[Opinion] CSR Impact Assessment – Practical Issues and Challenges

CS Devanshi Kedia – [2023] 156 taxmann.com 431 (Article)

Background

While the concept of CSR was prevalent world over, India became the first nation to codify provisions on CSR under Companies Act, 2013. Section 135 of the Companies Act, 2013, read with Companies (Corporate Social Responsibility) Rules, 2014 and Schedule VII provide a framework for fulfilling CSR obligation – formulation of policy, constitution of CSR Committee, CSR expenditure and disclosure.

Initially, CSR provisions were based on the principle “Comply or Explain”. Companies were required to comply with the requirements and in case of inability to comply, explain the reasons in the annual CSR report and there was no penal consequence prescribed. Subsequently, significant changes are made in the CSR provisions wherein CSR spend is mandated, either by itself or by transferring the unspent amount to a designated central government fund. Penal clause is also included in the CSR provisions. It can be said that these amendments have modified the principle to “Comply, Explain and Comply”.

One of the important prescriptions under the new CSR provisions is requirement of mandatorily carrying out impact assessment in certain cases. While there is a clarification provided by the MCA on various of these provisions, certain ambiguities continue to arise, especially with respect to the requirements around impact assessment.

Impact Assessment – Introduction

High-level Committee constituted by MCA on Corporate Social Responsibility, in its report (2019) made recommendation on mandating Impact Assessment. While making suggestion on this requirement, the Committee stated that carrying out Impact Assessment would not only encourage the companies to take considered decision before deploying CSR amount but also assess the impacts of their investments to capture the impact being generated by their activities.

Impact Assessment – Regulatory Requirements

As per the CSR Rules, Impact Assessment is required to be carried out

• by the Companies whose average CSR obligation in the three preceding financial years is Rupees Ten Crores or more, and
• for the project(s) having an outlay of Rupees One Crore or more and which were completed at least 1 year before the applicability of Impact Assessment.

It is further prescribed that impact study has to be carried out by an independent agency, and the report of which is required to be placed before the Board of the company and is also required to be annexed to the CSR Annual Report of the financial year.

Although the requirement appears to be short and simple, when specific instances are analyzed, there are many practical difficulties that are faced in determining the applicability of Impact Assessment. In this article, I have tried to evaluate and find answers to such issues.

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