CSR Amendment 2020 & Rules 2021

 

Changes brought in Corporate Social Responsibility subsequent to Companies Amendment Act 2020 and Companies (Corporate Social Responsibility) Rules 2021.

 

Corporate Social Responsibility (CSR) is a responsibility imposed on companies to integrate the environmental and societal needs along with the business needs. CSR is a mandatory obligation imposed on the corporate to ensure a sustainable business is carried on in the best interest of all stakeholders i.e, the Company itself, its shareholders and the society at large. India is the first country to impose statutory obligation on the companies to undertake CSR activities and has also provided a broad framework for companies by identifying activities which are considered as fit for “CSR Activities” and has laid down rules for its implementation. Sec 135 of the Companies Act 2013 read with Companies (Corporate Social Responsibility) Rules, 2014 (2014 Rules) came into effect from 1^st April 2014.

Sec 135 of the Act mandated that every company having:

·       Net worth of Rupees 500 crores or

·       Turnover of Rupees 1000 crores or more or

·       Net profit of Rupees  5 crores or more

during immediately preceding financial year shall undertake CSR Activities as recommended by the CSR Committee constituted as per the Rules framed. The CSR Committee has to formulate and recommend to the Board the CSR activities to be undertaken and the Board had to ensure that in every financial year the Company spends at least 2% of the average net profits made by the company in the immediately preceding three financial years (CSR Expenditure) in pursuance of its CSR Policy formulated by the company as approved by the Board of Directors of the company. The Rules define what constituted CSR activities and also laid down the mechanism for implementing the CSR activities by the companies.

The obligation imposed on companies to comply with provisions of Sec 135 and the Rules there under brought about various challenges and pitfalls which necessitated the Government to bring about amendments to meet the purpose for which the CSR obligation was introduced and also to lessen the hurdles faced by companies in complying with the said provisions.

Therefore the Companies (Amendment) Act 2020 (2020 Amendment) along with Companies (Corporate Social Responsibility Policy) Amendment Rules 2021(2021Rules) was introduced and has brought about various changes in terms of identifying and implementing CSR policies by the companies. The obligation of the companies to undertake CSR obligations has been mandatory as against voluntary and penal consequences have been introduced for non-compliance. Following is the brief of the amendments and changes brought about by the 2020 Amendment read with 2021 Rules specific to CSR:

1. Constitution of CSR Committee

In terms of the 2020 Amendment only companies whose CSR Expenditure is more than Fifty Lakhs Rupees in any financial year are required to constitute CSR Committees. If CSR Expenditure of a company is less than fifty Lakhs rupees in a financial year, the companies need not constitute CSR Committee and the roles and functions of CSR committee will be undertaken by the Board of Directors of such company.

2. Role of CSR Committee

The 2021 Rules has intensified the duties of CSR Committees by requiring it to formulate and recommend annual action plan with respect to CSR activities as against only monitoring the implementation of CSR projects and programmes. The action plan formulated by CS Committee should include

1. list of CSR projects that are approved to be undertaken in the areas or subjects specified under Schedule VII of the Companies Act;
2. manner of execution of such projects;
3. modalities of utilisation of funds and implementation schedules;
4. monitoring and reporting mechanism for the projects; and
5. details of need and impact assessment, if any, for the projects undertaken.

The 2021 Rule also provides flexibility to alter and recommend revised action plan on reasonable justification provided to that effect.

3. Definition of Corporate Social Responsibility:

The definition of the term “Corporate Social Responsibility” has been now revised to include all those activities which are undertaken by the company in accordance with Sec 135 except those activities which are specifically excluded.  The definition carves out following activities as outside the scope of CSR activities:

·       Activities undertaken in pursuance of the normal course of business of the company. Exceptions has been granted to such companies who are engaged in research and development activity of new vaccine, drugs and medical devices related to COVID – 19 until FY 2022-23 on certain conditions though their normal course of activities include research and development of vaccines.

·       Any activity undertaken by the company outside the India (except for the training of the Indian sports personnel representing any State or Union territory at the national level or India at International level).

