The provisions of Corporate Social Responsibility (CSR) were first introduced under the Companies Act, 1956 ( erstwhile Act) on discretionary basis which were further formalized and made applicable for qualifying companies under the Companies Act, 2013 (Act) making India as one of the first country to make CSR mandatory with an objective to align organizational growth with that of social and environmental growth.
At present, provisions under section 135 of the Act regulate large companies i.e. (a) companies having net worth of INR 500 crores or more; (b) turnover of INR 1,000 crores or more; or (c) net profit of INR 5 crore or more, during the immediately preceding financial year, to spend at least 2% of the average net profits during the three immediate preceding financial years towards CSR activities. Additionally, constitution of a dedicated board level CSR Committee to oversee CSR gamut including inter-alia formulation of CSR Policy, recommendation of expenditure towards CSR (giving preference to local areas) and monitor CSR policy.
However, on account of lenient provisions and absence of penal provisions, the intent of CSR could not be abundantly achieved. Therefore, companies failing to comply with CSR provisions could merely state the fact of such non-compliance along with justification in the board’s report, which left a doorway open for companies to ‘non-comply’ and ‘explain’ to get away with this requirement.
Paradigm shift in CSR
In year 2019 and 2020, Companies Amendment Act, 2019 and Companies Amendment Act, 2020 (“Amended Acts”) were introduced with an intent to ensure more accountability and better enforcement to strengthen the compliance management in corporate sector and corporate governance norms. To make companies more compliant in their CSR spending / compliances and push them to allocate their funds in timely manner and plan effectively to adhere to CSR provisions, following changes were incorporated under the Act:
In addition to above, Ministry of Corporate Affairs (“MCA”) has issued the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (the “Amended Rules”) on 22 January 2021, effective from the same date, which amended the existing Companies (Corporate Social Responsibility Policy) Rules, 2014 and introduced significant changes:
Amended Rules have revised the definition of Corporate Social Responsibility, which sets out that activities undertaken pursuant to ordinary course of business by the companies would disqualify for CSR except for prescribed class of entities engaged in development and research of vaccine or drug related to COVID-19 for certain period. The revised definition also prohibits any activity undertaken outside India to be eligible for CSR unless the activity pertains to training of Indian sports personnel representing at national or international level. Further, any direct / indirect donation to the political parties, activities benefitting employees of the company or activities carried out with an intent to fulfil statutory obligations under any other law would also disqualify from the ambit of CSR.
According to the Amended Rules, companies may implement CSR by (a) itself; (b) registered not for profit organization; (c) registered trust or society; or (d) entity established under an Act of Parliament or a State legislature. Further, every entity intending to undertake or implement CSR activities shall be required to make an application with the central government electronically in Form CSR-1, following which a unique CSR registration number will be allotted to the implementing entity. Further, a company may engage international organizations for monitoring, designing and evaluation of CSR projects but they are not explicitly permitted to carry out implementation related activities. Moreover, the Board is additionally entrusted to overlook the implementation of projects and other CSR related matters.
Amended Rules prescribe that CSR committee shall formulate an annual action plan which will inter-alia include list of CSR projects, execution plan, implementation schedules, reporting mechanism and impact assessment.
Amended Rules tighten up the requirements relating to CSR expenditure since earlier, provisions were open ended any most of the expenditure including overheads towards CSR were eligible under CSR expenditure. It has now been clarified and an upper limit i.e. five percent of the CSR expenditure is stipulated for administrative overheads for a financial year.
Reporting format for annual report on CSR has been updated basis amended provisions. Further, qualifying foreign companies are mandated to contain an annual report on CSR under the financials filed with the MCA. In addition to this, specified companies (having average CSR obligation of INR 10 crore or more in 3 immediately preceding financial years) shall undertake an impact assessment through independent agency and such report shall be made part of annual report of CSR.
The MCA earlier issued a circular dated 23 March 2020, stating that the amount of CSR funds spent towards COVID-19 would be an eligible CSR activity. In continuation to it, MCA has now issued another circular dated 5 May 2021, clarifying and widening the areas for spending CSR funds by eligible companies under schedule VII of the Act.
Few additional areas for CSR are introduced by MCA wherein expenditure on creating health infrastructure, manufacturing & supply of oxygen including concentrators, cylinders, ventilators, establishment of oxygen storage plants or other similar activities are eligible CSR expenditure. Further, contribution towards prescribed research and development projects, contribution to public funded universities and certain Organisations engaged in conducting research in science, technology, engineering, and medicine shall also be considered as eligible CSR activities.
Current position of CSR
Now, with the introduction of Amended Acts, Rules and Ministry of Corporate Affair’s amendment notifications, CSR provisions are streamlined at large and most of the modified provisions are effective as on date and accordingly, qualifying companies are under mandatory obligation to comply with the CSR provisions and make required contributions and follow the stricter regime around CSR. Companies can no longer get away with the requirement of CSR by providing justification under the board’s report. Companies failing to spend the required amount by the end of financial year must transfer such amount in escrow account of the company or specified fund in this regard within the prescribed timelines. Any non-compliance may now lead to significant exposure for the companies as well as officers-in-default.
In present time, companies work in a give and take environment and they are accountable towards the environment and society they work in and make profit from. Central Government also intend to have the CSR amount utilized by eligible companies, either by spending for society well-being, doing the expenditure on COVID-19 related activities or by transferring it to prescribed funds. It has now become unavoidable for companies to just be focused on their own growth but to also be facilitators for growth of the society at large.