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What Is CSR Policy Formation?

CSR Policy Formation is the process of creating a formal corporate document that outlines a company’s approach to its social responsibility obligations under Indian law. This policy: 

  • Defines the CSR vision and philosophy of the company 
  • Identifies priority CSR focus areas and activities 
  • Specifies how CSR projects will be selected, executed, monitored, and evaluated 
  • Establishes roles, governance, budgeting, and reporting mechanisms 

The policy is the strategic linchpin that turns abstract corporate purpose into measurable social value. 

Under Section 135 of the Companies Act, 2013 and corresponding CSR Rules, certain companies are legally required to formulate, approve, adopt, implement, and disclose a CSR Policy.

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Legal and Regulatory Framework Governing CSR Policy

CSR policy formation in India is shaped primarily by legislative and regulatory mandates framed under the Companies Act, 2013: 

  • Section 135 of the Companies Act, 2013 

Section 135 introduces CSR as a statutory obligation for companies meeting any of the following thresholds in the immediately preceding financial year: 

  1. Net worth of ₹500 crore or more 
  2. Turnover of ₹1,000 crore or more 
  3. Net profit of ₹5 crore or more

Once a company meets any one of these criteria, it must comply with the CSR provisions, which include forming a CSR committee and adopting a CSR policy. 

  • Companies (Corporate Social Responsibility Policy) Rules, 2014 

The CSR Rules provide detailed guidance on: 

  1. Contents of the CSR policy 
  2. CSR Committee structure and duties 
  3. Schedule VII activities 
  4. Monitoring and implementation requirements 

The Rules clarify that eligible CSR activities must align with areas listed in Schedule VII of the Companies Act and must not be part of normal business operations.

  • Schedule VII of the Companies Act, 2013 

Schedule VII outlines permissible CSR activities, such as: 

  1. Eradicating hunger, poverty, and malnutrition 
  2. Promoting education, gender equality, and health 
  3. Environmental sustainability 
  4. Rural development 
  5. Support for armed forces veterans 
  6. Disaster management and relief 

Companies include one or more of these focus areas in their CSR policy.

  • Key Government Guidelines and Amendments 

The Ministry of Corporate Affairs (MCA) and SEBI periodically issue clarifications, amendments, and procedural updates to enhance CSR transparency, accountability, and impact. Recent changes include the CSR-1 registration process for implementing entities and separate filing windows for CSR-2 disclosures.

Why CSR Policy Formation Matters

  • Statutory Compliance 

    A documented CSR policy is mandatory for eligible companies. The Board must approve the policy, and its contents must be disclosed in the Board’s Report and on the company’s website.

  • Strategic Accountability The policy translates abstract goals into actionable, measurable CSR programs. It ensures that CSR spending is not arbitrary, but aligned with business values and social priorities. 
  • Transparency and Governance CSR policies drive transparency. They set out how funds will be allocated, how projects will be chosen, and how results will be monitored, creating governance discipline. 
  • Stakeholder Trust Investors, regulators, employees, customers, and communities value clear CSR commitments. A formal policy enhances corporate reputation and signals ethical business conduct.

Core Elements of an Effective CSR Policy

A compliant CSR policy must include the following key components: 

  • Company’s CSR Philosophy and Objectives 

This section outlines the company’s overarching social responsibility vision and how CSR supports its long-term purpose. 

  • Identification of CSR Focus Areas 

The policy should list CSR projects or programs the company plans to undertake that fall within Schedule VII of the Act.

  • Modalities of Execution and Implementation 

It must specify how CSR activities will be implemented — either directly by the company or through implementing agencies such as Section 8 companies, registered trusts, or NGOs with valid registrations and established track records in relevant domains. 

  • Modalities of Fund Utilization 

This section describes how CSR funds will be allocated, governed, and tracked, including financial management protocols and roles of CFO or financial officers.

  • Monitoring and Reporting Mechanisms 

The policy must set out how CSR projects will be monitored, reviewed, and evaluated — including progress tracking, impact assessment, and governance reviews.

  • Implementation Schedules and Timelines 

A clear implementation schedule must be included, often with milestones and evaluation dates. 

  • Surplus Treatment 

Surplus arising out of CSR projects must not form part of the business profits of the company. 

Step-by-Step Guide to CSR Policy Formation

The formation of a CSR policy is a structured, collaborative process involving multiple stages: 

 Step 1: Determine CSR Applicability 

Review the company’s financials to confirm whether CSR obligations apply — based on net worth, turnover, or net profit thresholds.

If not applicable, CSR may be undertaken voluntarily, but the formal policy and compliance obligations apply only when thresholds are met. 

Step 2: Constitute the CSR Committee 

Before drafting the policy, the company must form a CSR Committee. 

CSR Committee Composition 

Minimum of three directors 

  1. At least one independent director if the company requires independent directors under Section 149 of the Companies Act 
  2. If the company has only two directors, both must constitute the CSR Committee 
  3. For foreign companies, the CSR Committee must include at least two members, including a director in India. 

The CSR Committee provides strategic direction, oversight, and governance support throughout the policy formation and implementation lifecycle. 

Step 3: Conduct Needs Assessment 

Before drafting the policy, conduct an internal and external needs assessment to: 

  • Understand community needs 
  • Align CSR initiatives with company values 
  • Identify relevant focus areas under Schedule VII 
  • Explore partnerships with NGOs, government agencies, or implementing partners 

This should involve stakeholder consultation, research, data analysis, and alignment with organizational strategy. 

