CSR under Companies Act - Major Amendments

The Ministry of Corporate Affairs, Government of India has notified new amendments to the Companies (Corporate Social Responsibility) Rules, 2014.

Before discussing the amendments in details, first let us look at the CSR implementation by MCA so far:

Background of CSR

Corporate Social Responsibility ('CSR' in short) was conceived by the Government of India as 'an instrument for integrating social, environmental and human development concerns'. The Ministry of Corporate Affairs, Government of India ('MCA') had issued 'Corporate Social Responsibility Voluntary Guidelines, 2009' as first step to assist businesses to adopt responsible governance practices. In its preamble it states that 'CSR is not philanthropy and CSR activities are purely voluntary- what companies will like to do beyond any statutory requirement or obligation'.

These guidelines were further refined subsequently as 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011' ('NVGs). The Guidelines have been articulated in the form of nine (9) Principles with the Core Elements to actualize each of the principles. It is stated therein that 'the Guidelines use the terms 'Responsible Business' instead of Corporate Social Responsibility (CSR) as the term 'Responsible Business' encompasses the limited scope and understanding of the term CSR'.

The MCA constituted a High Level Committee (HLC) under the chairmanship of Shri Anil Baijal (former Secretary, Government of India) to suggest measures for monitoring progress of implementation of CSR policies by companies at their level in September, 2015. The recommendations of the report of the HLC were considered by the Companies Law Committee thereafter constituted by the MCA.

The principle of NVG was subsequently translated into a mandatory provision of CSR in Section 135 of the Companies Act, 2013 ('the Act'). Section 135, Schedule VII and the Companies (Corporate Social Responsibility) Rules, 2014 ('CSR Rules') were notified on 27th February, 2014 and came into force from 1st April, 2014 and so the financial year 2014-15 was the first year of implementation of CSR under the legislature.

The inclusion of CSR in the statute is a unique provision of company law in India.

CSR REQUIREMENTS

• Mandatory constitution of CSR Committee with three or more directors including one independent director by every company (whether public or private) fulfilling net worth or turnover or net profit criteria under section 135(1) during immediately preceding financial year;
• Board's Report shall disclose the composition of CSR Committee;
• Formulation of a CSR Policy and disclosure in board's report and on the company's website;
• Expenditure in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years on CSR activities as per Policy;
• Explanation of reason for not spending the amount earmarked in the Board's Report;
• the Board of the company and its CSR committee are responsible for monitoring the CSR activity undertaken by the company.

MAJOR AMENDMENTS IN CSR PROVISIONS SO FAR

The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016 Dated 23rd May 2016 - The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through - company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State legislature.

The Companies (Amendment) Act, 2017  - the ambiguity of 'any financial year' while examining the CSR applicability based on net worth or turnover or net profit, was substituted with 'the immediately preceding financial year'.

The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2018 Dated 19.09.2018  -

The Companies (Amendment) Act, 2019 (yet to be notified) - any amount remaining unspent on CSR, pursuant to any ongoing project is required now to be transferred by the company within a period of 30 days from the end of the financial year to a special account called 'the Unspent Corporate Social Responsibility Account to be spent by the company on CSR within a period of 3 financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of 30 days from the date of completion of the third financial year.

The Companies (Amendment) Act, 2020 -

• if the company spends an amount in excess of the requirements provided under this sub-section, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.
• Liability of penalty now introduced instead of fine earlier;
• Where the amount to be spent by a company on CSR does not exceed fifty lakh rupees, the requirement for constitution of the Corporate Social Responsibility Committee shall not be applicable and its functions shall be discharged by the Board of Directors of the company.

The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020. Dated 24.08.2020 - research and development activity of new vaccine, drugs and medical devices related to COVID-19 in normal course of business for financial years 2020-21, 2021-22 and 2022-23 in collaboration with any of the institutes or organisations mentioned in item (ix) of Schedule VII to the Act is allowed as eligible CSR activity and details of such activity shall be disclosed separately in the Annual Report on CSR included in the Board's Report.

