RELATED PARTY TRANSACTIONS – AN ANALYSIS

Learning No. 13

Month: June 2021

RELATED PARTY TRANSACTIONS – AN ANALYSIS

Introduction

When a Company becomes publicly held entity, its members expect better return, transparency in its operations and compliance in letter and spirit. The leakage of funds is the main concern which every company is facing and normally happens through the Related Party Transactions. In turn, it will affect return to its members. Hence it is pre-requisite that the transactions with related parties must be tightened. It doesn’t mean it must be totally prohibited. But such transactions shall be executed on arm’s length basis. In this article, an attempt has been made to analyze the various provisions of Companies Act, 2013 and Listing Regulations connected to the Related Party Transactions.

Normally, when a transaction takes place between two parties, there exists market mechanism. That means, demand and supply (Transaction takes place at Market price (MRP)). On the other hand, when a transaction is executed with related parties, they may get preferred facilities in form of payment at discount rate, extending credit period which unrelated parties are not getting. In order to prevent misuse of such type of transactions, company should maintain caution and arm’s length relationship while executing contract or arrangement.

As the name suggests, Related Party Transactions means any transaction, deal or arrangement between two and more parties who have any relationship before such transaction is executed.

REGULATORY FRAMEWORK

The concept was introduced for the first time under the Companies Act, 2013 (“the Act”) and it got inherence from the erstwhile Companies Act, 1956, the details of old provisions are as given below:

Ø Section 297: Board approval was required for entering into any contract or arrangement with the related parties w.r.t. sale, purchase or supply of any goods, materials and services or for underwriting the subscription of any shares in, or debentures of, the company. Further, there was a requirement to get central Government approval for above mentioned contract if the company has more than Rs. 1 Cr. paid up capital. The said section also mentioned about various exemption under sub section (2).

Ø Section 299: directors to disclose their interest in other concerns to the Board of Directors before entering into any contract with the related parties. Only exception is where directors of one company taken together have less than 2 % of paid up capital of another company.

Ø Section 300: Directors not to participate in voting when the board resolution is passed relating to any business in which such person is interested.

Ø Section 314: Office or Place of profit

Currently, regulatory framework governing the Related Party Transactions is given as follows:

Following points must be followed to treat AS Related Party Transactions

 

Before entering into any transactions by the reporting company, compliance officer must look into following factors. If it is satisfied, such transactions will be treated as Related Party Transactions.

But if transaction is in “Ordinary Course of Business” and “arm’s length basis”, then provisions of Sec 188 (1) shall not applicable.

 

PROCESS INVOLVED IN IDENTIFICATION OF RELATED PARTY TRANSACTIONS

Let us now understand how we can treat transactions as Related Party Transactions based on the following:

Step no. 1 - IDENTIFICATION OF RELATED PARTY

The word “related party” is defined under Section 2(76) of the Companies Act, 2013 are as follows along with illustrations:

 

Following are the related parties w.r.t. ABC Ltd and let’s take, Mr. V, W, X, Y, and Z are directors and Mr. U as MD of this company. The related parties to the reporting company are as under:

Sl. No	Related parties
i.	A director or his relative (For eg: Mr. V, Mr. W, Mr. X, Mr. Y and Mr. Z and the relatives of them.)
ii.	Key managerial personnel or his relative (For eg: Mr. U along with his relatives.)
iii.	A firm in which a director, manager, or his relative is a partner   (For eg: Mr. X is a partner at PQR & Co, firm. Hence PQR & Co will be treated as related party)
iv.	a private company in which a director or manager or his relative is a member or director; (For eg: Mr. Z is also a director in MNO Pvt Ltd and Mr. Z’s relative is a member in MNO Pvt ltd, MNO Pvt. ltd becomes a related party.)
v.	A public company in which a director or manager is a director and holds along with his relatives more than 2% of its paid-up capital   (For eg: Mr. Y along with his relatives holds more than 2% of the paid-up capital of HIJ Ltd. In such case, HIJ Ltd will be considered as a related party)
vi	Any body corporate whose board of directors, MD or manager is required to act in accordance with the advice, directions or instructions of a director or manager (NA in cases when these directions are followed in  professional capacity)   (For eg: When JKL Ltd acts on the directions of Mr. V, JKL Ltd will be a related party.)
vii	Any person on whose advice, directions or instructions a director or manager is required to act. (If it is done in a professional capacity, they are not considered as related party)   (For eg: Mr. R on whose advice Mr. W has to act will be considered as a related party.)
8	Holding, Subsidiary or Associate of such company These all will be considered as related parties: ·  EFG Ltd holding 72% in ABC Ltd (EFG Ltd is a Holding Company) ·  ABC Ltd is holding 65 % in RTS Ltd (RTS is a Subsidiary Company) ·  ABC Ltd is holding 23% in JAQ Ltd (JAQ Ltd is an Associate Company)
9	Any company which is subsidiary of a holding company to which it is also a subsidiary. (KQJ Ltd & RTS Ltd is both subsidiaries of EFG Ltd. Thus, KQJ Ltd. also becomes a related party)
10	As per Rule 3 of Companies (Specification of definitions details) Rules, 2014 for the purposes of above-mentioned sub-clause (ix), a director [other than an independent director] or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.

