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The new rules governing corporate social responsibility

June 27, 2021
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This article is written by Raj Jaiswal pursuing Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

India is one of the first countries in the world to introduce legislation to implement corporate social responsibility (CSR) activities, making it obligatory, following an amendment to the Companies Act, 2013 in April 2014. Corporate social responsibility (CSR) has been defined under Section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility) Rules, 2014 as the company’s responsibility towards the environment and the community as a whole. Here, companies have an obligation to fulfill their corporate social responsibility through activities relating to environmental protection, social and educational activities, etc.

In this article, we will begin by developing a general understanding of the concept of CSR, its origin in India, and its importance. We will also analyze the new rules governing CSR which The Ministry of Corporate Affairs (MCA) has introduced through its notification dated January 22, 2021, and the challenges in CSR.

What is corporate social responsibility?

Kotler and Lee, renowned business and marketing expert” defined CSR as “an obligation to improve community well-being through business practices, discretionary and contribution of corporate resources. To support social causes and to fulfill commitments towards corporate social responsibility, corporations undertake various corporate social initiatives such as eradicating hunger, malnutrition, promoting education, etc.

As per Section 2(d) of the Companies (CSR Policy) Amendment Rules, 2021 “corporate social responsibility (CSR)” means the activities undertaken by a company in pursuance of its statutory obligation laid down in Section 135 of the Act in accordance with the provisions contained in the rules of the act, but shall not include the following, namely:

  1. Activities are undertaken in pursuance of the normal course of business of the company.
  2. Any activity is undertaken by the company outside India except for the training of Indian sports personnel representing any state or union territory at the national level or India at the international level. 
  3. Contribution of any amount directly or indirectly to any political party under Section 182 of the Act.
  4. Activities benefiting employees of the company as defined in clause (k) of Section 2 of the Code on Wages, 2019.
  5. Activities supported by the companies on a sponsorship basis for deriving marketing benefits for its products or services.
  6. Activities carried out for the fulfillment of any other statutory obligations under any law in force in India.

The history of CSR in India

The concept of CSR in India is very old and has been practiced in Indian society from the very beginning. In ancient India, kings, landlords, and businessmen followed the concept of social responsibility and also gave importance and value to social responsibility. Every individual then believes in the term “The more you give, the more you receive”. The sustainability and growth of every individual and the society as a whole can only be improved and achieved by the collective growth of the society.

India has the richest tradition of corporate social responsibility (CSR) in the world. The concept dates back to over a hundred years. CSR in India has evolved through different phases, like community engagement, socially responsible employee relations, and socially responsible production.

Phases of CSR in India

In this phase, CSR was mainly known for its charity and philanthropic nature during industrialization. Organizations were solely responsible to proprietary and manager.

This phase was during the Independence struggle. CSR was used as a tool for Social Development. Organizations were responsible for proprietors, managers, and employees. For example; national leaders urged the businessmen to share their wealth for the benefit of marginalized people, trusts were asked to donate for causes like women’s education, etc.

This phase was during the emergence of PSUs. The organization’s responsibility was towards the proprietor, managers, and other environmental factors.

In this phase, CSR became characterized as a sustainable business strategy. Organizations’ were responsible for proprietors, managers, the environment, and the public in general.

Significance of CSR

Analysis of amendments in CSR Rules, 2021

On January 22, 2021, The Ministry of Corporate Affairs (MCA) amended the Companies (Corporate Social Responsibility Policy) Rules, 2014. Now, these rules will be known as Companies (Corporate Social Responsibility Policy) Amendment Rules 2021. These rules were amended to infuse more transparency and to increase accountability under the Companies (Corporate Social Responsibility Policy) Rules 2014.

Administrative overheads

After the amendment, the “administrative overheads” refer only to the expenses incurred by the company for ‘general management and administration’ of corporate social responsibility functions in the company. It excludes all the other expenses which are directly incurred for designing, monitoring, implementation, and evaluation of a particular CSR project from the ambit of administrative overheads.

In simple terms, it means that the administration expenditure will exclude all the direct expenses towards a particular CSR project or programme.

International organization

The international organization is an organization notified by the central government under Section 3 of the United Nations (Privileges and Immunities) Act, 1947 (46 of 1947), as an international organization and, to which the provisions of the Schedule to the said Act apply.

The central government has also allowed the international organization the evaluation, designing, and monitoring of the CSR project or programme.

Ongoing project

It means a multi-year project which a company undertakes in fulfillment of its CSR obligation and it must have timelines not exceeding three years excluding the financial year in which it was commenced.

It also includes other projects that are not approved as a multi-year project but whose duration has been extended beyond one year by the Board based on reasonable justification.

