Ministry of Corporate Affairs (MCA) has released the Draft Companies (CSR Policy) Amendment Rules, 2020 proposing amendments to Companies (Corporate Social Responsibility Policy) Rules, 2014 for public comments.
An attempt has been made to analyse the rules and the changes that are brought out by the said rules vis a vis the rules as are existing on date.
Change in the definition of corporate social responsibility
The Draft rules have defined the term Corporate Social Responsibility more elaborately by a generally inclusive definition and a few exclusions:
- All activities undertaken by the Company in pursuance of its statutory obligation laid down under Section 135 and in accordance with the Rules made thereunder
- The following activities have been specifically excluded from CSR Activities:
- Activities undertaken in pursuance of normal course of business of the company – This is covered under existing 4(1) of the Rules – Covered under Rule 2(c)(i) of the existing rules
- Any activity undertaken by the company outside India – This was covered under Rule 4(4) of the Existing Rules
- Contribution of any amount directly or indirectly to any political party under section 182 of the Act – This was covered under Rule 4(7) of the Existing Rules
- activities that significantly benefit the employees of the company and their families.
Provided that in case of any activity having less than twenty five percent employees as its beneficiary, then such activity shall be deemed to be CSR activity under these rules.”;
While the existing rules provides a blanket ban on the expenditure for the benefit only for the employees of the company and their families to be considered as CSR Expenditure, the amended Rule prescribes a threshold up to which such expenditure can be considered as CSR expenditure and if the threshold is exceeded then such expenditure will not be covered as CSR Expenditure. Only such activities which cover less than 25% of its employees as its beneficiaries will be covered as CSR activity as per the revised rules.
In the FAQs on the old CSR Policy, the following activities were not covered under CSR Expenditure:
One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.
Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act
Since there is no specific exclusion of these activities in the definition, one can interpret that these activities are now covered under the Definition of CSR Activities if such activities fall within the scope of the activities prescribed under Schedule VII of the Companies Act.
In the same FAQs the following clarifications were given:
MCA vide General Circular No. 21/2014 dated June 18, 2014 has clarified that the statutory provision and provisions of CSR Rules, 2014, is to ensure that while activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act 2013. However, the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities.
Change in definition of CSR policy
The Draft Rules define CSR Policy as under:
“CSR Policy” means a statement containing the approach and direction given by the board of a company, as per recommendations of its CSR Committee, for selection, implementation and monitoring of activities to be undertaken in areas or subjects specified in Schedule VII of the Act
The definition indicates that CSR Policy is a
- Statement containing the approach and direction given by the Board of the Company
- As per the recommendation of the Company’s CSR Committee
- For Selection, implementation and monitoring of activities
- To be undertaken in areas or subjects specified in Schedule VII of the Act
This definition is more elaborate than the earlier definition and explicitly mentions what should be covered under CSR policy and how should the CSR Policy be made.
New Definition Of International Organisation
The draft rules have introduced a new definition INTERNATIONAL ORGANISATION as under:
“(f) “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.”
Net Profit
Except for change in Clause numbering from 2(f) of the Old Rules to Clause 2(g) in Draft Rules there is no change in the Definition of Net Profit.
Two new definitions have been added as follows:
(h) “Ongoing Projects” 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 also include such projects that were initially not approved as a multi-year project but whose duration has been extended beyond a year by the Board based on reasonable justification.
(i) “Public Authority” means ‘Public Authority’ as defined in sub-clause (h) of section (2) of Right to Information Act, 2005.”
Substitution of rule 4 – CSR activities in toto with new provisions
. The revised Rule 4 reads
The major changes brought about by the substitution, as per our interpretation are under:
With reference to the agencies that can undertake CSR activities
| Existing Rules | Draft Rules 2020 |
| Rule 4(2)
The Board of Directors may decide to undertake the CSR Activities approved by the CSR Committee through a) A Company established under Section 8 of the Companies Act or a registered Trust or registered Society, established by the Company, either singly or along with any other companies; or b) A company established under Section 8 of the Companies Act, or a registered Trust or registered Society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State Legislature Provided that if, the Board of a Company decides to undertake its CSR activities through a company established under Section 8 of the Act or a registered trust or registered society, other than those specified in sub rule, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programmes to be undertaken, the modalities of utilization of funds of such projects and the monitoring and reporting mechanism |
Rule 4(1) The Board shall ensure that the CSR activities are undertaken by the company itself or through:
(a) a company established under section 8 of the Act, or (b) any entity established under an Act of Parliament or a State legislature. Provided that such company/entity, covered under clause (a) or (b), shall register itself with the central government for undertaking any CSR activity by filing the e-form CSR-1 with the Registrar along with prescribed fee. |
What is new under the draft rules
- Under Clause 4(2)(a) of the Existing rules, the Company may by itself or along with any other company can carry out the CSR activities, through a Section 8 Company or Registered Trust or Registered Society. The Draft Rules permit the activities to be conducted by the Company by itself through a Section 8 Company or any entity established under an Act of Parliament or a State legislature. Thus, collaboration of one or more Companies for forming a Section 8 Company or Registered Trust or Registered Society for the purpose of carrying out CSR Activities is not covered under the Draft Rules.
