Corporate Social Responsibility (CSR) was initially introduced in 2013, marking a significant development in corporate governance. Over time, multiple series of proposed amendments have enhanced and refined the CSR framework. Notably, substantial amendments came into effect on January 22, 2021. The key impact of these amendments is a shift in the compliance approach – companies are now required to either comply with the CSR regulations or provide a detailed explanation for non-compliance. Failure to adhere to the regulations could result in financial penalties. This “comply or explain” paradigm represents a strategic move towards ensuring greater corporate accountability and societal contribution in the realm of CSR.
Corporate Social Responsibility (CSR) is multifaceted, addressing various dimensions to fulfil ethical and societal commitments. Environmental Social Responsibility involves adopting sustainable practices to reduce environmental impact. Ethical/Human Rights Social Responsibility emphasises integrity, fair labour practices, and the protection of human rights. Philanthropic Corporate Responsibility extends to charitable donations, volunteering, and support for social causes. Economic Corporate Responsibility encompasses maintaining economic stability, fair treatment of stakeholders, and robust governance practices for long-term well-being and sustainability.
For many companies, CSR is regarded as a pivotal driver of business success. It can play a critical role in cultivating a positive brand reputation, fostering customer loyalty, and attracting and retaining talented employees. This blog delves into the pivotal role of Corporate Social Responsibility (CSR) in fostering support and contributions from businesses and corporations to nonprofit organisations dedicated to social and environmental causes. CSR for NGOs serves as a means for companies to actively contribute to community well-being and the enhancement of societal conditions. Examining the collaborative efforts between corporations and NGOs through CSR initiatives, i.e., channelling CSR funds for NGOs, the blog highlights the positive impact on a range of social and environmental issues.
Dynamic Shifts: The Evolution of CSR Provisions Through Sequential Amendments
The landscape of Corporate Social Responsibility (CSR) provisions has undergone a series of amendments, reflecting an evolving regulatory framework. The Companies (Amendment) Act of 2017, implemented on 3rd January 2018, marked an initial shift in the paradigm. Subsequently, the Companies (Amendment) Act of 2019, notified on 31st July 2019 (and effective from 22nd January 2021), introduced a notable change by incorporating Section 135(7), thereby transitioning from a “comply or explain” approach to a more stringent “comply or pay fine” stance.
Building on this progression, the Companies (Amendment) Act of 2020, notified on 28th September 2020 (effective from 22nd January 2021), and further refined the regulatory landscape by substituting Section 135(7). This amendment marked a shift from the earlier “comply or pay fine” to the current “comply or pay the penalty” framework, reinforcing the emphasis on corporate adherence to CSR norms.
Additionally, the Companies (CSR Policy) Amendment Rules of 2021, notified on 22nd January 2021, played a pivotal role in shaping the CSR governance framework. Furthermore, the Companies (CSR Policy) Amendment Rules of 2022, notified on 20th September 2022, likely introduced additional refinements or updates to the CSR policy landscape, contributing to the ongoing evolution of CSR regulations in corporate governance.
Advantages of Corporate Social Responsibility (CSR) under Companies Act 2013
The inclusion of Section 135 in the Companies Act of 2013 has mandated CSR for companies surpassing a specified threshold, offering a multitude of benefits:
- Positive Brand Image: Engaging in CSR initiatives allows companies to contribute to social welfare, significantly enhancing their brand image by showcasing their commitment to being socially responsible entities.
- Stakeholder Engagement: CSR efforts foster deeper engagement with a wide spectrum of stakeholders, including customers, employees, shareholders, and local communities. It creates a sense of shared purpose and community involvement.
- Enhanced Business Performance: Companies that invest in CSR tend to experience heightened business performance. They are perceived as more trustworthy, resulting in an expanded consumer base and stronger customer loyalty.
- Improved Reputation: CSR initiatives play a pivotal role in enhancing a company’s reputation. They promote ethical and sustainable business practices, reinforcing the perception of a responsible corporate citizen.
- Competitive Edge: CSR serves as a strategic advantage, as it enables companies to meet stakeholders’ expectations and elevate their satisfaction levels. This, in turn, enhances the company’s competitive position in the market.
- Industry Leadership: Companies that actively pursue CSR initiatives can position themselves as industry leaders, setting benchmarks that inspire others to follow suit. By exemplifying responsible business practices, they influence the entire sector positively.
These benefits underscore the value of CSR as a means of fulfilling legal obligations and a strategic tool that can drive business success, enhance reputation, and contribute to societal well-being.
Eligibility Criteria for Corporate Social Responsibility
Prior to commencing the registration process for Corporate Social Responsibility (CSR) initiatives, it is imperative to ensure that all necessary documents and qualifications are in order. Here is a summary of the key eligibility requirements:
- Applicability:
CSR in India applies to the primary company, its holding and subsidiary companies, and foreign companies operating within the country.
- Financial Criteria:
To be eligible for CSR obligations, companies must meet certain financial benchmarks, including a net worth greater than 500 crore, a turnover exceeding 1000 crore, and a net profit of more than 5 crore in the preceding financial year.
