1. BACKGROUND
Corporate Social Responsibility (CSR) can be defined as a company’s sense of responsibility towards the community and environment (both ecological and social) in which it operates. Companies can fulfil this responsibility through waste and pollution reduction processes, by contributing educational and social programmes, by being environmentally friendly and by undertaking activities of similar nature. CSR is not charity or mere donations. CSR is a way of conducting business by which corporate entities visibly contribute to the social good.
The Companies Act, 2013 has formulated section 135, Companies (Corporate Social Responsibility) Rules, 2014 and Schedule VII which prescribe mandatory provisions for companies to fulfil their CSR. This article aims to analyse these provisions (including all the amendments therein).
Applicability of CSR provisions
o On every company including its holding or subsidiary having:
* Net worth of Rs. 500 crores or more, or
* Turnover of Rs. 1,000 crores or more, or
* Net profit of Rs. 5 crores or more
o during the immediately preceding financial year, and
* A foreign company having its branch office or project office in India, which fulfils the criteria specified above.
However, if a company ceases to meet the above criteria for three consecutive financial years then it is not required to comply with CSR provisions till such time as it meets the specified criteria.
The Ministry of Corporate Affairs, vide Notification dated 22nd January, 2021 in exercise of the powers conferred by section 135 and sub-sections (1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013), notified rules to further amend the Companies (Corporate Social Responsibility Policy) Rules, 2014. These rules are to be called the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.
They shall come into force on the date of their publication in the Official Gazette. As per the Notification, section 21 of the Companies (Amendment) Act, 2019 has come into force with effect from 22nd January, 2021.
2. The top ten points relating to changes in CSR rules are as follows
CSR expenditure
(i) Surplus from CSR activities to be ploughed back in same project or transferred to Unspent CSR Account and spent as per policy and annual action plan, or transferred to Fund within 6 months of the end of the financial year.
(ii) Excess amount spent shall be set off within three succeeding financial years subject to conditions (i.e., surplus arising out of CSR activities shall not be considered and the Board of the company shall pass a resolution to that effect).
(iii) CSR amount may be spent for creation / acquisition of capital asset to be held in the manner prescribed.
(iv) Specific exclusion of sponsorship activities for deriving market benefits from the scope of CSR activities.
Governance
(v) Eligible implementing entities through which a company shall undertake CSR activities will be required to register themselves with the Central Government w.e.f. 1st April, 2021.
(vi) Responsibility of the Board to ensure that the funds so disbursed have been utilised for the purposes and in the manner as approved by it and the CFO or the person responsible for financial management shall certify to the effect.
(vii) CSR Committee to formulate Annual Action Plan for CSR activities.
(viii) Companies with average CSR obligation of Rs. 10 crores or more in three preceding years to undertake impact assessment through an independent agency for projects of Rs. 1 crore or more which have been completed not less than one year before the impact study and the report to be placed before the Board and in the Annual Report of CSR.
Reporting
(ix) Earlier, only the contents of the CSR policy were required to be disclosed on the company’s website. Now, composition of CSR Committee, CSR Policy and projects approved by the Board are required to be disclosed.
(x) New format inserted for disclosure to be included in the Board’s Report.
3. The provisions relating to amendment of the Companies Act are tabulated below:
|
Section
|
Description
|
Amendment
|
Earlier
provision
|
Implication
|
|
135(5)
|
CSR spending
|
If the company has not completed 3
years since incorporation, then 2% of average net profit during such
immediately preceding financial year
|
The Board to ensure that the company
spends at least 2% of the average net profit made during 3 immediately
preceding financial years
|
This provision is to rationalise the
method of computation of net profit for the purpose of CSR
In case of newly-incorporated entities,
the amount of CSR expenditure will be increased
|
|
135(5)
2nd proviso
|
Unspent amount not relating to an
ongoing project
|
The unspent amount not relating to an
ongoing project shall be transferred to a Fund specified in Schedule
VII within 6 months of the end of the financial year
|
If the company fails to spend the
amount, the Board is required to specify the reasons for not spending
|
This is a welcome step and the
corporates will be benefited
In case the amount cannot be spent, it
can be transferred to a Fund, avoiding non-compliance
|
|
135(6)
|
Unspent amount relating to an ongoing
project
|
The company is required to transfer the
amount to a special ‘Unspent CSR Account’ within 30 days from
end of financial year and spend it within 3 financial years from date
of such transfer
|