- Under the Draft Rules the Company can get the CSR Activities done through either a Section 8 Company formed by itself or through any entity established under an Act of Parliament or a State Legislature. The words “ENTITY ESTABLISHED UNDER AN ACT OF PARLIAMENT OR A STATE LEGISLATURE” assume significance. Our view / interpretation of this clause, that Institutes of Chartered Accountants, Cost Accountants, Company Secretaries, LIC of India etc. are the entities established under an ACT of Parliament and Trusts / Societies which are established under Indian Trust Act or Societies Registration Act are not covered.
- In the existing Rules there is a proviso to Rule 4 (2) which reads as under:
Provided that if, the Board of a Company decides to undertake its CSR activities through a company established under Section 8 of the Act or a registered trust or registered society, other than those specified in sub rule, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programmes to be undertaken, the modalities of utilization of funds of such projects and the monitoring and reporting mechanism
This proviso enabled the Companies to route their CSR expenditure through Registered Trusts / Registered Societies if they fulfil the eligibility criterion. However, this proviso has been missing under the Draft Rules. Thus, Registered Trusts or Registered Societies cannot be used for channeling the CSR Expenditure by the Companies in the revised Rules. This is our view of the matter.
- The Section 8 Company that is incorporated for channeling the CSR expenditure shall
- Register itself with the Central Government by filing Form CSR 1 with the ROC
- The registration has to be done before undertaking any CSR activities by the Section 8 Company
- However, the revised rules will not have any impact on the CSR Projects / Programmes which were approved prior to the notification of the Revised Rules. This implies for the projects which were approved under the existing rules, even if the conditions specified in Rule 4 of the Draft Revised Rules are not complied, they can be continued.
| Existing Rules | Draft Rules 2020 |
| Rule 4(3) – A company may also collaborate with other companies for undertaking projects or programmes 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 programmes in accordance with these rules. | Rule 4(2) – A company may also collaborate with other companies for undertaking projects or programmes 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 programmes in accordance with these rules. |
There is no change in the rules.
| Existing Rules | Draft Rules 2020 |
| No such rule | Rule 4(3) –
A company may engage international organizations 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. Provided that a company may also engage an international organization for implementation of a CSR project subject to prior approval of the central government. |
What’s New: The revised Draft Rules provide for the following, which were not there under the existing rules
- International Organizations are allowed to help organizations for designing, monitoring and evaluation of CSR projects and also for Capacity Building of Company’s employees for CSR
- CSR spends can be done through international organization after obtaining prior approval of the Central Government.
- This could pave way for International Donors to directly step in the Indian NGO arena.
| Existing Rules | Draft Rules 2020 |
| No such rule | Rule 4(4) –
Board of a company shall satisfy itself that the funds so disbursed have been utilized for the purpose and in the manner as approved by it and Chief financial Officer or the person responsible for financial management shall certify to the effect |
What’s New: The requirement of Board satisfaction that the CSR funds have been utilized for the purpose has been incorporated in the Rules. Further the CFO of the Company has to certify to this extent. Where and how the Certificate of the CFO is to be provided is not specifically mentioned in the Revised Rules.