 Whereas “Relative” (Sec 2(77)) means

·   a member of the same HUF;

·   husband & wife;

·   one person is related to the other like father (including step father) mother (including step mother), son (including step son), son’s wife, daughter, daughter’s husband, brother (including brother), sister (including step sister).

As per Regulation 2(1)(zb) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as amended from time to time, the term “Related Party” means related party as defined under Section 2(76) of the Companies Act, 2013; or Such entity is a related party under the applicable accounting standards. Please note that if any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity, such entity/ person shall be treated as a related party. The definition shall not be applicable to the units issued by Mutual funds which are listed on recognized stock exchange.

 

Step no. 2: TRANSACTIONS INVOLVED IN THE RELATED PARTY TRANSACTIONS

 

Sl. No.	Transactions considered as Related Party Transactions
1	Sale, purchase or supply of any goods or materials;
2	Selling or otherwise disposing of, or buying, property of any kind;
3	Leasing of property of any kind;
4	Availing or rendering of any services;
5	Appointment of any agent for purchase or sale of goods, materials, services or property;
6	Such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company
7	Underwriting the subscription of any securities or derivatives thereof, of the company

OFFICE OR PLACE OF PROFIT

Meaning: It means any office or place:

i. which is held by a director, if the director holding it receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

ii.  which is held by person connected to the directors ie an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;

 

Purpose: To prevent a Director/ person connected to the directors from being placed in the inconsistent position without proper selection procedure/ approval.

 

Step no. 3: APPROVAL STRUCTURE

                

LEVEL 1 approval: Audit Committee approval

 

As per Sec 177 of the Act, for every transaction with the related parties, the prior approval of Audit Committee is required. But in case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board. The approval structure is as follows:

The Committee shall consider 2 factors while specifying the criteria for making omnibus approval, namely,

(i) Repetitiveness of the transactions; and

(ii) Justification for the need of omnibus approval.

 

Such approval for the RPT shall be obtained on annual basis (Rule 6-A of the Companies (Meetings of Board and its Powers) Rules, 2014) and shall be valid for a period not exceeding 1 financial year (requires fresh approval after expiry of such FY). Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

 

As per third proviso to Sec 177 (4) of the Act, in case any transaction involving any amount not exceeding Rs. 1 Crore is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within 3 months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee.

 

level – 2 approval: BOARD OF DIRECTORS’ APPROVAL

As per Sec 188(1) of the Act, no company shall enter into any contract or arrangement with related parties except with the consent of the Board of Directors. The provisions of this sub-section shall not apply to any transactions entered into by the company in its ordinary course of business and at an arm’s length basis.

 

Such meeting can be held in person or through virtual means as may be prescribed. The Approval of the Board of Directors cannot be obtained by passing a circular resolution or by any other mode (as prescribed in SS-1 on Board meeting).

 

As per Section 188(3) of the Act, where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a resolution in the general meeting under sub-section (1), such transaction required to be ratified by Board and General Meeting within 3 months from the date on which such contract or arrangement was entered into. It is clear from sub section (3) that requirement of prior approval shall not required.

 

Where there is any interested director in any contract/ arrangement with related party, such director shall not be present at meeting during discussions on subject matter of resolution relating to such contract/ arrangement. Interested Director shall not be counted for quorum and shall not allow participating in the voting. But in case of private companies, interested director may participate in such meeting after disclosure of his interest.