CSR policy

The new definition of CSR policy includes the approach and direction given by the Board of a company, taking into account the recommendations of its CSR Committee. The definition also includes guiding principles for selection, implementation, and monitoring of activities as well as formulation of the annual action plan.

Public authority

Here, public authority means the same as defined under Section 2 clause (h) of the. The public authority has been defined as an authority, institution, or body of self-government established by:

  1. The Constitution,
  2. Any other law made by Parliament,
  3. Any other law made by the State Legislature.

Amendment in the applicability of CSR committees (Rule 5)

The companies are required to constitute a CSR committee under Rule 5. The CSR committees in accordance with the company’s CSR policy are required to formulate an annual action plan and to recommend it to the Board of the company.

As per the recommendation of the company’s CSR committee, the annual action plan can be altered at any time during the financial year and is required to include:

  1. Implementation schedule/timeline and method of fund utilization;
  2. Manner of execution of the listed projects;
  3. Approved list of CSR projects;
  4. Mechanism of monitoring and reporting ongoings of the project; and
  5. The details of the need for project and impact assessment, if any project undertaken by the company.

Amendment in CSR implementation process (Rule 4) 

The title of Rule 4 is amended as CSR Implementation by the 2021 Amendment from CSR Activities under CSR Policy Rules 2014. Under the amended Rules, a company is required to undertake its CSR implementation activities either by itself or through other implementing agencies which can be;

  1. Established under Section 8 of the Companies Act,
  2. A registered public trust or,
  3. A registered society established,

In addition, a company may also take the help of

  1. Any entity established under an Act of Parliament or a state legislature, or
  2. A Section 8 company, registered public trust, or a registered society, having an established track record of a minimum of three years, for its CSR implementation.

Under Rule 4(5) of the amended Rules, the Board is required to ensure that the funds are utilized only for the purposes they are approved to use it and in case of any ongoing project, the Board is required to ensure that the implementation of the project is done within the approved timelines. The new rules also give power to the Board to make modifications for the smooth implementation of CSR activities.

Amendment in criteria of CSR expenditure (Rule 7)

The Board has to ensure that the administrative overheads should not exceed 5% of the total CSR expenditure of the company for the financial year.

The Board has to ensure that any surplus arising out of CSR activities should be reinvested back into the same project or it has to be transferred to the unspent CSR account and must be spent in pursuance of CSR policy and also with accordance to the annual action plan of the company or such surplus amount shall be transferred to a fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year.

The Board has to ensure that any excess amount must be set off against the requirement to spend up to immediate succeeding three financial years subject to the conditions that the excess amount available for set-off should not include the surplus arising out of the CSR activities if any. The Board of the company is required to pass a resolution to this effect.

Provisions with relation to acquisition of capital assets

If a company has created any assets prior to the commencement of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, then the company has to comply with the requirement within a period of 180 days from such commencement, 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 in CSR reporting (Rule 8)

All those companies having an average CSR obligation of ten crore rupees or more, in the last three preceding financial years, through an independent assessment agency are mandatorily required to undertake the impact of their CSR projects. The impact assessment reports are required to be annexed to the annual report on CSR and also to be placed before the Board of the company. Further, a company undertaking impact assessment is permitted to book expenditure up to five percent of the total CSR expenditure of Rupees Fifty Lakh, whichever amount to less, towards corporate social responsibility.

In addition, some Additional disclosures are also mandatory which follows:

Amendment in website disclosure (Rule 9)

The Board of Directors of the company has to mandatorily disclose the composition of the CSR committee and the CSR policy and projects approved by the Board on their website for public access.

Conclusion

In India, CSR has gained importance in recent years as companies are now realizing the importance of investing in CSR for achieving benefits of creating shareholder value, operational efficiency, better access to capital, increased revenue base, strategic branding, human and intellectual capital, and lower business risk.

CSR in India was legislated with the hope that it would emerge as an effective tool that synergizes the efforts of the Corporate and the social sector towards sustainable growth and development of societal objectives at large. Similarly, it was also felt that the society would also get benefitted as the government has been found to be wanting in its efforts to help the local populace in several instances. The Act in spite of all its good intentions failed to cover a lot of ground.

Therefore, the Companies (CSR Policy) Amendment Rules 2021 were introduced to create a stringent regulatory architecture for carrying out CSR activities in India and to overhaul India’s CSR regime. The New CSR Policy Rules,2021 have introduced new requirements, ensuring compliance with the new legal framework, companies have to preserve detailed records of CSR committee meetings, impact assessment of CSR contributions, projects undertaken through implementing partners, etc. The concepts, such as the meaning of CSR, CSR policy, CSR implementation have been amended and provided in a more detailed and structured form.

References


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