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This article is written by Aabir Shoaib, pursuing a Diploma in General Corporate Practice: Transactions, Governance, and Disputes from Lawsikho.

Introduction

One of the most crucial decisions of the government was amending the Companies Act of 2013. The Companies Amendment Act was revised in 2015, 2017, 2019, and currently, as suggested, in 2020. Keeping in mind the dynamic evolution of the corporate sector, the intent of the amendment varies consequently to strike a balance in the ease of doing business to corporate development. On September 18, 2019, the government established a Company Law Committee with the aim of facilitating greater ease of living for law-abiding businesses. The government and the committee’s ultimate aim was to decriminalise several further clauses of the Act depending on their seriousness, as well as take other required steps to make it easier for the country’s companies. The Committee’s report was tabled in November 2019.

The Committee on Company Law (“CLC”) was created in the context of the government’s efforts to improve the comfort of corporate life in India and to implement certain intricate reforms such as decriminalising certain acts. Following the submission of the Company Law Committee’s opinion, the MCA introduced the Companies (Amendment) Bill, 2020 in Parliament, which was approved by the Lok Sabha on September 19, 2020, and by the Rajya Sabha on September 22, 2020. Following that, on September 28, 2020, the President of India gave his assent to the Companies (Amendment) Bill, 2020, and the Companies (Amendment) Act, 2020 (“2020 Act”) was passed. The 2020 Act is divided into sixty-six parts that aim to amend the various clauses of the 2013 Act. The 2020 Act’s goal is to decriminalise minor, technological, or procedural non-compliance depending on the extent and seriousness of those offences, thus facilitating and fostering ease of doing business, as well as other reforms to further promote ease of living for law-abiding corporates in the nation. The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 released on March 13th, 2020 by the Ministry of Corporate Affairs (MCA). The regulations were written to implement the 2019 changes to the Companies Act. Certain amendments to corporate social responsibility (CSR) were made during the Finance Minister’s 2019 budget speech, and they were subsequently passed in July 2019. The new regulations have been drafted to enforce these reforms and are applicable to all CSR-compliant and non-profit organisations in India.

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This article outlines and attempts to explain the following concepts:

  • Corporate social responsibility under the Companies (Amendment) Act, 2020.
  • Amendments and effects on CSR compliant companies.
  • Direct and indirect implications of the Companies (Amendment) Act, 2020 on CSR activities of non-profit organisations. 
  • Conclusion.
  • References.

The purpose of this article is to equip the reader with a clear understanding of the changes brought about by the new Companies (Amendment) Act, 2020 in contrast to the previous Companies Act 2013. It also outlines the specific changes which are now to be compiled by the existing companies which were incorporated previously and the new companies which will or are yet to be incorporated. The direct and indirect implications of the Companies (Amendment) Act, 2020 on the CSR activities of Section 8 companies, owing to their differentiated nature of operations and functioning have also been explained and elaborated to provide a clear grasp of understanding to the reader.

Corporate Social Responsibility under the Companies (Amendment) Act, 2020, Amendments and effect on CSR compliant companies

A corporation or a company is a legal body created by a group of people to participate in and conduct the commercial or industrial activity. Based on the corporation law of the state, an organisation may be structured in a variety of forms for tax and financial responsibility purposes. The type of corporate arrangement a company prefers, such as a partnership, sole proprietorship, or corporation, is usually determined by the line of business it operates in. These systems also reflect the company’s ownership structure. The Companies Act of 2013 requires any company that has a total value of Rs. 500 Crore or more, the revenue of Rs. 1000 Crore or more, or net profit of Rs. 5 Crore or more, to form CSR Committees during the immediately preceding fiscal year and to expend 2% of the company’s average net profit made in the three financial years immediately prior to its policy for CSR. The Companies Act 2020 waives the establishment of CSR committees for companies with a liability of up to Rs. 50 lakh each year. Moreover, businesses that in the financial year pay any amount above their CSR liability will deduct an excess amount for future CSR liabilities. 

In the case of a company that fails in compliance with Section 135, sub-section (5) or sub-section (6) [Companies Act, 2013 (mca.gov.in)] the company shall be liable for a penalty of twice the amount required to be transferred to the Fund as provided for in Schedule VII of the Companies Act, 2013 or the ‘Unspent Corporate Social Responsibility Account’, where this provision is not complied with as the case may be, or one crore rupees, whichever is less, and a penalty of one-tenth of the amount needed to be transferred by the corporation to any fund stated in Schedule VII of the Companies Act, 2013, or the unspent corporate social responsibility account, as the case may be, or two lakh rupees, whichever is less, shall be imposed on any officer of the company who is in default.

Consequently and put in simpler words, corporate social responsibility, on the other hand, shall not include: 

  1. Any activities that the company engages in as part of its business.
  2. A company’s operation that takes place outside of India.
  3. Contributions to a political party, either directly or indirectly.
  4. Activities that favour only the staff of the firm (if company employees are 25 percent or less of the people served by an activity, it can be counted as CSR).

