Analysis of Companies (CSR Policy) Amendment Rules, 2021

Analysis of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

“Legitimate profit earning can not be devoid of social responsibility, and that companies can not get away without meeting corporate social responsibility requirements.”

With the Corporate Social Responsibility (CSR), Companies are able to develop their own social investment strategies and decide where to invest and implement programs, but the government has recommended particular areas of need, including eradicating hunger and poverty, maternal and child health, promoting gender equality and environmental sustainability etc. Companies should give preference to the local areas where they operate. If a company does not conduct its own Corporate Social Responsibility (CSR), it can give the required amount to the government’s socio-economic welfare programs such as the Prime Minister’s National Relief Fund etc.

When the provision for Corporate Social Responsibility (CSR) was introduced by Companies Act 2013, It was being said by the Government that the provision for Corporate Social Responsibility (CSR) will follow what is globally known as “Comply or Explain (COREX)”, Which means the Companies will not be mandated to spend on Corporate Social Responsibility (CSR) and the Board Report will only give reasons for not spending.

The Ministry of Corporate Affairs (MCA) has amended the Companies (Corporate Social Responsibility Policy) Rules, 2014 through notification dated January 22, 2021. It shall be noted that the MCA has brought major changes in the Companies (Corporate Social Responsibility) Rules, 2014 (‘the Rules’) through the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 has amended the Rules majorly with respect to following facets;

• Following is the detailed analysis of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021;

Rule 2: Definitions

• It shall be noted that the following amendments have been made through the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021; 

√ “Administrative overheads” means the expenses incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company but shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme. 

In the above definition general management and administration expenditure excludes direct expenses towards particular CSR Project or Programme.

√  “CSR Policy” 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.

In the above definition, a statement shall contain the approach and direction with relation to selection, implementation and monitoring of CSR Project or Programme.

√  “International Organization” means an organization notified by the Central Government as an international organization 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 Government has allowed the International Organization for designing, monitoring and evaluation of the CSR Project or Programme. 

√  “Ongoing Project” means a multi-year project undertaken by a Company in fulfilment 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. 

As per definition, Ongoing project = Project already commenced + multi-year project whose duration is not less than one year but not exceeding 3 years 

√  “Public Authority” means ‘Public Authority’ as defined in clause (h) of section 2 of the Right to Information Act, 2005. 

Rule 4: CSR Implementation

• The Board shall ensure that the CSR activities are undertaken by the company itself or through –

√ Section 8 Company;

√ Registered Public Trust;

√ Registered Society registered u/s 12A & 80G of Income Tax Act, 1961; or

√ Company with established track record of atleast 3 years.

• It shall be noted that the eligible intermediaries through which the company shall undertake the CSR Project or Programme will require to register itself with the Central Government by filing the Form CSR-1 electronically with effect from April 01, 2021.
• Further on filing the Form CSR-1 with the Central Government, a unique CSR Registration Number will be generated by the system automatically.
• International Organization as defined in Rule 2 of the Rule can also be engaged 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.
• Further, it is the responsibility of the Board of the Company to monitor the implementation of ongoing projects and to ensure that the funds are utilized for approved purpose and shall be certified by the Chief Financial Officer (CFO) or Person in charge of finance.
• The Board shall have a power to make modifications in such projects to ensure smooth implementation of the project within permissible time limit. 

 Rule 5: CSR Committees

• It shall be noted that the CSR Committee shall formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the following, namely:

√ the list of CSR projects or programmes that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act;

√ the manner of execution of such projects or programmes as specified in sub-rule (1) of Rule 4;

√ the modalities of utilization of funds and implementation schedules for the projects or programmes;

√ monitoring and reporting mechanism for the projects or programmes; and

√ details of need and impact assessment, if any, for the projects undertaken by the company

√ Board may alter such plan at any time during the financial year, as per the recommendation of its CSR Committee.

Rule 7: CSR Expenditure 

• The board shall ensure that the administrative overheads shall not exceed 5% of total CSR expenditure of the company for the financial year.
• Any surplus arising out of CSR activities 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 6 months of the expiry of the financial year.
• Any excess amount may be set off against the requirement to spend up to immediate succeeding 3 financial years subject to the conditions that;

√ the excess amount available for set off shall not include the surplus arising out of the CSR activities, if any, in pursuance of sub-rule (2) of this rule;

√ the Board of the company shall pass a resolution to that effect.

• Provisions with relation to acquisition of Capital Assets:

• Any capital asset created by a company prior to the commencement of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, shall within a period of 180 days from such commencement comply with the requirement of this rule, which may be extended by a further period of not more than 90 days with the approval of the Board based on reasonable justification.

Amendment to Rule 8: CSR Reporting

• Companies with average CSR obligation of 10 Crore or more in the 3 immediately preceding financial years shall undertake impact assessment through an independent agency for projects of 1 crore or more which have been completed not less than 1 year before undertaking the impact study.
• The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR.

Amendment to Rule 9: Website Disclosure

• 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.

Amendment to Rule 10: Transfer of unspent CSR

• Until a fund is specified in Schedule VII for the purposes of sub-section (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.
• New format inserted for disclosure of ‘Annual Report on CSR activities’ to be included in the Board’s Report. 

Disclaimer: This note has been prepared for general guidance on matters of interest only and does not constitute a professional advice. In no Event the author/Firm shall be liable for any direct, indirect, special or Incidental damage resulting from or arising out of or in connection with the use of this information.