CSR Policy Amendment Rules 2021 And CSR Amendments in Companies (Amendment) Act, 2020
INTRODUCTION
The Ministry had set up a High-Level Committee on CSR in 2018 chaired by then Secretary, Corporate Affairs Injeti Srinivas for amending the law aimed to strengthen the Corporate Social Responsibility ecosystem, by improving and strengthening disclosures and by simplifying compliances. It also aims to address the inadequacies of the present CSR architecture by removing ambiguities, bringing in objectivity, and by simplifying language.
Ministry of Corporate Affairs (“MCA”) vide notification dated January 22, 2021 notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (“Amendment”) which provides amendments to the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“Rules”) in relation to the corporate social responsibility (“CSR”) obligations required to be complied with by the companies under the Companies Act, 2013 (“Act”). The Amendments have made with the objective of bringing transparency and increase the accountability of the companies undertaking CSR activities.
Pursuant to the said amendment, the applicable companies are required to do either of the following:
- spend the required amount for CSR activities as prescribed under schedule VII; or
- park the unspent amount of ongoing projects in a separate account within 30 days of the end of financial year; or
- transfer unspent amount to such funds as mentioned in Schedule VII viz. Clean Ganga Fund or PMNRF or like within 6 months of the end of financial year.
Further, some of fresh concepts have also been introduced in the Rules like registering of implementing agencies by filing e-form CSR-1 with the MCA, certificate by CFO, mandatory impact assessment.
The highlights the significant changes made in the CSR Rules by the MCA is listed below:
A. Exclusions from the definition of CSR (Rule 2)
- Activities undertaken in normal course of business;
Provided that the exclusion for three year till FY 2022-23, in case companies engage in the Research & Development activities of vaccine/ drugs/ medical devices related to COVID-19, to such companies which are engaged in Research & Development activities of new vaccine, drugs and medical devices in their normal course of business. This exclusion will be allowed only in case the companies are doing such Research & Development in collaboration with organisations as mentioned in item (ix) of schedule VII and disclose the same in their Board’s report.
- Activity undertaken outside India except for training of Indian sports personnel representing any State or Union territory at national level or India at international level;
- Contribution to political party under section 182;
- Activities benefitting the employeesonly;
Note: The definition of employee has been referred from section 2 (k) of Code on Wages Act 2019 i.e. “Employee” means, any person (other than an apprentice engaged under the Apprentices Act, 1961), employed on wages by an establishment to do any skilled, semi-skilled or unskilled, manual, operational, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied, and also includes a person declared to be an employee by the appropriate Government, but does not include any member of the Armed Forces of the Union.
Further, in case the activity is intended to provide generic benefit to the public and large and the employees also get benefited in the process, the Rule does not intend to discard such activity as a CSR activity. The idea is that the companies should not come out with activities where the employees are the only intended beneficiaries.
- Sponsorship activities which help the company in deriving marketing benefits;
- Activities carried out for fulfilling any other statutory obligation.
B. Definition of CSR Policy (Rule 2)
The definition of CSR Policy focuses on the role of board towards CSR Policy which has to be prepared taking into account the recommendation of the CSR Committee.
The new definition requires the Policy to have approach and direction of Board along with guiding principles for selection, implementation and monitoring of the CSR activities undertaken by the companies. Further, the Policy should also contain annual action plan.
C. Defining “ongoing projects” (Rule 2)
As per the amendment in section 135 (6), the unspent amount, if any, for ongoing projects, shall be transferred in a separate bank account for the period of three financial years and failing which, the company 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.
As per the definition, the ongoing project can be a multi-year project of maximum 4 financial years (including the first year of commencement) i.e., mere one-time spending surely cannot be a “project”. It requires continued expenditure over time.
Basis reasonable justification, any project which was not initially approved as multi-year project can also be converted to an ongoing project/ multi-year project and can be extended beyond one year by the board of directors.
Note: Multi-year project should not be more than 3 financial years excluding the first year of commencement. Multi-year project should have been commenced within the Financial year to call it “ongoing”.
Example: If a company contributes to the annual running expenses of a Cancer hospital, the spending for the next year cannot be considered as “ongoing project”. However, installation of new facility at the same hospital, if already taken during the year, can be considered as “ongoing project”.
D. Modes of implementing CSR activities (Rule 4)
On and after April 1, 2021, companies can undertake CSR activity only through implementing agencies which are registered with MCA. Provided that, the requirement of registration is not required on the CSR projects approved prior to April 1, 2021.
Implementing agencies can do registration by filing e-form CSR-1 with MCA portal, post which the implementing agencies will receive a unique CSR Registration Number. This e-form has to be verified by a practicing CA/ CS/ CWA;
Following entities can only apply for such registration:
- Established by the company either singly or jointly with other company – Section 8 company, registered public trust, registered public society (not private), registered under section 12A and 80G of the Income Tax Act, 1961;
- Established by the Government – Section 8 company, registered trust (here both public and private), registered public society;
- Established under an Act of Parliament or State Legislature – any entity;
- Established by anyone – Section 8 company, registered public trust, registered public society (not private), registered under section 12A and 80G of the Income Tax Act, 1961; having track record of atleast three years in undertaking similar activities.
Note: It is mandatory registration of implementing agency with the MCA, and entities will not be hired as implementing agencies until they register themselves.