·       Contribution of any amount directly or indirectly to any political party under section 182 of the Act.

·       Activities that significantly benefit the employees of the company as defined in clause (k) of section 2 of the Code on Wages, 2019 (29 of 2019);

·       Activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services

·       Activities carried out for the fulfillment of any other statutory obligations under any law  in force in India

4. Definition of CSR Policy:

As against the 2014 Rules which defined CSR Policy to be just statement of activities and expenditure, the term CSR Policy has been defined under 2021 Rules to mean statement encompassing all actions to be undertaken by companies in performance of its CSR obligation. CSR Policy now 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.

5. Definition of “Administrative Overheads”

While 2014 Rules allowed CSR mandated companies to incur expenses related to capacity building of its employees and implementation agencies as well as for administrative purposes upto a maximum of 5% from CSR Expenditure of that financial year; the 2021 Rules allows only “Administrative Overheads” to a maximum of 5% of CSR Expenditure to be considered from CSR Expenditure. The term Administrative Overheads has been defined to mean expenses incurred for general management and administration of CSR functions by the company but shall not include the expenses directly incurred for designing, implementation, monitoring and evaluation of a particular CSR project or programme. Thus unlike 2014 Rules, expenses incurred by its implementing agency are not allowed under 2021 Rules.

6. Definition of “International Organisation”

The definition of International Organisation has been introduced to identify those organisations with whom companies can collaborate with or engage for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy as well as for capacity building of their own personnel for CSR. The companies can engage only those organisations which are notified by the Central Government as an international organisation under Section 3 of the United Nation (Privileges and Immunities) Act, 1947 to which the provisions of the Schedule to the said Act apply. Therefore, any international organisations which do not confirm to Sec 3 of the United Nation (Privileges and Immunities) Act, 1947 cannot be appointed as implementing agency by the companies.

7. Definition of “Ongoing Project”

Ongoing Projects are defined to mean those projects which are undertaken by the Company under its CSR obligation for a period beyond one financial year and not exceeding four financial years (including the financial year in which it was commenced). The definition also includes those projects which initially was projected to be completed within one year but has been extended beyond one financial year on reasonable justification given by the board of that company.

The need for definition of “Ongoing Project” was necessary because, as per the 2020 Amendment, the companies who were not able to complete their CSR Expenditure of that particular financial year because the CSR projects or programmes extends beyond a period of financial year can now transfer such amount to “Unspent CSR Account” which can thereafter be utilised for such projects/programmes for a further period of three financial years. This facility has opened up opportunities for the companies to undertake multiyear (up to 4 financial years) projects for the betterment of society which actually creates the impact that was intended from CSR obligation.

8. Definition of “Pubic Authority”

The 2021 Rules have brought in the definition of “Public Authority” which means “Public Authority as defined in the Right to information Act, 2005. Sec 2 (h) of the Right to Information Act, 2005 defines Pubic authority

"as any authority or body or institution of self- government established or constituted—

(a) by or under the Constitution;

(b) by any other law made by Parliament;

(c) by any other law made by State Legislature;

(d) by notification issued or order made by the appropriate government,

and includes any--

(i) Body owned, controlled or substantially financed;

(ii) Non-Government organisation substantially financed;

Directly or indirectly by funds provided by the appropriate government;

The Rules 2021 has introduced the definition of the Public Authority because the CSR Expenditure can be spent by a company for creation or acquisition of a capital assets to be held by a Public Authority. In simple terms, company can now sponsor for creation or acquisitions of capital assets by a PSU or a Gram Panchayat or NGOs funded by Government and claim it as CSR Expenditure.

9. CSR Registration Number

The 2021 Rules has brought about an identification tag for entities which are eligible for companies to collaborate with for undertaking CSR activities. With effect from 1^st April 2021, any entities whether a Section 8 registered company or a registered public trust or a registered society have to register itself with the Central Government by electronically filing Form CSR -1 with the Registrar of Companies. On successful registration entities will be granted CSR Registration Number and become eligible to accept CSR funds from companies. The introduction of CSR Registration Number eases burden on companies to prove that entities satisfy the criteria that are stipulated under the Rules.

