CORPORATE SOCIAL RESPONSIBILITY (CSR) – LATEST CHANGES IN CSR RULES

Learning No. 12 

Month: Feb 2021

CORPORATE SOCIAL RESPONSIBILITY (CSR) – LATEST CHANGES IN CSR RULES

In India, the Companies Act, 2013 (the Act) has made mandatory for certain class of companies to spend on Corporate Social Responsibility (CSR) activities. CSR has played a vital role in economic development and health care of people during CoVID-19 pandemic situation. Ministry of Corporate Affairs has brought in amendments in Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules, 2014”) through Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (CSR Amendment Rules, 2021) which came into effect on January 22, 2021. An attempt has made in this article to demonstrate latest changes in CSR rules, 2014.

DEFINITIONS (Rule 2 of CSR Rules, 2014 fully substituted with the following definitions)

 

a.  Corporate Social Responsibility (CSR): 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 these rules, but shall not include the following, namely: -

 

(i)   activities undertaken in pursuance of normal course of business of the company:

However, any company engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business, may undertake research and development activity of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23 subject to the conditions that: -

 

·         such research and development activities shall be carried out in collaboration with any of the institutes or organizations mentioned in item (ix) of Schedule VII to the Act;

 

·         details of such activity shall be disclosed separately in the Annual Report on CSR included in the Board’s Report;

 

In order to qualify R&D activities of new vaccine, drug and medical devices related to CoVID-19 as CSR, such activities shall be carried out jointly with Institute/ organization as mentioned in Sch VII (ix) of the Act and details shall be disclosed separately in Board Report.

 

(ii)      Any activity undertaken by the company outside India except for training of Indian sports personnel representing any State or Union territory at national level or India at international level;

 

(iii)     Contribution of any amount directly or indirectly to any political party under section 182 of the Act;

 

(iv)    Activities benefitting employees of the company as defined in section 2(k) of the Code on Wages, 2019;

 

(v)      Activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services;

 

(vi)    Activities carried out for fulfilment of any other statutory obligations under any law in force in India;

 

b.  CSR Policy: means a statement containing the approach and direction given by the Board of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan.

 

Every class of companies to which Sec 135 shall apply, shall amend the CSR policy in line with the definition to include statement containing the approach and direction given by the Board (as recommended by CSR Committee) along with guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan for CSR.

 

c.  Administrative overheads: means the expenses incurred by the company for general management and administration’ of CSR functions in the company but shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or programme;

 

The board shall ensure that the administrative overheads shall not exceed 5% of total CSR expenditure of the company for the financial year (Rule 7). It excludes direct expenses connected to CSR project like its designing, implementation, monitoring and evaluation etc.

 

d.  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, to which the provisions of the Schedule to the said Act apply;

 

e.  Net profit means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely:-

 

(i)   any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and

 

(ii)  any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act:

 

Provided that in case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381, read with section 198 of the Act;

 

f.   Ongoing Project: means a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the Board based on reasonable justification.

 

In the on-going project, project should be undertaken must have timeline for fulfillment of CSR obligations between 1 year to 3 year excluding financial year in which it is commenced.

 

g.  Public Authority: means ‘Public Authority’ as defined in section 2(h) of the RTI Act, 2005.

 

ENTITIES ELIGIBLE FOR CSR ACTIVITIES & FILING (Rule 4 fully substituted as below)

 

Board of Directors of the company can undertake the CSR activities either by its own or through:

 

(a)    Sec 8 Company, or a registered public trust or a registered society registered u/s 12A & 80G of the Income Tax Act, 1961, established by the company, either singly or along with any other company, or

(b)    Sec 8 Company or a registered trust or a registered society, established by the Central Government or State Government; or

(c)    any entity established under an Act of Parliament or a State legislature; or

(d)    Sec 8 company, or a registered public trust or a registered society, registered u/s 12A & 80G of the Income Tax Act, 1961, and having an established track record of at least 3 years in undertaking similar activities.

 

Every aforementioned entity, which intends to undertake any CSR activity, shall register itself with the Central Government by filing the e-Form CSR-1 with the RoC, w.e.f. 01.04.2021. However, this amendment shall not affect the CSR projects or programmes approved prior to 01.04.2021. Such one-time e-form submitted shall be verified digitally by Practising Company Secretary, Chartered Accountant or Cost Accountant. On submission, a unique CSR Registration Number shall be generated by the system automatically.

 

But there is no restriction for a company to directly spend in CSR activities. In such case, it is not required to file the e-form with the RoC. Also a company may 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.

 

Apart from above, 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.

 

MONITORING, EVALUATION & CERTIFICATION

·      The Board of a company shall satisfy itself that the funds so disbursed have been utilized for the purposes and in the manner as approved by it.

·      the Chief Financial Officer or the person responsible for financial management shall certify to the effect.

·      In case of ongoing project, 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.

 

CSR COMMITTEE (Rule 5 fully substituted as below)

 

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, namely: –

 

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 rule 4(1);

c)    the modalities of utilization of funds and implementation schedules for the projects or programmes;

d)    monitoring and reporting mechanism for the projects or programmes; and

e)    details of need and impact assessment, if any, for the projects undertaken by the company.