Further Section 203 of the Companies Act read with Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 requires the appointment of CFO only in case of listed Companies and Public Limited Companies with a share capital of not less than Rs. 10 Crores. CSR Rules cover private limited Companies also and the coverage is based on the average profit of the Company as one of the conditions. Thus, there is a possibility that Companies Which are covered under CSR Rules may not be required to appoint CFO under Section 203. In such cases, who will certify under Rule 4(4) of the Revised Rules. This is not clear.
| Existing Rules | Draft Rules 2020 |
| No such rule | Rule 4(4) –
In case of ongoing projects, 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 time period. |
What’s New: The Board is cast with the responsibility of monitoring the implementation of the ongoing projects with reference to approved time lines and empowered to make modifications. Ongoing projects are defined as 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 also include such projects that were initially not approved as a multi-year project but whose duration has been extended beyond a year by the Board based on reasonable justification.
Thus, it seems that the CSR Projects to be undertaken by the Board, by implication can have a timeline of four years including the financial year in which such projects have been initiated.
CSR COMMITTEES
| Existing Rules | Draft Rules 2020 |
| Rule 5(2) – The CSR Committee shall institute a transparent monitoring mechanism for the implementation of the CSR Projects or programs or activities undertaken by the Company | Rule 5(2) – 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:
(a) the list of CSR projects or programmes 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 programmes as specified in sub-rule (1) of Rule 4; (c) the modalities of utilization of funds and implementation schedules for the projects or programmes; and (d) monitoring and reporting mechanism for the projects or programmes. (e) Details of need and impact assessment, if any, undertaken by the company.” |
What’s New: The CSR Committee is now cast with an additional responsibility of formulating and recommending to the Board an annual action plan in pursuance of the CSR Policy and the action plan shall cover all the areas which were specified in the Rule 5(2).
CSR POLICY
| Existing Rules | Draft Rules 2020 |
| CSR Policy
Rule 6 (1) – The CSR Policy of the Company shall, inter alia, include the following, namely: a) A list of CSR Projects or programmes which a company plans to undertake falling within the purview of the Schedule VII of the Act, specifying modalities of execution of such project or programmes and implementation schedules for the same; and b) Monitoring process of such projects or programmes Provided that the CSR activities does not include the activities undertaken in pursuance of normal course of business of a company; Provided further that the Board of Directors shall ensure that activities included by a Company in its Corporate Social Responsibility Policy are related to the activities included in Schedule VII of the Act 2. The CSR policy of the Company shall specify that the surplus arising out of the CSR projects or programmes or activities shall not form part of the business profits of the Company |
What’s the difference: CSR Policy has been specifically defined under Rule 2(e ) as under:
“CSR Policy” means a statement containing the approach and direction given by the board of a company, as per recommendations of its CSR Committee, for selection, implementation and monitoring of activities to be undertaken in areas or subjects specified in Schedule VII of the Act.”
This virtually covers the provisions of Rule 6 which has been omitted. However Rule 6(2) which has been omitted which reads as : The CSR policy of the Company shall specify that the surplus arising out of the CSR projects or programmes or activities shall not form part of the business profits of the Company.
However, a provision was inserted under the new Draft Rules that surplus of CSR activities shall be ploughed back and shall not be forming part of the profits of the Company – Rule 7(2)
CSR EXPEDITURE
| Existing Rules | Draft Rules 2020 |
| Rule 7 – CSR expenditure shall include all expenditure, including contribution to the corpus, for projects or programmes relating to CSR activities approved by the Board on the recommendation of the CSR Committee, but does not include expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act. | Rule 7 (1) The board shall ensure that the administrative overheads incurred in pursuance of sub-section (4) (b) of section 135 of the Act shall not exceed five percent of total CSR expenditure of the company for the financial year.
Provided that a company undertaking impact assessment, in pursuance of sub-rule (3) of Rule 8, may incur administrative overheads not exceeding ten percent of total CSR expenditure for that financial year. (2) Any surplus arising out of the CSR projects or programmes or 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 action plan of the company. (3) The CSR amount may be spent by a company for creation or acquisition of assets which shall only be held by a company established under section 8 of the Act having charitable objects or a public authority. Provided that any asset created by a company prior to the commencement of Companies (CSR Policy) Amendment Rules, 2020, 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. (4) Unspent balance, if any, towards fulfilment of CSR obligation at the time of commencement of these Rules shall be transferred within a period of thirty days from the end of Financial Year 2020-21 to special account viz., ‘Unspent Corporate Social Responsibility Account’ opened by the company and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three 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 thirty days from the date of completion of the third financial year.” |
What’s New:
1. Administrative Expenditure shall not be more than 5% of the Total CSR Expenditure. This means the Administrative Expenditure in the Company spending on CSR activities, the administrative expenditure shall not be more than 5%. However, if the CSR Activities are being done by another company, then this limit is not applicable because of the use of words “administrative overheads incurred in pursuance of sub-section (4) (b) of section 135 of the Act” which shall not cover the activities per se. If the Impact Assessment is also conducted in a particular financial year then the limit is increase to 10%.
