An Overview of Companies (CSR Policy) Amendment Rules 2021

1. The Ministry of Company Affairs ‘ MCA’ vide Companies (CSR Policy) Amendment Rules 2021 shifted CSR spending mandatory from the voluntary. In this article, an attempt has been made to cover all the amendments read with statutory provisions under section 135 of Companies Act, 2013.

2. EFFECTIVE DATE – [Rule 1(2)]: The Amendment Rules 2021 shall come into force on the date of their publication in the Official Gazette i.e. 22 Jan 2021, unless explicitly provided elsewhere in this notification.

3. MEANING OF CSR ACTIVITIES [Rule 2(1)(d)]: Corporate Social Responsibility (CSR) activity means an activity undertaken by a company in pursuance of its statutory obligation laid down in Sec 135 of the Act.

3.1 Activities not covered under CSR The following activities are excluded from the list of CSR activities:-

(a) Activities undertaken in pursuance of the normal course of business of the company.

Exception: A company engaged in research & development of a new vaccine, drugs and medical devices in their normal course of business may undertake such activities related to Covid 19 for the financial year 2021, 2021-22 & 2022-23 as CSR activities subject to following conditions :

Conditions: Such activities shall be undertaken in collaboration with any of the institutions or organizations mentioned in item ix of Schedule VII of the Act & the details of such activities shall be disclosed separately in the Board’s Report under the heading ‘Annual report of CSR’.

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

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

(d) The activities benefitting employees of the company (Apprentice engaged under the Apprentices Act 1961 are not covered under the definition of an employee)

(e) The activities supported by the companies on a sponsorship basis for deriving marketing benefits for its products or services;

(f) The activities carried out for the fulfillment of any other statutory obligations under any law in force in India

4. CSR COMMITTEE:-

4.1 Statutory provision [Section 135(1)]: Every company having

(a) Net worth of ≥ Rs 500 crores or

(b) Turnover of ≥ Rs 1000 crores or

(c) Net profit of ≥ Rs 5 crores during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

4.1.1 Where a company is not required to appoint an independent director under the Act, it shall have in its Corporate Social Responsibility Committee two or more directors.

4.1.2 Disclosure: – [Section 135(2)] The Board’s report shall disclose the composition of the Corporate Social Responsibility Committee.

4.2 Relaxation: [Section 135(9)]: Where the amount to be spent by a company does not exceed fifty lakh rupees, the requirement for the constitution of the CSR Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.

4.3 Functions – [Section 135(3)] The CSR Committee shall (a) Formulate an action plan and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company (in areas or subject specified in Schedule VII). (b) Recommend the amount of expenditure to be incurred on such activities. (c) Monitor the CSR Policy of the company from time to time.

4.4 Annual Plan : [Rule 5(2)] The CSR committee shall formulate & recommend an annual plan to the Board.

4.5 The annual plan by the CSR committee shall include (a) The list of CSR projects or programs that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act. (b) The manner of execution of such projects or programs. (c) The modalities of utilization of funds and implementation schedules for the projects or programs. (d) Monitoring and reporting mechanism for the projects or programs. (e) The details of need and impact assessment, if any, for the projects undertaken by the company.

4.6 The Board of the company may alter the plan at any time during the financial year, as per the recommendation of the CSR committee based on the reasonable justification to that effect.

5. BOARD’S RESPONSIBILITY: [ Section 135(4)] The Board of every company shall –

(a) After taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the CSR Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any.

(b) Ensure that the activities as are included in the CSR Policy of the company are undertaken by the company.The Board shall ensure that the CSR activities are undertaken by the company itself or through eligible entities.

6. ELIGIBLE ENTITIES [Rule 4(1)] The CSR liabilities can be undertaken through the following eligible entities: –

(a) A company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80 G of the Income Tax Act, 1961 established by the company, either singly or along with any other company, or

(b) A 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

(c) Any entity established under an Act of Parliament or a State legislature; or

(d) A company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities

6.1. [Rule 4(3)] A company may engage international organizations for designing, monitoring, and evaluation of the CSR projects or programs as per its CSR policy as well as for the capacity building of their personnel for CSR.

6.2 [Rule 4(4)] A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules

6.3 Registration by the Entity undertakes CSR activity – [Rule 4(2)] 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 01^st day of April 2021.

6.3.1 Form CSR-1 shall be signed and submitted electronically by the entity and shall be verified digitally by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.

6.3.2. On the submission of the Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically

6.4 . The provisions of this sub-rule shall not affect the CSR projects or programs approved prior to the 01st day of April 2021.