Moreover, there are also some changes in the definitions of certain words and phrases and certain duties provided under the Act which will have to be taken under due consideration by the companies and the government operating from now on.

In addition, the following rules shall also apply:

  1. Change the concept of “CSR strategy” to “a paper outlining a company’s approach to choosing, enforcing, and tracking its CSR operations.”
  2.  Make arrangements for foreign organisations, such as the UN, to be protected by CSR. Create a category for ‘ongoing ventures,’ which are multi-year projects (not exceeding three years) that businesses perform to meet their CSR commitments, except the financial year in which the activity began. 
  3. Allow the government to create a “National Unspent Corporate Social Responsibility Fund” for any CSR funds that have not been invested.
  4. This fund would be used to carry out CSR projects as required by the Companies Act.

Direct and indirect implications of the Companies (Amendment) Act, 2020 on CSR activities of non-profit organisations

Section 8 Companies Act, also known as a non-profit organisations (NPO), are corporations formed for the purpose of supporting business, art, science, faith, welfare, or any other beneficial purpose, providing that all proceeds and other revenue are used to further the company’s objectives and no dividends are charged to its shareholders. Various provisions of the Companies Act, 2013 (“Companies Act”) will not apply or will apply with exceptions, modifications, and adaptations to a body to which a licence is granted under the provisions of section 8 of the Companies Act, i.e. companies with charitable items, etc., according to a notification issued by the (Indian) Ministry of Corporate Affairs on June 5, 2015. (“Non-Profit Companies”). 

Direct implications on CSR activities of non-profit organisations are as follows :

Not-for-profit entities founded by corporations (either alone or in collaboration with others) or independently established entities are required to register under Sections 12A and 80G of the Income Tax Act. Every five years, these would need to be renewed.

  • Compulsory registration with the Ministry of Corporate Affairs. 

Beginning April 1, 2021, every CSR implementing agency must register with the Ministry of Corporate Affairs (MCA) and get a unique CSR Registration Number.

  • Involvement of transnational organisations

UN entities, as defined by the UN (Privileges and Immunities) Act of 1947, are allowed to be designated for the design, monitoring, and assessment of CSR projects, as well as institutional strengthening for own CSR personnel (the latter is capped at 5% as an administrative expense).

Indirect implications on CSR activities of Non-Profit organisations are as follows :

  • Audited financial reports.

As a result of the revisions, the company’s CFO is now responsible for certifying the disbursement and use of CSR funds. This shift necessitates the use of certified financial usage reports at the project level by CSR implementing agencies.

  • Impact evaluation reports.

Under the new amendments, select enterprises with a minimum overall CSR budget and project budget must do an independent impact evaluation assessment. As a result, CSR implementing agencies must develop the necessary expertise and partnerships in order to drive external impact assessment for qualified initiatives.

  • Resilient systems and procedures.

CSR implementing agencies would need to have and establish strong systems and processes that enable documentation in order to provide the requisite evidence and information for financial reporting and other compliance.

Conclusion

Corporate laws are the foundation of business legislation, overseeing the admission of corporations into the market, controlling their operations, ensuring shareholder responsibility, and establishing corporate governance standards. India’s corporate governance system has changed dramatically over the past few decades. The Companies Act of 2013, which was enacted to put Indian company law in line with global norms, is widely regarded as one of India’s most important legal changes in recent history. The Companies Act of 2013 and subsequent regulatory amendments in the field of companies’ law were enacted with the aim of encouraging the establishment of organisational frameworks for conducting business and making such conduct simpler. 

To begin with, the Act’s relaxations will assist businesses in not only reducing enforcement expenses but also allowing them to concentrate on their core market practises. Companies would find it easy to correct their errors, pay the tax, and become legal, which aligns with the goal of encouraging ease of doing business. The Bill also aims to incorporate some planned relaxations that could further encourage industry and trade emphasis while still saving costs associated with regulatory criteria. The Bill reduces the pressure on start-ups and small companies by concentrating on relatively minor non-compliance by new enterprises due to a lack of expertise and/or capital (which may also be relevant for SMEs). 

Though companies in India are likely to support the decriminalisation of such offences, certain people on the other end of the continuum might believe that the Bill went too far because some of the non-compliance that was intended to be decriminalised may have harmed the public interest. Adding more NCLT benches and raising the judge ceiling to the maximum strength of the bench will serve to reduce the backlog and make it easier for litigants to enter the appellate body. It is critical to remember that the Bill seeks to allow the Central Government significant authority, exercisable if required after consultation with the authorities, to grant concessions and preferential care to classes of companies considered appropriate under the Act. It would be fascinating to see if the Indian Parliament adopts the Bill in its final form, as well as whether any further changes to the Act are proposed in light of the new pandemic.

References

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