2. Surplus or unspent CSR funds shall be transferred to Unspent CSR Account and spent only on CSR Activities.
3. Assets can be created out of CSR Funds only if the assets are held by a Section 8 Company or by a public authority. Public Authority is defined as follows:
“public authority” means any authority or body or institution of self government established or constituted—
(a) by or under the Constitution;
(b) by any other law made by Parliament;
(c) by any other law made by State Legislature;
(d) by notification issued or order made by the appropriate Government, and includes any—
(i) body owned, controlled or substantially financed;
(ii) non-Government organisation substantially financed,
directly or indirectly by funds provided by the appropriate Government;
In respect of assets created out of CSR funds prior to the notification of the Draft rules, the compliance under the revised rules should be made within 180 days of the notification of the revised rules or within 270 days based on an extension provided by the Board for reasonable justification. This implies that all such assets should be transferred to a Section 8 Company or a public authority within the time limits specified.
4. Unspent Balances of CSR funds as of the date of notification of the revised rules shall be transferred to an account designated as Unspent Corporate Social Responsibility Account’ within 30 days of end of Financial year 2020-21 i.e. 30th April 2021. Such unspent balance shall be spent within a period of three financial years from the date of such transfer i.e. three years from the date of transfer. Further unspent balance after the expiry of the three years prescribed shall be transferred to a Fund specified under Schedule VII in this regard within 30 days.
The rule is not clear about unspent balance in the period subsequent to the commencement of the revised rules.
CSR REPORTING
| Existing Rules | Draft Rules 2020 |
| New Rule | Rule 8(3) – A company having the obligation of spending average CSR amount of Rs 5 Crore or more in the three immediately preceding financial years in pursuance of sub section 5 of Section 135 of the Act, shall undertake impact assessment for their CSR projects or programmes, and shall disclose details of the same in its Annual Report on CSR |
What’s New : Every Company having CSR spending of Rs. 5 crores or more in the three immediately preceding financial years needs to undertake impact assessment for its CSR projects and disclose in the Annual Report on CSR.
Display of CSR activities on its web site
| Existing Rules | Draft Rules 2020 |
| Rule 9 – The Board of Directors of the Company shall, after taking into account the recommendations of the CSR committee, approve the CSR policy for the Company and disclose contents of the such policy in its report and the small be displayed on the company’s web site, if any, as per the particulars specified in the annexure. | 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 for public viewing, as per the particulars specified in the Annexure |
What”s New: Disclosure of the Composition of CSR Committee, CSR Policy and Projects approved on the Web site is now made mandatory. However, the revised rule does not specify whether the CSR Annual report needs to be disclosed on the Web Site.
Rule 10 :National Unspent Corporate Social Responsibility Fund :
| Existing Rules | Draft Rules 2020 |
| Not specified. New Rule | (1) The Central Government shall establish a fund called the “National Unspent Corporate Social Responsibility Fund” (herein after referred as “the Fund”) for the purposes of sub-section (5) and (6) of section 135 of the Act. The Fund shall be utilized for the purposes of undertaking CSR projects in the in areas or subjects specified in schedule VII of the Act.
Provided that until such fund is created the unspent CSR amount in terms of provisions of sub-section (5) and (6) of section 135 of the Act shall be transferred by the company to any fund as specified in schedule VII of the Act. (2) The manner of administration, authority for administration of the Fund shall be in accordance with such guidelines as may be prescribed by the Central Government from time to time.” |
What’ New: Unspent CSR Funds are to be transferred to National Unspent Corporate Social Responsibility Fund. The Rules etc for the same will be notified later.