 

However, the Board may alter such plan at any time during the financial year, based on the recommendation of its CSR Committee with reasonable justification to that effect.

 

Rule 6 of CSR Rules, 2014 w.r.t. CSR policy is fully omitted.

 

CSR EXPENDITURE (Rule 7 fully substituted as below)

Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be  

·      re-invested back into the same project or

·      transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or

·      transfer such surplus amount to a Fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year.

 

The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by –

a)    a Section 8 Company, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number (after filing Form CSR-1); or

b)    beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or

c)    a public authority:

 

However, any capital asset created by a company prior to the commencement of this Amendment Rules, shall within a period of 180 days from such commencement comply with the requirement of this rule, which may be extended by a further period of not more than 90 days with the approval of the Board based on reasonable justification.

 

EXCESS CSR AMOUNT SPENDING

Where a company spends an amount in excess of 2% average net profit, such excess amount may be set off up to immediate succeeding three financial years’ subject to the following conditions–

 

·         The excess amount available for set off shall not include the surplus arising out of the CSR activities, if any.

·         The Board of the company shall pass a resolution to that effect.

 

CSR REPORTING (Rule 8 fully substituted as below)

Every applicable company shall include detailed Annual Report on CSR activities as a part of Board’s Report w.e.f. FY 2020-21 onwards in the format viz., Annexure II (new format introduced in CSR amendment Rules, 2021) to CSR Rules 2014. However, for the FY prior to FY 2020-21, Annual Report on CSR Activities shall be in a format viz., Annexure I (old format).

 

THE IMPACT ASSESSMENT OF CSR PROJECTS

 

This is the new concept which is introduced in CSR amendment rules, 2021. As Rule 8 (3)(a) of the rules, every company having average CSR obligation of Rs. 10 crore or more, in the 3 immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of Rs. 1 crore or more, and which have been completed not less than 1 year before undertaking the impact study.

 

It is clear from the sub rule that a company shall be eligible to do impact assessment through external agency only if following conditions are satisfied:

·         every company whose CSR obligation is Rs. 10 crores or more in 3 immediately preceding FY;

·         Outlay of CSR projects is Rs. 1 crore or more, and

·         Completion period is not less than 1 year before undertaking the impact study.

 

If above conditions are not satisfied, then no need to do the impact assessment. The reporting company is free to choose independent agency who shall be CSR professionals for impact assessment of CSR activities. Such impact assessment reports shall be placed before the Board and shall be annexed to the Annual Report on CSR.

 

 

EXPENDITURE FOR IMPACT ASSESSMENT

 

A company undertaking impact assessment may book the expenditure towards CSR for that financial year, which shall not exceed 5% of the total CSR expenditure for that financial year or Rs. 50 lakh, whichever is less.

 

WEBSITE DISCLOSURE (amendment to Rule 7)

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, if any, for public access.

 

TREATMENT OF UNSPENT CSR AMOUNT (Rule 10 - new rule introduced)

Until a fund is specified in Schedule VII for the purposes of section 135 (5) & (6) of the Act, the unspent CSR amount, if any, shall be transferred by the company to any fund included in schedule VII of the Act.

 

Unspent amount not relating to ongoing Project: Where an unspent amount not relates to any ongoing project referred to in Sec 135 (6), such unspent amount shall be to a Fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year. Also reason for not spending CSR amount must also to be disclosed in Boards’ Report. So CSR amount remaining unspent (other than ongoing project) for the FY 2020-21 shall be transferred to Schedule VII fund latest by September 30, 2021. This provision became effective from Jan 22, 2021.

 

Unspent amount relating to Ongoing Project: Any unspent amount Sec 135 (5) relating to any ongoing project, shall be transferred to a special account viz., Unspent Corporate Social Responsibility Account within a period of 30 days from the end of the FY and such amount shall be spent by the company within a period of 3 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 30 days from the date of completion of the third financial year. So CSR amount remaining unspent relating to ongoing project for the FY 2020-21 shall be transferred to a separate bank account in the name of “Unspent Corporate Social Responsibility Account” within 30 days from FY end ie., April 30, 2021. Such amount can be spent towards CSR obligations within 3 years failing which it has to be transferred to a fund specified in Schedule VII within 30 days of expiry of 3^rd FY ie., April 30, 2024. This provision became effective from Jan 22, 2021.

 

PENALTY FOR UNSPENT (Sec 135 (7) of the Act)

 

If a company is in default in complying with the provisions of Sec 135 (5) & (6) of the Act:

 

Company	shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or 1 crore rupees, whichever is less,
Officers in default	shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or 2 lakh rupees, whichever is less.

 CONCLUSION

CSR Amendment rules give much more clarify on monitoring, implementing and spending on CSR activities. The rules give the opportunity to the CS professional who is experience in CSR, can act as independent agency for impact assessment of CSR activities. We as a professionals must be well versed with CSR amendment rules.  

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