IMPORTANT AMENDMENTS INTRODUCED BY THE CSR AMENDMENT RULES, 2021

We now discuss the major changes brought in by the amendment to the Companies (Corporate Social Responsibility) Amendment Rules, 2021 dated 22nd January, 2021:

• Administrative overheads now defined: Rule 4 (6) provided that expenditure, including administrative overheads, on CSR capacity building of own personnel shall not exceed 5% of total CSR expenditure in a financial year. Now, rules clearly define administrative overheads to mean 'expenses incurred by the company for 'general management and administration' but not directly incurred for particular project or programme.
• 'Corporate Social Responsibility' defined: the definition has been substituted to give a negative list of activities not included in CSR, viz., activities in normal course of business or outside India or contribution to political party or benefitting employees of company or for deriving marketing benefits for its products or services or for fulfilment of any other statutory obligations under any law.
• Registration of entities for undertaking CSR activities: Every entity who intends to undertake any CSR activity, shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar, with effect from the 01st day of April 2021 verified digitally by a practicing professional (CA/ CS/ CMA). On submission of the Form unique CSR Registration Number shall be generated automatically.
• Engagement of international organisations for CSR projects or programmes: company may 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. 'International Organisation' means an organisation notified by the Central Government as an international organisation 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.
• CFO certification - the Chief Financial Officer or the person responsible for financial management shall certify that the funds so disbursed for CSR have been utilised for the purposes and in the manner as approved by the Board of the company.
• Board to monitor the implementation of ongoing project - with reference to the approved timelines and year-wise allocation and the Board shall be competent to make modifications. 'Ongoing Project' has been defined to mean 'a multi-year project' undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding 3 years excluding the financial year in which it was commenced.
• Annual Action Plan: The CSR Committee shall formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy including list of CSR projects or programmes that are approved, manner of execution, modalities of utilisation of funds details of need and impact assessment, etc.
• Set off and carry forward of CSR expenditure - Where a company spends an amount in excess of requirement provided under sub-section (5) of section 135, such excess amount may be set off against the requirement to spend under sub-section (5) of section 135 up to immediate succeeding 3 financial years subject to the condition that excess amount available for set off shall not include the surplus arising out of the CSR activities and Board of the company shall pass a resolution to that effect.
• Creation or acquisition of capital asset - amount spent on it shall be held by - (a) a company established under section 8 of the Act, or a Registered Public Trust or Registered Society or (b) beneficiaries of the said CSR project or (c) a public authority. Any capital asset created by a company prior to the commencement of the Rules 2021, shall comply with the requirement of this rule within 180 days, which may be extended by a further period of not more than 90 days with the approval of the Board based on reasonable justification.
• CSR impact assessment - Every company having average CSR obligation of Rs. 10 crores or more in the 3 immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of Rs. 1 crore or more, and which have been completed not less than 1 year before undertaking the impact study. It shall be placed before the Board and shall be annexed to the annual report on CSR. The Company undertaking impact assessment may book the expenditure for that financial year, which shall not exceed 5% of the total CSR expenditure for that financial year or Rs. 50 lakh, whichever is less.
• Website disclosure - Board of Directors of the Company shall also mandatorily disclose the CSR Projects approved by the Board in addition to disclosure of composition of the CSR Committee and the CSR Policy.
• Transfer of Unspent CSR amount: Until a fund is specified in Schedule VII for the purposes of subsection (5) and (6) of section 135 of the Act, the unspent CSR amount, if any, shall be transferred by the company to any fund included in schedule VII of the Act, i.e., Clean Ganga Fund or the prime minister's national relief fund or Prime Minister's Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women.  
• Format for Annual Report on CSR Activities to be included in the Board's Report: separate format prescribed for financial year commencing on or after 1st day of April, 2020, provided in the 2021Rules as ANNEXURE -II.

CONCLUSION

As stated in the report of High Level Committee on CSR constituted by MCA - the rationale behind CSR legislature is not to generate financial resources for social and human development since the resource gap, if any, for such development or social infrastructure, could as well have been met by levying additional taxes/ cess on these corporates. The objective of this provision is indeed to involve the corporates in discharging their social responsibility with their innovative ideas and management skills and with greater efficiency and better outcomes. Use of corporate innovations and management skills in the delivery of 'public goods' is at the core of CSR implementation by the companies.

Since societal needs keep evolving over time, CSR policy and provision of law continue to remain in a dynamic mode in keeping with the objectives of the legislature. The initial few years of roll out of CSR programme by the MCA was meant to be 'a learning period' for all stakeholders. Hence, more changes are being introduced in the CSR provisions under the Act from time to time.  The rationale underlying CSR provisions of the Act however remains to facilitate CSR activities of companies through self-regulation in accordance with the spirit of the Act and Rules.

The Author is a Practicing Company Secretary and can be reached at bidisha.a2704@gmail.com