No corresponding provision
|
This is a welcome step and the corporates
will be benefited
This will enable corporates to plan
their cash flows and park the excess amount in ‘Unspent CSR Account’ to be
utilised within next 3 F.Y.s
|
|
135(7)
|
Contravention w.r.t. sections 135(5) and
135(6)
|
Fine equal to:
In case of company – 2X of the amount required to be
transferred, or Rs. 1 crore, whichever is less
In case of officers – 1/10th of the amount
required to be transferred, or Rs. 2 lakhs, whichever is less
|
No corresponding provision
|
Provision for fine introduced
|
4. The provisions relating to amended CSR Rules as per the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 are tabulated below:
|
Rule
|
Description
|
Amendment
|
Earlier
provision
|
Implication
|
|
4
|
CSR implementation
|
Eligible implementing entities through
which a company shall undertake CSR will require to register themselves
with Central Government w.e.f. 1st April, 2021
|
No corresponding provision
|
Welcome step from the point of view of
governance
|
|
Responsibility of the Board to ensure that the funds so disbursed
have been utilised for the purposes and in the manner as approved by
it and the CFO or the person responsible for financial management shall certify
to the effect
|
|
5(2)
|
CSR Committee
|
Committee to formulate annual action
plan for CSR activities
|
Institute transparent monitoring
mechanism for implementation of projects
|
This is a new provision
Shall help in formulation of
Board-governed annual plan. This would lead to good governance
|
|
Board may alter such plan based
on recommendation of CSR Committee
|
|
7
|
CSR expenditure
|
Board to ensure administrative overheads
not to exceed 5% of total CSR expenditure for financial year
|
Contribution to corpus, expenditure on
CSR projects approved by Board on recommendation of CSR Committee, excluding
items not falling under Schedule VII
|
New provisions and welcome ones
This was required as corporates
necessarily need to incur some administrative expenses
|
|
Surplus from CSR activities not to be treated as business profit and
be ploughed back in same project or transferred to Unspent CSR
Account and spent as per policy and annual action plan or transfer to
Fund within 6 months from the end of financial year
|
New provision
Shall benefit the corporates in
smoothening their cash flow and also compliance of the CSR provision
|
|
Excess amount spent shall be set off within 3
succeeding financial years subject to conditions (i.e., surplus
arising out of CSR activities shall not be considered and Board of the
company shall pass a resolution to that effect)
|
New provision
Shall benefit the corporates in
smoothening their cash flow and also compliance of the CSR provision
|
|
CSR amount may be spent for creation
/ acquisition of capital asset to be held in the manner prescribed
|
|
|
8
|
CSR reporting
|
Companies with average CSR
obligation of Rs. 10 crores or more in 3 preceding years to undertake impact
assessment through an independent agency for projects of Rs. 1 crore or
more which have been completed not less than 1 year before the impact study
|
No corresponding provision
|
New provision
Will lead to good governance
|
|
The report to be placed before the
Board and in the Annual Report of CSR
|
|
Company may book the expenditure
towards CSR which shall not exceed 5% of total CSR expenditure or Rs. 50
lakhs, whichever is less
|
|
9
|
Display of CSR activities on website
|
Company to disclose composition of CSR Committee,
CSR Policy and projects approved by the Board
|
Company to disclose the contents of the
CSR policy
|
|
|
10
|
Format for Annual Report on CSR
|
New format inserted for disclosure to be included in the Board’s
Report
|
No corresponding provision
|
Procedural, to clarify the definitions
and meanings
|
|
2(b)
|
Meaning of administrative overheads
|
General management and administrative
expenditure, excluding direct expenses towards a particular project
|
No corresponding provision
|
|
2(d)
|
Meaning of CSR activities
|
Excludes sponsorship activities for deriving market benefits for its
products
|
As per Schedule VII
|
|
2(f)
|
Meaning of CSR Policy
|
Definition amended to widen the scope
of Committee to recommend formulation of annual action plan
|
|
2(g)
|
Meaning of international Org.
|
As defined u/s 3 of UN (Privileges and
Immunities) Act
|
No corresponding provision
|
|
2(i)
|
Meaning of ongoing project
|
Project already commenced, multi-year
project, i.e., not less than 1 year but not exceeding 3 years
|
No corresponding provision
|
|
2(j)
|
Meaning of public authority
|
As defined under the RTI Act
|
No corresponding provision
|
|
6
|
CSR Policy
|
Omitted
|
List of CSR projects which a company
plans to undertake and monitoring process
|
This provision was omitted as the
provision relating to annual plan has been introduced
|
5. Impact Analysis
(I) The new rules will give the corporates thenecessary flexibility in spending in case of ongoing projects.
(II) Those corporates that are unable to spend for any reason will be able to comply with the rules if they transfer the amount to a special Fund
(III) The new rules will bring in more transparency and will involve experts in impact analysis.
(IV) The quality of governance through the Board will be a notch higher
(V) The reporting and disclosure will improve.