Step 4: Draft the CSR Policy Document 

The CSR Committee prepares the draft CSR policy covering all statutory requirements and strategic priorities. It should include: 

  • CSR Vision and Mission 
  • Targeted Schedule VII activities 
  • Implementation approach and modalities 
  • Project timelines 
  • Fund allocation and budgeting 
  • Roles and responsibilities 
  • Monitoring and reporting processes 

Using templates and examples — often provided by legal advisors or CSR specialists — helps ensure completeness and compliance. 

Step 5: Board Approval 

The CSR Committee recommends the draft policy to the Board of Directors, who must formally approve it. Board approval is mandatory for legal compliance. The Board must also ensure that policy activities are aligned with Schedule VII and not part of normal business operations. 

 Step 6: Website Publication and Disclosure 

Once approved, the CSR policy must be published on the company’s official website and included in the Board’s Report in the annual report. Public disclosure reinforces transparency and accountability. 

 Step 7: Annual Action Plan Preparation 

After policy approval, prepare an Annual Action Plan detailing: 

  • Specific projects for the year 
  • Budgeted CSR spending 
  • Implementation schedules 
  • Monitoring and impact evaluation plans 
  • Partner organizations and stakeholders 

Annual Action Plans ensure that the CSR policy is translated into executable projects with measurable outcomes.

Roles and Responsibilities in CSR Policy Formation

Effective CSR policy formation requires participation across the organization: 

  • CSR Committee 

Responsibilities include: 

  1. Formulating and recommending the CSR policy 
  2. Recommending CSR expenditure 
  3. Overseeing implementation and monitoring 
  4. Establishing transparent monitoring mechanisms 

The Committee must meet at least twice per year to review progress and recommend revisions.

  •  Board of Directors 

The Board: 

  1. Reviews and approves the CSR policy and annual plan 
  2. Ensures compliance with statutory obligations 
  3. Allocates funds based on the Committee’s recommendation 
  4. Reviews progress periodically 
  • Chief Financial Officer (CFO) or Financial Lead 

Under the amended CSR Rules, the CFO or financial officer is responsible for certifying that CSR funds are utilized for approved purposes and aligning financial reporting with policy commitments.

  •  Implementing Partners 

Companies can execute CSR activities: 

  1. Directly through internal teams 
  2. Through registered agencies that have valid CSR-1 registration and a track record of at least three years

Using experienced partners enhances project execution, oversight, and community impact. 

Monitoring, Reporting, and Evaluation

A CSR policy must have clear monitoring and reporting procedures: 

  • Internal Monitoring and Field Oversight 

Regular monitoring should track: 

  1. Project progress against timelines 
  2. Fund utilization 
  3. Compliance with policy and Schedule VII objectives 

Technology tools like dashboards and management software help centralize monitoring. 

  • Periodic Reporting to the Board 

The CSR Committee must present progress reports periodically to the Board, including financial updates, milestones achieved, challenges, and next-step recommendations. 

  •  Annual Disclosure in Board’s Report 

In the Board’s Report, companies must disclose: 

  1. Composition of the CSR Committee 
  2. Overview of the CSR policy 
  3. Amount spent on CSR 
  4. Projects approved and undertaken 
  5. Reasons for unspent amounts (if applicable) 

This disclosure ensures transparency and regulatory compliance.

Budgeting and Spending on CSR

  • Minimum CSR Spend Requirement 

Companies must spend at least 2% of their average net profits made during the three immediately preceding financial years on CSR activities. 

  • Handling Unspent CSR Amounts 

If a company fails to spend the required amount, it must transfer the unspent amount to a specified fund in Schedule VII or explain reasons in the Board’s Report. 

Some extended rules allow multi-year projects to be completed across financial years, which affects unspent amount treatment.

Penalties for Non-Compliance

Non-compliance can attract penalties under the Companies Act. Recent legal trends, including amendments, have decriminalized certain CSR defaults but still impose fines or penal actions. Courts have referenced changes in penalty structures. 

Best Practices for CSR Policy Formation

To make CSR policy effective: 

  • Align CSR With Business Strategy 

CSR should complement business goals and values to enhance corporate distinctiveness. 

  • Engage Stakeholders 

Consult employees, community members, beneficiaries, and NGOs to shape realistic, impactful projects. 

  • Use Tech for Monitoring 

Dashboards, data analytics, and impact tracking tools help measure outcomes and report transparently. 

  • Partner With Credible NGOs 

Choose partners with valid registration, strong track records, and reputable credentials. 

  • Conduct Impact Assessments 

Evaluating social outcomes helps improve design and resource allocation over time. 

  • Communicate Transparently 

Publish updates, case studies, and success stories on digital platforms to build trust and awareness. 

Frequently Asked Questions

CSR policy formation is crucial for businesses as it establishes a framework for responsible corporate behavior. It enhances reputation, attracts customers and investors, and fosters employee engagement while contributing to societal welfare.

The duration of the CSR policy formation process varies based on the complexity and size of the organization. Typically, it can take a few weeks to several months to develop a comprehensive policy.

Yes, we tailor our CSR policy formation services to align with industry standards and best practices, ensuring that your organization meets relevant guidelines.

We provide a range of resources, including templates, frameworks, and best practices to assist businesses in developing effective CSR policies. Additionally, our consultants offer guidance throughout the process to ensure success.

Companies meeting net worth, turnover, or net profit thresholds under Section 135 must formulate a CSR policy.

It must include Schedule VII activities planned, execution modalities, monitoring processes, implementation schedules, and funding mechanisms.

Yes — implementing agencies such as registered NGOs with CSR-1 registration and a three-year track record can execute CSR projects.

Yes — eligible companies must spend at least 2% of average net profits on CSR annually.

Surplus arising from CSR activities must not form part of business profits.

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