How to draft a CSR Policy

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INTRODUCTION

Contributing to the society by engaging in Corporate Social Responsibility (CSR) signifies a tripartite model wherein:

(i) the Company acts as the principal,

(ii) implementation agency is the agency on field utilizing CSR funds, and

(iii) society at large is the ultimate beneficiary.

The new Companies (CSR Policy) Amendment Rules, 2021 notified on 22nd January 2021 (CSR Rules) also covers these three parties by imposing immense responsibilities on the Board of a Company and specifying eligible implementation agencies for the benefit of the society at large.

CSR activities of a company shall be undertaken as per its stated CSR Policy. Rule 2(1)(f) of the amended CSR Rules defines CSR Policy as below:

“CSR Policy means a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan.”

As per section 135(3)(a) of the Act, the CSR Policy shall be formulated by the CSR Committee and recommended to the Board for its approval. In this article, we will discuss the key elements which shall be incorporated while drafting a CSR Policy.

DRAFTING OF CSR POLICY

The CSR policy should be drafted in a manner that it would encourage, support and disseminate a legislative framework for accelerating implementation of best CSR practices by the company. The Policy makers should consult with the appropriate stakeholders such as on-site CSR officials, staff and volunteers; CSR Committee members, etc.

Here the author has bifurcated the CSR Policy in 5 Sections containing relevant sub–sections.

SECTION 1: PREAMBLE, VISION & MISSION, SCOPE

The first section of the Policy is not a requirement of law rather a preliminary introduction depicting the essence of CSR and goals of the company at a macro level.

PREAMBLE

Pro-active companies have been meaningfully contributing to the society long before the modern conceptualization of CSR. Thus, it would be an impactful beginning of the Policy to include an excerpt in the form of a charter or preamble mentioning the ideologies, commitment towards creating a positive impact on the society and enlightening the strong ethical philosophies of the company.

However, in case the company has just begun to undertake CSR activities then it may opt for defining its purpose or objective behind serving the community.

VISION & MISSION

Vision paints a futuristic picture of the impact that your company wants to have on the society through its CSR activities. Mission is the succinct roadmap of how the company aim to convert the vision into a reality.

SCOPE

The scope shall clearly highlight that the Policy serves as a guideline for implementing and monitoring the CSR activities. The Policy may give a glimpse of the normal course of business of the company and mention that the contribution towards the same shall not be considered as a CSR contribution.

SECTION 2: GOVERNANCE STRUCTURE

A robust and transparent well-defined structure for complying with CSR laws is the cornerstone of good governance practices. The apex body is the Board of the Company upon which CSR Rules have imposed the ultimate responsibilities. Thus, clearly mentioning the same in the Policy is of utmost important for clear demarcation.

Board is the apex body but CSR committee has been empowered to have the most active role in adhering to the CSR provisions. Hence, its constitution and functions shall also be clearly defined.

Further, Rule 4(5) of the CSR Rules has introduced a new certification by the Chief Financial Officer or the person responsible for financial management for certifying that the funds disbursed are utilized for the purpose and in the manner as approved by the Board.

As per new definition of CSR Policy, it should also include approach and direction given by the Board, taking into account the recommendations of its CSR Committee.

SECTION 3: GUIDING PRINCIPLES

The definition of CSR Policy makes it mandatory to include guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan. Let’s discuss the guiding principles one by one:

SELECTION & LIST OF ACTIVITIES

This portion of the Policy consists of the focus areas or sectors in which the company aim to contribute and what derives the company to select those particular areas for contributing. To add on to this, the company may mention the beneficiary communities its targeting to work with.

Now, as per Section 135(3)(a) of the Act, the company is also supposed to list out the CSR activities to be undertaken by it as per Schedule VII. The activities which will not qualify as CSR should also be present in the Policy. These activities/programs should be annexed as an Annexure to the Policy which can be easily amended as and when required.

IMPLEMENTATION

This is the most crucial part of the CSR Policy as it will guide the stakeholders how the company will be managing its CSR projects. As per CSR Rules, the Company may implement its CSR activities by adopting all or any of the following three approaches:

  1. Directly through in-house teams
  2. Through qualified implementing agencies including trusts, societies and section 8 companies [Rule 4(1)]
  3. Collaborating with other companies (Note: CSR committees of respective companies must be in a position to report separately on such projects) [Rule 4(4)]

The Company may also engage International Organizations (defined in Rule 2(g)) for designing, monitoring, and evaluation of CSR Projects as well as capacity building of their CSR personnel.

MONITORING

Monitoring of CSR activities is what we call complying with the law in spirit. The policy will consist of the mechanism for monitoring and reporting of the CSR activities.

It will also include assessing the progress of the annual action plan and ongoing projects, manner of execution, modalities of utilization of funds and need of impact assessment for projects.

For instance, a three-tier monitoring structure may start with (i) a ground level (on site) report which will be reviewed by (ii) specialized CSR cell and then (iii) be finally examined by the CSR committee.

SECTION 4: CSR EXPENDITURE

The companies shall mandatorily spend at least 2% of the average net profits made during the three immediately preceding financial years. The following provisions governing the CSR spending shall be covered in this section:

  • Budgetary allocation for CSR projects.
  • Calculation of Net Profit as per Section 198 of the Act read with CSR Rules.
  • Maximum limit of 5% of total CSR expenditure on the administrative overheads.
  • Set off and carry forward of amount spent in excess of CSR obligation up to immediate succeeding three financial year.
  • Treatment of unspent CSR amount of new and/or ongoing projects.

SECTION 5: REPORTING

Display the Policy and activities undertaken by the company on website (if any, for investors information). Publish the Annual Report on CSR Activities in the Annual Report of the company in the format prescribed under the CSR Rules.

CONCLUSION

Due to a plethora of amendments in the CSR Rules, the Policy of companies must be reviewed and modified. The latest CSR Policy should now be a mix of preamble, clearly demarcated functions of governing bodies, guiding principles for monitoring, implementation and spending. The Policy should also be reviewed and updated on a periodic basis to be in line with current provisions, best practices and good governance.

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