E. Role of International Organisation [Rule 4 (4)]
The Rules prescribe that companies may engage international organisations 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.
Accordingly, companies can appoint any other entity to undertake the prescribed overhead jobs in respect of CSR. In any case, the threshold allowed as administrative overhead will be applicable.
F. Board responsibility and CFO certification [Rule 4 (5)]
In addition to the monitoring by the board, it requires the CFO or person responsible to give utilisation certificate of the disbursements of funds. Further, CFO of the company shall require certifying the annual CSR report.
Note: This clause makes the CFO apparently responsible for the entire CSR provision without him being part of the CSR committee or the board of directors.
G. CSR Committee – responsibility to recommend annual action plan [Rule 5 (2)]
The CSR committee is required to formulate and recommend to the Board a detailed annual action plan to include:
- List of CSR projects to be undertaken;
- Manner & execution of such projects;
- The modalities and utilization of funds;
- Monitoring and reporting mechanism; and
- Details of need of impact assessment, if any
Provided that Board may alter such plan any time during the financial year, as pe the recommendation of CSR committee, based on the reasonable justification to that effect.
Note: Where the amount to be spent by a company under section 135 (5) does not exceed 50 lakh rupees, the requirement under sub-section (1) for 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. [Inserted by The Companies (Amendment) Act, 2020] Link: Companies Act, 2013 (mca.gov.in)
H. CSR Expenditure [Rule 7]
The Board shall ensure that the administrative overheads shall not exceed 5% of the total CSR Expenditure of the company for the financial year.
Note: Administrative Overheads means the expenses incurred by the company for ‘general management and administration’ of CSR functions in the company but shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or programme.
I. Surplus out of CSR program [Rule 7 (2)]
The surplus out of CSR activity shall
- Not be form the part of business profits of the Company; or
- Ploughed back to same project; or
- Transfer to Unspent CSR account; or
- Transfer to fund specified in Schedule VII within 6 months from the end of financial year.
J. Excess amount spent [Rule 7 (3)]
Where a company spends an amount more than 2% average net profit, such excess amount may be set off up to immediate succeeding 3 financial years subject to the following conditions–
- the excess amount available for set off shall not include the surplus arising out of the CSR activities, if any
- the Board of the company shall pass a resolution to that effect.
K. Unspent amount of ongoing projects to be transferred to Unspent CSR Account
As per the amendment in section 135 (6), the unspent amount, if any, for ongoing projects, shall be transferred in a separate bank account for the period of three financial years and failing which, the company 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.
Note: Since the provisions are applicable from January 22, 2021, any amount that remains unspent on ongoing project in FY 2020-21 will have to be transferred to separate account within April 30, 2020.
L. Unspent amount, otherwise (other than ongoing projects) to be transferred to any fund specified in Schedule VII [Rule 10]
Unless the unspent amount relates to any ongoing project referred to in section 135 (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
M. Title holder of CSR assets [Rule 7 (4)]
The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held in the name of –
- Section 8 Company, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number (after filing Form CSR-1); or
- beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
- a public authority:
Therefore, it can be said that any capital asset acquired / created for the purpose of CSR has to be in the name of only a section 8 company or a registered public trust or registered society having CSR registration Number and cannot be held in the name of the company itself.
Further, for existing capital assets (i.e., prior to the commencement of CSR Amendment Rules 2021) shall comply the requirements of this rule within 180 days (i.e., by July 21, 2021) or additional period of 90 days with the Board’s approval and with reasonable justification.
N. Annual CSR Report [Rule 8(1)]
A new detailed Annual Report on CSR Activities to be included in the Board’s Report for FY 2020-21 onwards has been prescribed in Annexure II under the Rules. However, for FY prior to 2020-21, old Annual Report on CSR Activities will continue.
O. Mandatory CSR impact assessment
Every company having minimum 10 crore of average CSR obligation in last 3 years shall have to undertake mandatory 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 one 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.
A company undertaking impact assessment may book the expenditure towards CSR 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.
P. Additional disclosures on the website of the company [Rule 9]
This requires the companies to inter alia mandatorily disclose the
- CSR projects approved by the board;
- CSR Policy’ and
- Composition of CSR Committee for public access
Q. Penalties & punishments:
Company: 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, Rs. 1 crore, whichever is less
Every officer of the company who is in default: Penalty of 1/10th 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, Rs. 2 Lakh, whichever is less.
[Substituted by the Companies (Amendment) Act, 2020. Notification dated September 28, 2020] Link: Companies Act, 2013 (mca.gov.in)
Links:
1. Report Of The High Level Committee On Corporate Social Responsibility 2018: https://www.mca.gov.in/Ministry/pdf/CSRHLC_13092019.pdf
2. Companies CSR Policy Amendment Rules, 2020. W.e.f. 24.08.2020: http://egazette.nic.in/WriteReadData/2020/221325.pdf
3. MCA Notification for effecting amendment brought vide Companies (Amendment) Act, 2019: http://egazette.nic.in/WriteReadData/2021/224636.pdf
4. MCA Notification for effecting amendment brought vide Companies (Amendment) Act, 2020: http://egazette.nic.in/WriteReadData/2021/224637.pdf
5. CSR Policy Amendment Rules, 2021: http://mca.gov.in/Ministry/pdf/CSRAmendmentRules_22012021.pdf
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