Blog

2021

New Amendments in Corporate Social Responsibility Rules

New Amendments in Corporate Social Responsibility Rules

According to the United Nations Industrial Development Organisation, Corporate Social Responsibility (CSR) is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (Triple – Bottom Line – Approach), while at the same time addressing the expectations of shareholders and stakeholders. Changes in the global environment increasingly challenge business around the world to look beyond financial performance, and to integrate social and environmental concerns into their strategic management.

Prior to Companies Act 2013, CSR in India has traditionally been seen as a philanthropic activity. And in keeping with the Indian tradition, it was believed that every company has a moral responsibility to play an active role in discharging the social obligations, subject to the financial health of the company.

On 29th August 2013, The Companies Act 2013 replaced the Companies Act of 1956. The New Act has introduced far-reaching changes that affect company formation, administration, and governance, and incorporates an additional section i.e. Section 135 – clause on Corporate Social Responsibility obligations (“CSR”) for companies listed in India. The clause covers the essential prerequisites pertaining to the execution; fund allotment and reporting for successful project implementation.

Recent Changes in CSR Provisions:

The Companies Amendment Acts of 2019 and 2020 resulted in some major changes in the CSR provision under Section 135 of the Companies Act. To provide for the notified changes, the Ministry of Corporate Affairs (MCA) had released the Draft Companies (Corporate Social Responsibility Policy) Amendment Rules in March 2020 (“Draft Rules”) inviting public comments. Recently, on 22nd January 2021, the MCA finally issued the Companies (Corporate Social Responsibility Policy) Amendment Rules (“New Rules”) giving effect to the changes introduced in CSR by the Companies Amendment Acts of 2019 and 2020.

1. Transfer of Unspent CSR Amount (Introduction of Rule 10):

• The 2021 Amendment has introduced a New Rule 10 requiring companies to transfer the unspent CSR amount to any fund already mentioned under Schedule VII till "the Fund" referred to in Section 135(5) and 135(6) of Companies Act, 2013 is created or specified.
• It is to be noted that the Draft Rules proposed the establishment of a National Unspent CSR Fund by the Central Government ("the Fund") for the purposes of Section 135(5) and 135(6) of the Companies Act.

2. Display of CSR Activities on Website (Changes in Rule 9):

• Rule 9 of the New Rules requires the Board to disclose the composition of the CSR Committee, CSR Policy and Projects on their website for public access. This provision is similar to the earlier Rule 9 under CSR Policy Rules 2014.
• Making the companies disclose their CSR Activities and contributions to society is important to help the public make informed decisions. The investors these days are becoming socially aware and want to engage with companies that take positive steps for the development of the society.

3. Impact Assessment Reporting:

The New Rules have added Rule 8(3) as per which companies having average CSR obligation of ten crore rupees or more in three immediately preceding financial years are required to undertake impact assessment through an independent agency of their CSR projects.
• The impact assessment reports are required to be placed before the Board and annexed to the annual report on CSR.
• A Company undertaking impact assessment is allowed to book the expenditure towards Corporate Social Responsibility for that financial year not exceeding five percent of the total CSR expenditure or fifty lakh rupees, whichever is less.
• Thus, after the notification of New Rules, companies qualifying the mentioned threshold shall be mandatorily required to carry out impact assessment of their CSR contributions.
• It is hoped that such a requirement will result in more meaningful contributions by companies towards the society.
• There is however scope for clarity with respect to the provision allowing companies to claim five percent towards CSR expenditure for impact assessment.
• Prima facie, it gives an understanding that such companies have the option to claim ten percent in total as their CSR expenditure - five percent for administrative overheads and five percent for impact assessment. Although, the same has not been explicitly mentioned in such clear terms. A statement from the government in this behalf can remove this ambiguity.

4. Spending on R&D for Covid Research:

• In view of the COVID pandemic, MCA, by way of a notification dated 24th August 2020 has allowed companies to engage in research and development activity of new vaccine, drugs and medical devices in their normal course of business to undertake such research and development in relation to COVID-19 as their CSR obligation for three financial years (from 2020 to 2023).
• This exception has been duly incorporated in New Rules subject to the following conditions:

• Such research and development activities shall be carried out in collaboration with any of the institutes or organisations mentioned in item (ix) of Schedule VII to the Act including Public funded universities, IITs, Indian Council for Medical Research (ICMR) etc.
• Details of such activity shall be disclosed separately in the Annual report on CSR included in the Board’s Report.

5. CSR Implementation (Change in Rule 4):

• The title of Rule 4 has been changed from CSR Activities under CSR Policy Rules 2014 to CSR Implementation as a result of the 2021 Amendment.
• Under the New Rules, a company is allowed to undertake its CSR implementation either by itself or through another company established under Section 8 of the Companies Act, a registered public trust or a registered society established
i. either by the company itself, or
ii. by the Central Government or State Government.