- Recipient NGOs:
Registered Indian companies typically allocate their funds of CSR for NGOs that hold certifications such as 80G, 12A, and a Non-Governmental Organizations Registration Certificate, along with compliance with the Foreign Contribution Regulation Act, which requires a Registration Certificate.
- Compliance:
All documentation related to CSR initiatives must conform to the applicable legal acts and be submitted for renewal annually, ensuring that the company remains in good standing with regulatory requirements.
- Reporting and Transparency:
Companies are required to report their CSR expenditure in their annual reports, providing comprehensive details about policies, initiatives, funds allocated, and projects implemented.
- Alignment with Business and Values:
CSR initiatives should be relevant to the company’s core business activities, work to enhance the quality of life in local communities and reflect the company’s core values and mission.
It is crucial to emphasize that CSR is not an optional undertaking but a legal requirement. Companies that fail to meet their CSR obligations may face penalties, fines, and a damaged reputation. Adherence to these criteria ensures that CSR initiatives are carried out effectively and in line with regulatory mandates.
CSR for NGOs: Strengthening Social Initiatives
CSR for NGOs pertains to the funding and grant mechanisms through which these organisations can secure financial and other forms of support from the corporate sector. The provisions of the Companies Act 2013 govern this symbiotic relationship between corporations and NGOs through allocating CSR funds to NGOs.
In accordance with this legislation, companies meeting certain financial thresholds—specifically, a net worth of 500 crores or more, a turnover exceeding 1000 crores, or a net profit surpassing 5 crore rupees during any financial year—are obligated to earmark a designated portion of their resources for Corporate Social Responsibility (CSR) initiatives. This allocation must constitute 2% of the average net profits of these companies. Encouragingly, promoting CSR for NGOs represents a commendable initiative, further emphasising the positive impact that corporate social responsibility can have on non-governmental organisations dedicated to societal and environmental causes.
The CSR for NGOs disbursed by companies is directed towards addressing social developmental issues. These initiatives are designed to positively impact the living standards of economically disadvantaged and underprivileged segments of society. By channelling resources into these causes, corporations collaborate with NGOs to create a more equitable and sustainable society.
Key Funding Archetypes in Philanthropy and CSR
Within the landscape of philanthropy and corporate social responsibility (CSR) funding, there exist three distinct funding archetypes, each with its unique beliefs about how to achieve impact:
- Program Proponents: These funders prioritise the outcomes of specific programs and projects. They place significant emphasis on measurable results and may be less inclined to allocate resources to indirect costs or overall organisational development.
- Adaptive Funders: Adaptive funders adopt a more flexible approach. They are open to supporting indirect costs and investing in organisational development, provided that NGOs can make a compelling case for the importance of these elements in achieving their objectives.
- Organisation Builders: This archetype values programmatic outcomes and the organisation’s strengthening. They recognise the significance of investing in the capacity and sustainability of NGOs in addition to specific programs.
CSR funders, who constitute a substantial portion of private giving in India, tend to align predominantly with the program proponents archetype. They often allocate limited funding for organisational development and restrict their contributions to indirect costs to a fixed rate, frequently falling below 5%. It’s important to note that NGOs’ indirect costs can vary significantly, ranging from 5% to 55%, depending on their missions and operational models. This variability is akin to how a corporation’s sales and administrative costs differ across industries and products.
CSR funders’ focus on regulatory compliance partly shapes these funding practices. The 2021 amendments to the CSR law in India introduced substantial financial penalties for non-compliance, influencing the priorities of CSR funders. The majority of CSR funders in India are relatively small, unlisted companies that spend less than ₹50 lakh annually on CSR activities. These companies may rely on their boards for decision-making and action plans, and these boards may lack experience in working with NGOs or social impact initiatives. Consequently, the priorities of such CSR funders tend to revolve around risk avoidance, compliance, and cost minimisation.
It’s worth noting that not all companies are fully aware of the intricacies of CSR rules they are complying with. For instance, the 5% cap on administrative overhead costs typically pertains to a business’s internal CSR operation costs, not the grantee’s administrative expenses, as is often misunderstood.
Requisites for Receiving Funds of CSR for NGOs in India
To qualify for Corporate Social Responsibility (CSR) funding in India, non-governmental organisations (NGOs) must adhere to specific prerequisites and obtain particular certifications. Here are the key criteria and the relevant certificates necessary for eligibility:
Legal Entity:
NGOs wishing to receive CSR funding must establish themselves as a legal entity. This legal entity can take the form of:
- A company registered under Section 8 of the Companies Act, 2013 (previously Section 25 of the Companies Act, 1956).
- A registered public trust.
- A registered society.
Income Tax Registrations:
- 12A Registration: NGOs should secure 12A registration under the Income Tax Act of 1961. This registration provides them with an exemption from income tax, allowing them to operate tax-free.
- 80G Registration: NGOs are also required to obtain 80G registration. This registration offers donors a 50% income tax exemption on the amount donated to the NGO.
Track Record:
NGOs are typically expected to demonstrate a proven track record of at least three years. This showcases their commitment and credibility in executing charitable activities.
