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CSR Amendment Rules, 2021: A New Paradigm

Sonali Jain
13 Feb 2021 5:05 AM GMT
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The concept of Corporate Social Responsibility (hereinafter referred as CSR) is known for its philanthropic nature. The term has its traces from the pre-independence era when Mahatma Gandhi urged rich industrialists to contribute their share of wealth towards poor and marginalized sections. Thus, CSR acts as an ethical obligation on the companies to utilize their resources in addressing the needs of society and to ensure the companies' sustainability in the long run. With the passage and enforcement of the Companies Act, 2013, watershed legislation, India became the first country with a statutory mandate for CSR.

LEGAL PROVISIONS RELATING TO CSR IN THE COMPANIES ACT,2013

The provision for CSR was introduced for companies by Section 135 in the Companies Act, 2013. According to this provision, a company having a net worth of INR 500 Cr. or more, or turnover of INR 1,000 Cr. or more or a net profit of INR 5 Cr. or more are required to spend at least 2% of their three-year annual net profit towards CSR activities in a Financial year. India is the only country to have statutory provisions for companies meeting the abovementioned benchmarks to contribute towards CSR. Further the section talks about the composition of CSR committee and setting off extra amount spent on CSR activities. It mentions about the duty of Board of Directors to indicate the reasons for non-spending of such amount on CSR activities in their report. The provision is to be read with schedule VII of the Companies Act, 2013 which details out the activities that can be undertaken under the purview of CSR policy.

KEY TAKEAWAYS FROM THE 2021 CSR AMENDMENT RULES

The Ministry of Corporate Affairs (MCA) has amended the Companies (Corporate Social Responsibility Policy) Rules, 2014 through a notification dated January 22, 2021, thus giving effect to the changes introduced in CSR by the Companies Amendment Acts of 2019 and 2020.

• Changes in the definition clauses mentioned in Rule 2 of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

The incorporation of definition of 'Administrative overheads' in Rule 2(1)(b) gives the clear understanding of the term which was not there in the previous rules. The term specifically means the expenses incurred for general management and administration of CSR functions in the company and explicitly excludes any expenses incurred for the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project.

Rule 2(1) (d) mentions the activities undertaken under the purview of Section 135 for Corporate Social Responsibility. However, six activities have been explicitly excluded to qualify as CSR activity. The abovementioned activities being activities undertaken in the normal course of business, the

being activities benefitting the employees, , undertaken outside India, contributing towards political party u/s 182, sponsorship activities which help the company in deriving marketing benefits, and carried out for fulfilling statutory obligation The main reason for such a definition is to have corporates think strategically and carefully while undertaking CSR activities rather than just pick and choose any activity mentioned under Schedule VII of the Companies Act, 2013.

With the inclusion of the definition of CSR policy in Rule 2(1) (f), Rule 6 stands omitted. CSR Policy is now defined as 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 the formulation of the annual action plan. The rules are a pioneer in the development of a comprehensive CSR policy.

Rule 2(1) (g) introduces International Organization in the framework of India's CSR. It allows corporates to take a call on the appointment of any outside organization for designing, monitoring, and evaluating their CSR projects and in assisting them with capacity building of their personnel under Rule 4(3) of New Rules.

The term Ongoing Projects has been defined in Rule 2(1)(i) to mean a multi-year project undertaken to fulfill CSR obligation stretching to a maximum duration of 4 years (three years excluding the year of commencement). As per the amendment in section 135, the unspent amount, if any, for ongoing projects, may be transferred to a separate bank account for three years and is not required to be transferred to the Fund specified in schedule VII as required in Section 135(5) of the Companies Act,2013. However, the uncertainty still remains for the projects whose implementation extends beyond 4 years span.

• Amendment in CSR implementation scheme under Rule 4

For all projects effective from April 1, 2021, companies can undertake CSR activity only through implementing agencies that are registered with the Central Government. For registration, a form CSR-1 has to be filed electronically after which a unique CSR Registration Number shall be generated. The template of e-form is present in the rules. In this way, a list of all such participating entities is maintained by the MCA which increases the chances of timely fulfillment of proposed activities. The amendment also states the entities which can apply for registration. The mentioning of public trusts and registered societies in section 8 for implementation of CSR policy will usher a way for companies to have access to various entities for carrying out their CSR obligations.

• Amendment in role of CSR Committee under Rule 5

Now the CSR committee is required to formulate and recommend to the Board a detailed action plan covering entire CSR policies and projects to be undertaken by the company. The detailed mention of the inclusions in the action plan removes the vagueness of Rule 5 in earlier CSR Rules, 2014 which only said about the institution of a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.

• Amendment in CSR Expenditure under Rule 7

It is now the responsibility of the Board to ensure that administrative overheads in relation to CSR do not exceed five percent of the total CSR expenditure of the company. Also the surplus from any project can't be titled as business profit and has to be utilized for any CSR project. Thus, as per the new rules if the company fails to spend the earmarked two percent of net profits towards CSR, it will have to specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project, transfer it to a government notified fund.

• Amendment In CSR Reporting under Rule 8

The amended rules require that any corporation with a CSR obligation of Rs 10 Cr. or more for the three preceding financial years would be required to hire an independent agency to conduct impact assessment of all of their projects with outlays of Rs 1 Cr. or more. Companies will be allowed to count 5% of the CSR expenditure for the year up to Rs 50 lakh on impact assessment towards CSR expenditure.

• Amendment in display of CSR activities on website under Rule 9

Mandatory disclosure of CSR projects approved by the Board is to be placed on the website of the company. This will ensure greater accountability of companies and a closer check on the compliance of rules.

• Amendment in transfer of unspent amount under Rule 10

Since the provisions are applicable from January 22, 2021, any amount that remains unspent on ongoing project in FY 2020-21 will have to be transferred to any separate account already mentioned under Schedule VII till "the Fund" referred to in Section 135(5) and 135(6) of Companies Act, 2013 is created or specified.

CSR has always been a topic of discussion in all forums. In order to achieve the intent of CSR policy, Indian scenario called for a rethink of strategy. The amendments, being technical in nature, are a way to ensure strict compliance of the rules and to keep a tight check on the activities of companies. They are aimed at further improving the ease of doing business, decriminalizing non-compliance with CSR provisions as well as to make the CSR framework more transparent. The provisions of the New Rules seem to be more detailed and structured even with respect to the earlier mentioned concepts of CSR, CSR Policy, and CSR Implementation in the 2014 rules. Allowing companies engaged in research and development (R&D) activities for new COVID-19 vaccines, drugs and medical devices to include such activities in their normal course of business for inclusion in CSR activities is much appreciated. With the new rules more responsibility has been casted on the shoulders of the Board to ensure proper implementation of legal norms related to CSR.

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