 Therefore, with effect from 1^st April 2021 companies before engaging with any entities for undertaking CSR Activities have to satisfy itself that such entities have procured CSR Registration Number. However, for any projects or programmes which have been approved prior to 1^st April 2021 and granted to entities satisfying the conditions laid down under the 2014 Rules will be still allowed to continue such projects or programmes and will not be disqualified for absence of CSR Registration Number.

10. CSR can be spent on creation or acquisition of capital assets

Companies are allowed to spend the CSR Expenditure for creation or acquisition of a capital asset held by:

 (a) company established under section 8 of the Companies Act 2013, a registered public trust or a registered society, having charitable objects and CSR Registration Number; or

(b) beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or

(c) A Public Authority

Thus, the 2021 Rules aims to cater CSR activities not only in revenue models but also to capital intensive industries or organisations for encouraging effective initiatives yielding future economic benefits to the society.

 

11. Certificate of CSR Implementation.

The 2021 Rules has imposed an obligation on the Board to ensure that the funds disbursed for CSR activities have been properly used for the purpose for which it was disbursed. Further the 2021 Rules require every company to furnish a “certificate” from its Chief Financial Officer or others responsible for financial management that the funds disbursed has been utilised and in the manner approved by the board of the company.

 12. Unspent CSR Expenditure

One of the major changes brought about by 2020 Amendment is that companies can no longer set aside their CSR Expenditure on the ground that they could not identify suitable projects for the spend. The 2020 Amendment read with 2021 Rules there under is to the effect that all unspent CSR Expenditure for any financial year will have to be transferred to an “Unspent CSR Account” to be opened with a bank within  a period of thirty days from the expiry of financial year if the company is undertaking an Ongoing Project or in the absence of any Ongoing Project the company will have to transfer the unspent amount to any Fund specified in the Schedule VII within a period of six months from the expiry of the financial year. In other words, no unspent CSR Expenditure can remain with the company but is required to be transferred as stated above.

13. Set-off of excess CSR Expenditure

The 2020 Amendment not only provides for the treatment of unspent CSR Expenditure, but also provides for treatment for any amount spent in excess of CSR Expenditure. In terms of the 2020 Amendment, in the event the company spends any amount in excess of the CSR Expenditure, such company may set off such excess amount in the immediate three succeeding financial years by passing a Board resolution to that effect provided such excess amount spent is not out of surplus arising out of CSR activities.

14. Surplus arising out of CSR Activities

 Any surplus arising out of CSR activities can be utilised in terms of Rule 7 (2) of the 2021 Rules. In terms of the said Rule, surplus arising out of CSR activities shall not form part of business profits of the Company but shall be ploughed back to the same project or transferred to Unspent Account or to a Fund specified in Schedule VII.

15. Impact Assessment

2021 Rules imposes an obligation on companies having mandatory CSR obligation to spend above Rs. Ten Crores in three immediately preceding financial years to undertake impact assessment of their CSR projects from an independent agency. The impact assessment reports are required to be placed before the Board of the company and annexed to the annual report on CSR.

The 2021 Rules allows companies undertaking impact assessment to book the expenditure incurred for carrying out the impact assessment towards CSR Expenditure for that financial year not exceeding five percent of the total CSR Expenditure or fifty lakh rupees, whichever is less. The companies obligated to undertake impact assessment therefore can claim expenses to a total of 10% on the CSR Expenditure under Administrative Overheads and Impact Assessment.

16. CSR Reporting

The 2021 Rules has prescribed a new format for filing of Annual Report on CSR Activities which among other things requires details of amount available for setoff, amount required to be set off, surplus and report of impact assessment conducted if any.

17. Website Disclosure

The disclosure of CSR Committee members, CSR policy and projects approved by the Board on the website of the Company has been made mandatory if the company has any websites.

On reading of the above amendments and rules, it is evident that the Government is attempting to streamline the CSR activities of the companies to reap the desired impact on the society.