 

Board meeting’s resolution shall contain the following details:

1.  Name of related party and nature of relationship;

2.  Nature, duration of contract and particulars of contract/ arrangement;

3.  Material T&C of contract/ arrangement including value, if any,

4.  Any advance paid/received for contract/arrangement, if any;

5.  Manner of determining pricing and other commercial terms, both included as part of contract and not considered as part of contract;

6.  Whether all factors relevant to contract have been considered, if not, details of factors not considered with rationale for not considering those factors; and

7.  Any other info. Relevant/ important for Board to take a decision on proposed transaction.

 

level – 3 approval: SHAREHOLDERS’ APPROVAL IN THE GENERAL MEETING:

As per first proviso to Sec 188 of the Act read with Rule 15 of Companies (Meeting of Board and its powers) Rule, 2014, prior approval of shareholders by way of ordinary resolution required in cases of contract/ arrangement entered into with the related party exceeds the following threshold limit:-

 

Sl. No.	Contract/ Arrangement with related party with respect to:	Revised Threshold
i	Sale, purchase or supply of any goods or materials	10% or more of its turnover
ii	Selling or otherwise disposing of, or buying, property of any kind	10% of its net worth
iii	Leasing of property of any kind	10% or more of its turnover
iv	Availing or rendering of any services
v	Appointment of any agent for purchase or sale of goods, materials, services or property
vi	Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company	Monthly remuneration exceeding Rs. 2.50 lakhs
vii	Remuneration for underwriting the subscription of any securities or derivatives thereof, of the Co.	Exceeding 1% of its networth.

 

Ø It is hereby clarified that the limits specified in sub-clause (i) to (iv) above shall apply for transaction(s) to be entered into either individually or taken together with the previous transactions during a financial year.

 

Ø The turnover or net worth referred in the above sub-rules shall be computed on the basis of the audited financial statement of the preceding financial year.

Ø Members of the company shall not vote on such resolution to approve any contract or arrangement which may be entered into by the company, if such member is a related party. The said provision shall not be applicable to the company in which 90% or more members, in number, are relatives of promoters or are related parties:

Ø In case of private company, second proviso to Sec 188(1) shall not apply.

Ø First and second proviso to Section 188 (1)  shall not apply to:-

a.  Government company in respect of contracts or arrangements entered into by it with any other Government company;

b.  a Government company, other than a listed company, in respect of contracts or arrangements other than those referred to in clause (a), in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before entering into such contract or arrangement.

Ø The requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval:

ADDITIONAL PROVISIONS IN THE CASE OF LISTED COMPANIES

As per Reg 23 of the SEBI (LoDR) Regulations, 2015, All Material Related Party transactions shall require approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not.

 

Here, “Material Related Party Transactions” means

 

Ø A transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year exceeds 10% of the annual consolidated turnover of the listed company as per the last audited financial statements of the listed entity.

 

Ø A transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed 5% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

 

All related party transactions require prior approval of Audit Committee either through omnibus approval route or ordinary approval route.

 

The provisions of Reg 23 (2), (3) & (4) shall not apply in the following:

Ø transactions entered into between two government companies;

Ø transactions entered into between a holding company and its wholly owned subsidiary whose  accounts  are  consolidated  with  such  holding  company  and  placed  before  the shareholders at the general meeting for approval

 

COMPLIANCE

I. Disclosure/Reporting Requirements under Companies Act, 2013

Provision/ Section	Requirement
188(2)	Every contract or arrangement entered into under sub-section (1) shall be referred to in the Board’s report to the shareholders along with the justification for entering into such contract or arrangement.
129	Financial Statements to Comply with Accounting Standards - Disclosure of Related Party Transactions in Financial Statements  of a company to be made as per Applicable Accounting Standard
134(3)(h)	Board’s Report  to include Particulars of            Contracts or Arrangements with Related Parties referred to in Sec 188(1) in AOC-2
Rule 15(2)	Where any Director is interested in any contract with Related  Party, such director shall not  be present at  meeting during  discussion
184	Form MBP - 1 (General Notice of Disclosure) helps to evaluate the details of entities in which directors are interested.
189	The company shall maintain a register (Form MBP-4) for related party transactions. After entering the particulars in the register, such register shall be placed before the next Board meeting and signed by all directors present at the meeting.

II. Disclosure/Reporting Requirements  under SEBI (LODR), 2015

Provision	Requirement
23(9)	The listed entity shall submit within 30 days from the date of publication of its standalone and consolidated financial results for the half year, disclosures of related party transactions on a consolidated basis, in the format specified in the  relevant accounting standards for annual results to the stock exchanges and  publish the same on its website.
34(3)  read with Sch. V	Annual report shall contain RPT disclosures as specified in Para A of Schedule V  of these regulations
46(2)(g)	Listed Entity to disseminate on its Website Policy on dealing with RPTs.
Sch V. Para C  Disclosure 10(a)	Report on Corporate Governance shall disclose disclosures on materially  significant related party transactions that may have potential conflict with the  interests of listed entity at large
Sch V para C  Disclosure 10(f)	Report on Corporate Governance shall disclose web link where policy on dealing with related party transactions is disclosed.

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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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