agencies to conduct these impact assessments for them. Self-assessment is not an option.
4. What should be the budget of an Impact Assessment?
At maximum, companies can either spend 5% of their CSR expenditure or INR 50 lakh on impact assessment. They have to go with whichever amount comes out to be lesser.
5. When exactly must companies conduct an Impact Assessment?
An impact assessment needs to be undertaken within a year after the completion of the project. For instance, if your CSR project was completed in April 2022, you have time till May 2023 to conduct an impact assessment for the same.
6. When to conduct an Impact Assessment for multi-year projects?
For multi-year projects, impact assessment can be undertaken after the completion of the project or program. This implies that if a multi-year project is of 3 years, the first impact assessment will be undertaken after 3 years. Further, as a follow-up, the 2nd assessment needs to be undertaken a year after the completion of the program.
7. Is it mandatory to conduct an impact assessment prior to the completion of one year?
You must conduct an impact assessment after one-year completion of the project. However, in the case of an ongoing project of three years, the evaluation needs to be conducted only on completion of three years. However, if programs are upscaled or renewed after each financial year, a separate Impact Assessment needs to be carried out every year as they are considered individual single-year programs.
8. What is the main focus of the Social Impact Assessment?
Social impact assessment comprises processes that analyze, monitor, and manage the social impact of a CSR project, which may include the impact on people, communities, culture, political systems, rights, demographic, economic, touristic impacts, and more. Grossly describing projects that in some way impact the way people live is obliged to conduct social impact assessments.
9. Is Impact Assessment enough to evaluate CSR projects?
Many companies have made it an element of their CSR project’s lifecycle to conduct regular evaluations. From determining the baseline of the project to its completion, companies are conducting these evaluations or assessments. There are a plethora of methods that can lead to an effective impact assessment, but as we always say, there’s no one-size-fits-all when it comes to choosing your Impact Assessment approach. The agencies you hire to do the job for you make sure they make the most of their expertise. Out of a large variety of assessment frameworks, the one that suits your project will depend on various factors. Just to name a few, we have the size of your CSR program, project type, duration, factors affecting change, and the number of stakeholders involved.
10. Will the cost for agencies be counted as part of the INR 50 lakh or 5% limit?
As per the amended rules, the expenses related to ‘general management and administration of Corporate Social Responsibility functions in the company come under the Administrative overheads. However, the expenses for the designing, implementation, monitoring, and evaluation of CSR projects will not be included. Hence, the cost for agencies is neither part of the INR 50 lakh cap, nor the 5% cap on Admin expenditure
The bottom line…
CSR has become an important concept in the corporate world through these times of societal changes. CSR is about giving back to society for the betterment of all. It encourages companies to do charitable works, which contributes positively to the health, education and livelihood of millions of people around the world.
The philosophy of CSR of giving back to society, not just in the traditional sense of giving, especially during a pandemic or a disaster has been emphasized through the CSR amendment. It is an opportunity to rethink the old image of CSR activities and create a new one based on principles of responsibility, transparency and accountability.
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