Non-Governmental Organizations Registration Certificate:
Although not as commonly emphasised, NGOs may need to provide evidence of their registration as a non-governmental organisation.
Corporate donors often prefer to support NGOs that have acquired 80G and 12A registrations due to the associated tax benefits. This can make the NGO more appealing to potential contributors, encouraging both corporate and individual donors to contribute more.
It’s important to note that the regulations and requirements for availing funds of CSR for NGOs and NGO registration may evolve over time. To stay current with the latest guidelines, it is advisable to consult with relevant authorities and maintain up-to-date information on the application procedures and criteria.
Conclusion
To sum up, CSR for NGOs represents a vital avenue to advance their missions and create a more equitable and sustainable world. CSR for NGOs initiatives facilitate collaborations between the corporate sector and NGOs, aiming to address social, environmental, and ethical concerns.
NGOs that qualify for CSR funding through their compliance with legal requirements such as registration as a non-profit entity, income tax exemptions (12A and 80G registrations), and a proven track record gain access to essential resources for their projects and activities. This funding enables them to expand their reach and impact.
CSR for NGOs extends financial support, expertise, and resources from corporations invested in social and environmental causes. This partnership benefits NGOs by enhancing their capacity to drive positive change, conduct research, and deliver vital services to the communities they serve.
Furthermore, the collaboration between NGOs and corporations underscores the growing importance of ethical and socially responsible business practices. Corporations recognise that their operations have far-reaching consequences on society and the environment. By aligning with NGOs, they demonstrate their commitment to making a positive impact beyond profit margins.
CSR for NGOs bolsters their sustainability and promotes the principles of social responsibility, accountability, and sustainability in the corporate world. This synergistic relationship is powerful in addressing pressing global challenges and fostering a more just and prosperous future for all.
Frequently Asked Questions (FAQs)
For recently established NGOs, it is advisable to seek alternative funding sources such as grants from foundations/trusts, donations from high-net-worth individuals (HNIs), or contributions from retail donors within the first three years of their operations. Once they have built a credible track record, NGOs become eligible for Corporate Social Responsibility (CSR) funding.
To secure a CSR certificate in India, an NGO should follow these steps:
Register with the Registrar of Companies (ROC).
Apply for CSR-1 registration through the Ministry of Corporate Affairs (MCA).
Complete the CSR-1 form on the MCA website.
Obtain certification from a Chartered Accountant, Company Secretary, or Cost and Management Accountant.
Submit the form electronically via the MCA portal.
Upon approval, the MCA will issue a registration certificate valid for three years.
NGOs are crucial partners in Corporate Social Responsibility (CSR), excelling in education, women’s empowerment, environmental conservation, and poverty alleviation. Their funding from various sources enables strategic fund allocation for maximum impact. NGOs’ deep commitment to social causes ensures CSR efforts are genuinely geared towards positive change. Known for rigorous monitoring and evaluation, they provide transparent reporting on impactful outcomes. In essence, NGOs, with their expertise and dedication, serve as invaluable allies in promoting positive corporate contributions to society and the environment.
CSR programs, undertaken by businesses for societal benefit, often collaborate with NGOs specialising in human rights, health, education, environment, and development. Popular initiatives include reducing carbon footprints, enhancing labour policies, supporting fair trade, promoting diversity and inclusion, engaging in global philanthropy, encouraging volunteering, and addressing issues like poverty, healthcare, and disaster relief. Notable NGOs like IndiGoReach, Aroh Foundation, and Smile Foundation play a vital role in advancing CSR programs, creating a lasting impact on society.
The Ministry of Corporate Affairs (MCA) determines NGO eligibility for CSR funding, requiring registration under applicable laws like Section 8 of the Companies Act 2013 or Sections 12A and 80G of the Income Tax Act 1961. Successful NGOs should demonstrate a three-year track record and register with the Central Government using Form CSR-1. Other eligible entities include trusts, religious trusts, societies, and those registered under Section 12AA or granted 80G status. Compliance with MCA guidelines, including Form CSR-1 registration, ensures transparency and accountability in CSR initiatives.
NGOs must prioritise transparency in financial operations through accurate record-keeping, regular independent audits, and the publication of accessible annual reports. Donor transparency and clear information about funding sources are crucial for building trust. Effective governance involves an engaged board overseeing finances to ensure accountability. These practices instil confidence in donors and the public and promote efficient resource utilisation and effective program delivery, reinforcing the NGO’s commitment to its mission.
The three funding archetypes are Program Proponents, Adaptive Funders, and Organisation Builders. Program Proponents prioritize specific program outcomes, Adaptive Funders are flexible and may support indirect costs and organizational development, and Organisation Builders value both programmatic outcomes and organizational strengthening.
Companies meeting certain financial thresholds, such as a net worth of 500 crores or more, a turnover exceeding 1000 crores, or a net profit surpassing 5 crore rupees during any financial year, are obligated to allocate a portion of their resources for CSR initiatives. This allocation must constitute 2% of the average net profits of these companies.
Read Our Article: Form CSR-1: Why it is Mandatory for NGOs?
