This article has been written by Kalpalathikaa M.
The enactment of the Companies Act of 2013 saw India become the first country to legally mandate Corporate Social Responsibility (“CSR”) laws. The act set out specific criteria, fulfilling which companies have to spend 2% of their average net profits of 3 preceding years on CSR activities failing which the unspent amount had to be disclosed. Following the Act, Section 135 of the Act was brought into force which enabled the constitution of the CSR Committee and provided for the Specifications of the CSR Committee and the format for disclosure.
Fast forward to 2021, the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 introduced certain changes which will be instrumental in the implementation of the provisions of the Companies (Amendment) Act of 2019 and 2020. With these amendments coming into force, companies now face a “comply or suffer” situation, where unspent funds would have to be transferred to the Clean Ganga Fund, the PMNRF etc, These amendments, are not just mere changes made to the act, but will make changes to the overall implementation of CSR activities. Some new changes have also been included with respect to the registration of implementation agencies.
Breaking down the changes
Definition of CSR
The definition of CSR has excluded certain activities that are excluded from the purview of CSR. These include by are not limited to:
- Activities that are undertaken in the normal course of business: In case a company incurs expenditure for R&D activities with respect to vaccine/drugs/devices for Covid-19, they will be provided with an exclusion for 3 years until FY 2022-23.
- Activities that are undertaken outside India.
- Contributions to a political party, etc.
Nature of CSR spending
- Spending on CSR activities has been made mandatory for companies.
- In case there is any unspent amount, it must be transferred to the Unspent CSR Account. If it remains unspent for the succeeding 3 Financial Years, it must be transferred to Government Funds.
- Though this amendment seems to create a change, there is no effective change as such since the surplus stemming from CSR activities was prohibited from being included as a part of the business profits. The unspent amount must be transferred within 6 months from the conclusion of the financial year.
- If the company spends any excess amount on CSR over and above the stipulated limit of 2%, the excess can be set off against the CSR requirements of the immediately succeeding 3 financial years subject to certain conditions. These templates will be applicable for FY 2020-21.
The definition of Administrative Overheads had been added and only includes the expenditure incurred by the company for the administration and general management of CSR functions. The costs incurred towards administrative overheads must not exceed 5% of the total CSR expenditure of the company.
Companies must establish a CSR Policy which must contain details regarding action, approach and the direction taken by the company in accordance with the recommendations of the CSR committee. It must also provide for a set of guiding principles that will help with the selection, implementation and monitoring of activities along with the formulation of an annual action plan.
The CSR Board is responsible for ensuring that the funds disbursed for CSR activities have been utilized for the said purposes. It must monitor the implementation of CSR projects and ensure that it is complete within the stipulated timelines. These changes have been made with the intention of improving internal control measures for CSR activities.
A company can choose to do CSR activities either on its own or through implementing agencies. These agencies, however, must be mandatorily registered and a unique CSR Registration Number will be issued for each entity.
Most importantly, the CFO is required to provide a certificate of disbursement of CSR funds. He is also required to sign the CSR report.
Modes of implementing CSR activities
The amendment has introduced implementing agencies for which companies are qualified to carry out CSR activities. From 1st April, companies can conduct CSR activities only via the implementing agencies that are registered with the Ministry of Corporate Affairs (“MCA”). The implementing agency must register with the MCA by filling an e-form CSR-1 with the MCA. Once the registration is complete, the agency will be allotted a CSR Registration Number following which the form will be verified. The entities that can apply for registration are but not limited to companies, Entities established under a Parliament Act or State Legislature etc., Thus, unless the entity is registered, they cannot be hired as an implementing agency.
In addition to implementing agencies, international organizations can also be engaged for designing, monitoring or evaluating CSR programs and projects in accordance with the CSR policy of the company. The provision for the same is a directory in nature and not mandatory. Thus, a company can choose to appoint any entity in for the implementation of the CSR policy in accordance with the applicable administrative overhead.
Though the draft rules specified the option of choosing international organizations for undertaking CSR activities as an implementing agency, this proposal was dropped.
The amendments have been focused specifically on the internal control measures of a company. The onus of ensuring the compliances would fall on the CSR committee. Companies cannot give fortuitous reasons accounting for the gaps in CSR spending trends. Additionally, in accordance with the Companies Auditor’s Report Order (“CARO”) 2020, auditors are required to provide their inputs and comments on the CSR provisions with specific reference to the transfer of the unspent amount. Thus, the implementation of these amendments will see improved societal standards of living.
- Companies (CSR Policy) Amendment Rules, 2021-Detailed Analysis, TaxGuru, https://taxguru.in/company-law/companies-CSR-policy-amendment-rules-2021-detailed-analysis.html (last visited Feb 3, 2021).
- Vinod Kothari Consultants, CSR –“comply or suffer” provisions made effective – Vinod Kothari Consultants, http://vinodkothari.com/2021/01/CSR-comply-or-suffer-provisions-made-effective/ (last visited Feb 4, 2021).
- B. The Change, CSR in India is Now a Law, Medium (2017), https://bthechange.com/CSR-in-india-is-now-a-law-2502aa6d0daa (last visited Feb 4, 2021).
- CSR Rules-New Changes made in 2021, TaxGuru, https://taxguru.in/company-law/CSR-rules-new-changes-made-in-2021.html (last visited Feb 4, 2021).
- Implications of the Companies (Corporate Social Respons – KPMG India, https://home.kpmg/in/en/home/events/2021/01/implications-of-companies-CSR-amendment-rules-2021.html (last visited Feb 3, 2021).
- Vinod Kothari Consultants, PPT on Corporate Social Responsibility 2021- Amendments – Vinod Kothari Consultants, http://vinodkothari.com/2021/01/corporate-social-responsibility-2021-amendments/ (last visited Feb 4, 2021).
- Ministry of Corporate Affairs, CSR Amendment Rules-MCA, http://www.mca.gov.in/Ministry/pdf/CSRAmendmentRules_22012021.pdf (Last visited Feb 3, 2021).
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