• In addition to the above, a company may also take help of –

i. Any entity established under an Act of Parliament or a State legislature, or
ii. A Section 8 company, registered public trust or registered society, not referred to above but having an established track record of minimum three years, for its CSR implementation.

6. Mandatory Registration of Implementing Agencies:

• The New Rules further require all such implementing entities intending to undertake CSR activities to register themselves with the Central Government by filing form CSR-1 electronically for all CSR projects effective from 1st April, 2021.
• A unique CSR Registration Number shall be generated for all companies submitting Form CSR-1.
• In this way, a list of all such participating entities is maintained by the MCA which increases the chances of timely fulfillment of proposed activities.
• This past performance record of implementing agencies can be referred to by the companies and help them decide their engagement for future CSR activities.
• Under Rule 4(5) of the New Rules, the Board is required to satisfy itself that the funds are utilized for purposes approved by it.
• In case of ongoing project, the Board is required to monitor the implementation of the project with reference to approved timelines and year-wise allocation. The Board has also been given the power to make modifications to ensure smooth implementation.

7. Annual Action Plan for CSR Activities (Changes in Rule 5):

• Pursuant to the New Rules, the CSR Committee has been given the task of formulating and recommending to the Board an annual action plan in pursuance of its CSR policy. The aforesaid plan shall include the following:

• List of CSR projects to be undertaken under Schedule VII of the Companies Act;
• Manner of execution of such projects;
• Modalities of utilisation of funds and implementation schedules;
• Monitoring and reporting mechanism for the projects; and
• Details of need and impact assessment, if any, for the projects undertaken.

• The Board has also been given the power to alter the annual action plan in accordance with the CSR Committee’s recommendation based on reasonable justification.

8. Cap on CSR Expenditure (Changes in Rule 7):

Under the amended Rule 7, the Board has been given the responsibility to ensure that administrative overheads in relation to CSR do not exceed five percent of total CSR expenditure of the company.
• It is to be noted that the Draft Rules proposed an upper limit of ten percent for administrative overheads for companies undertaking impact assessment, but such a provision has not been directly notified in the 2021 amendment.
• Rather, under Rule 8(3)(c) of the New Rules, companies carrying out impact assessment have been allowed to claim five percent of total CSR expenditure or fifty lakh rupees, whichever is less, as a CSR Expenditure.
• Furthermore, the New Rules clarify that any surplus from CSR activities shall not be considered business profit and:

• Need to be either ploughed back into the same project or,
• Transferred to the Unspent CSR Account or,
• Transferred to a Fund specified in Schedule VII within a period of six months from the expiry of the financial year.

• The New Rules also allow a company to set off any excess amount spent by it in relation to its CSR requirements up to immediate succeeding three financial years subject to the following:

• The excess amount for set off shall not include the surplus arising out of CSR activities in pursuance of sub-rule (2); and
• The Board shall pass a resolution to that effect.

• Incorporation of such a provision is appreciated as it gives the companies the option of using the excess funds spent in previous years to meet their future obligations.

9. Creation/Acquisition of New Assets:

• Under the New Rules, a company is further allowed to spend the CSR amount for creation or acquisition of a capital asset held by:

a. Company established under section 8 of the Act, a registered public trust or a registered society, having charitable objects and CSR Registration Number;
b. Beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
c. A public authority.

• As argued in the Report 5 of the High Level Committee on Corporate Social Responsibility 2018, the rationale behind allowing companies to use the CSR amount for capital creation or acquisition is to encourage sustainable and effective initiatives.
• The idea is to not limit CSR amount to revenue expenses and instead use it to create capital assets that would yield future economic benefits.

10. International Organisation:

• The 2021 amendment introduces a new term ‘International Organisation’ defined under Section 2 (g) to refer to an organisation notified by the Central Government as such under section 3 of the United Nations (Privileges and Immunities) Act, 1947 (46 of 1947), to which the provisions of the Schedule to the said Act apply.
• The High Level Committee (“HLC”) on Corporate Social Responsibility 2018, headed by Injeti Srinivas, had recommended the introduction of International Organisations in India’s CSR regime.
• The recommendation has been duly incorporated pursuant to which companies are allowed to take help of International Organisations in designing, monitoring, and evaluating their CSR Projects, and in assisting them with capacity building of their personnel under Rule 4(3) of New Rules.
• It is to be noted that the Draft Rules also proposed engagement of International Organisations with respect to implementation of CSR Projects subject to prior government approval, but the same has not been notified in the New Rules.

 

Blog Archive


Financial Management