Changes in the format of annexure
The following major changes have been observed in the Annexure to be provided Under Rule 9. The following additional information to be provided under the draft revised rules:
- Name of Directors nominated for CSR Committee, Their DINs, Number of meetings of CSR Committee held during the year, number of meetings attended by the Director
- Provision of the web-link where Composition of CSR committee, CSR Policy and CSR projects approved by the board is disclosed on the website of the company
- Provision of details of Impact Assessment of CSR Projects carried out during the year
- Surplus arising out of the CSR Projects / Programmes / Activities during the year
- Details of Amount of CSR Unspent as per following table:
| Total Amount spent for the Financial year | Amount Unspent | |||
| Total Amount transferred to Unspent CSR Account as per Section 135(6) | Amount transferred to National Unspent CSR Fund as per Section 135(5) | |||
| Amount | Date of Transfer | Amount | Date of Transfer | |
- Details of CSR amount spent against ongoing projects for the financial year as per the following format
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
||
Sl No |
Name of the Project |
Project ID (if avail-able) |
Item from the list of Activi-ties under Sched-ule VII |
Local Area (Yes / NO) |
Location of the Project |
Project Dura-tion |
Amou-nt Alloca-ted to the Project Rs |
Amount Spent in the current Financial Year – Rs. |
Amo-unt transfe-rred to Unsp-ent CSR Accou-nt for the project under Section 135(6) |
Mode of Implem-entation- Direct Yes / NO |
Mode of Impleme-ntation – Though Impleme-ntation Agency |
||
State |
District |
|
|
|
|
|
Name |
CIN |
|||||
- Details of CSR amount spent against other than ongoing projects for the financial year
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
||
Sl No |
Name of the Project |
Project ID (if available) |
Item from the list of Activi-ties under Sched-ule VII |
Local Area (Yes / NO) |
Location of the Project |
Amount Spent for the Project – in Rs |
Mode of Impleme-ntation – Direct Y / No |
Mode of Implemen-tation – Through Implement-ation Agency – Yes / No |
||
State |
District |
|
|
Name |
CIN |
|||||
- Amount spent in Administrative Overheads
- Details of CSR amount spent/ unspent for the preceding three financial years as per following table
| 1 | 2 | 3 | 4 | 5 | |
| Financial year | Amount transferred to Unspent CSR Fund under Section 135(6) – In Rupees | Amount Spent in the current Financial Year – in Rs. | Amount transferred to National Unspent CSR Fund as per Provision to Sec 135(5) – In Rs | Amount remaining to be spent in succeeding financial year – in Rs | |
| Amount in Rs | Date of Transfer | ||||
- Details of CSR amount spent for ongoing projects of the preceding financial year(s) as per table below:
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
0 |
11 |
12 |
13 |
||
Sl No |
Nam-e of the Proj-ect |
Proj-ect ID (if availa-ble) |
Item from the list of Activi-ties under Sche-dule VII |
Local Area (Yes / NO) |
Location of the Project |
Finan-cial year in which the project was comm-en ced |
Project Dura-tion |
Amo-unt Alloc-ated to the Proj-ect Rs |
Amo-unt Spent in the current Finan-cial Year – Rs. |
Amo-unt transf-erred to Unsp-ent CSR Acco-unt for the proj-ect under Section 135(6) |
Mode of Implem-entation- Direct Yes / NO |
Mode of Implemen-tation – Though Implemen-tation Agency |
||
Sta-te |
Distr-ict |
Name |
CIN |
|||||||||||
- Amount transferred to ‘Unspent CSR Account’ pursuant to sub-rule (4) of Rule 7 of Companies (CSR Policy) Rules, 2014 for the financial year 2014-15 to 2019-20
| Sl No | Prededing Financial year | Amount Transferred to Unspent CSR Account under Section135(5) |
In case of creation or acquisition of asset, furnish the details relating to the asset so created or acquired through CSR spent in the financial year.
(a) Date of creation/ acquisition of the asset(s)
(b) Amount of CSR spent for creation /acquisition of asset
(c) Details of the entity/ public authority under whose name such asset is registered, address etc.
(d) Provide details of the property or asset(s) created/ acquired (including complete address and location of the property)
Specify the reason(s) if the company has failed to spend two per cent of the average net profit as per section 135(5)
Thus the reporting under the revised Rules is extensive and very detailed. The report has to be signed by the CEO, Director, CFO and person specified under Section 380(1)(d) i.e the person resident in India authorized to accept on behalf of the Company service of process and any notices and / or other documents required to be served on the company.
Author Bio
Well written article. My only submission is that there is no restriction in the proposed draft CSR policy 2020 on two or more companies joining together to form a Sec 8 company. You have opined that this is now not possible unlike the earlier rules.