6.5 Utilization of Fund [Rule 4(5)] The Board of a company shall satisfy itself that the funds disbursed to the entities for CSR have been utilized for the purposes and in the manner as approved by it and the Chief Financial Officer or the person responsible for financial management shall certify to the effect.

7. ACQUISITION OF CAPITAL ASSET [Rule 7(4)] The CSR amount may be spent by a company for the creation or acquisition of a capital asset, which shall be held by :

(a) A company established under section 8 of the Act, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number under Rule 4(2).

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

(c) A public authority.

7.1 Any capital asset created by a company prior to the commencement of the Companies CSR Amendment Rule 2021, shall within a period of one hundred and eighty days from such commencement comply with the requirement of this rule, which may be extended by a further period of not more than ninety days with the approval of the Board based on reasonable justification.

8. CSR EXPENDITURE:

8.1 Amount to be spent : [Section 135(5)]: The Board of every company shall ensure that the company spends, in every financial year, at least two percent of the average net profits of the company made during the three immediately preceding financial years

8.2 Where the company has not completed the period of three financial years, it shall spend 2% of the average net profit made from the date of its incorporation to the immediately preceding financial year.

8.3 The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.

8.4 Meaning of net profit – [Rule 2(1)(h)] Net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely: –

(i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and

(ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act

9. ADMINISTRATIVE OVERHEADS [Rule 7(1)] The board shall ensure that the administrative overheads shall not exceed five percent of the total CSR expenditure of the company for the financial year.

9.1 Administrative Overheads meaning : [Rule 2(b) ] Administrative overheads means the expenses incurred by the company for general management and administration of CSR functions in the company

9.1.1 Administrative overhead shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or program.

10. ONGOING PROJECT : [Rule 2(1)(i)] Ongoing Project means a multi-year project undertaken by a Company in fulfillment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the board based on reasonable justification.

10.1 Monitoring of Ongoing Projects- [Rule 4(6)]: In case of the ongoing project, the Board of a Company shall monitor the implementation of the project with reference to the approved timelines and year-wise allocation and shall be competent to make modifications, if any for smooth implementation of the project within the overall permissible limit.

10.2 Any amount remaining unspent pursuant to any ongoing project, undertaken by a company in pursuance of its CSR Policy shall be transferred by the company in the unspent CSR Account.

11. SURPLUS ARISES OUT OF CSR ACTIVITIES [Rule 7(2)] Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

12. SPECIAL UNSPENT CSR ACCOUNT : [Section 135(6)] A special bank account, called an Unspent CSR Account to be opened by the company in any scheduled bank.

12.1 Any amount remaining unspent pursuant to any ongoing project, undertaken by a company in pursuance of its CSR Policy shall be transferred by the company in the unspent CSR Account within a period of thirty days from the end of the financial year

12.2 The amount transferred to the unspent CSR account shall be spent by the company in pursuance of its obligation towards the CSR Policy within a period of three financial years from the date of such transfer.

12.3 In case, the company fails to spend the amount within a period of three financial years, it shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year

13. TRANSFER OF UNSPENT CSR AMOUNT. [Rule (9)] The unspent CSR amount, if any shall be transferred by the company to any fund included in Schedule VII of the Act until a fund is specified in Schedule VII for the purpose of transferring unspent CSR amount.

14. IMPACT ASSESSMENT : [Rule 8(3)] Every company having an average CSR obligation of ten crore rupees or more in the three immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of one crore rupees or more, and which have been completed not less than one year before undertaking the impact study.

14.1 The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR.

14.2 A Company undertaking impact assessment may book the expenditure towards Corporate Social Responsibility for that financial year, which shall not exceed five percent of the total CSR expenditure

15. CSR REPORTING [Rule 8] The Board’s Report of a company covered under these rules pertaining to any financial year shall include an annual report on CSR containing particulars specified in Annexure I or Annexure II, as applicable.

15.1 In case of a foreign company, the balance sheet filed section 381(1)(b) of the Act, shall contain an annual report on CSR containing particulars specified in Annexure I or Annexure II, as applicable

16. DISPLAY OF CSR ACTIVITIES ON WEBSITE [Rule 9 ] The Board of Directors of the Company shall mandatorily disclose the composition of the CSR Committee, and CSR Policy and Projects approved by the Board on their website, if any, for public access.

17. PENALTY FOR NON-COMPLIANCE [Section 135(7)]

17.1 Company:- The company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less.

17.2 Officer of the Company: Every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.

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