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Important Changes To India's Corporate Social Responsibility Regime

Rukshad Davar & Rahul Datta
22 Feb 2021 10:08 AM GMT
Important Changes To Indias Corporate Social Responsibility Regime
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In April 2014, the Indian government introduced a detailed corporate social responsibility ("CSR") regime as a part of the then newly introduced Companies Act, 2013 (the "Act").

As per Section 135 of the Act, CSR obligations apply to all companies, who, in the preceding financial year have a:

  • net worth of at least INR5 billion (approx. US$69 million);
  • turnover of at least INR10 billion (approx. US$138 million); or
  • net profit of at least INR50 million (approx. US$689,000).

All such companies are mandatorily required to formulate a CSR committee and spend, in the financial year, at least 2% of their average net profits made during the three (3) immediately preceding financial years.

In September 2020, the Indian government amended Section 135 of the Act under the Companies (Amendment) Act, 2020. In furtherance of this amendment, on January 22, 2021, the Indian government amended the Companies (CSR Policy) Rules, 2014 (the "CSR Rules") and introduced many key changes to the CSR regime.

Key Changes to the CSR Regime

  • Companies are eligible to undertake CSR obligations by themselves or through certain specified intermediaries (such as Section 8 companies, registered public trusts and certain registered societies). Under the amended CSR Rules, with effect from April 1, 2021, all such intermediaries will have to mandatorily register with the Indian government and obtain a CSR registration number. This change adds an extra registration. Most, if not all, intermediaries are already registered under their statute of incorporation and file their tax returns. The government can easily monitor any CSR activity undertaken by such intermediaries through these sources.
  • Previously, the CSR committee of a company was only required to formulate a CSR policy prescribing the principles for selection, implementation and monitoring CSR activities. However, under the amended CSR Rules, the CSR committee is also required to formulate an annual action plan to implement the principles of the company's CSR policy. This change imposes extra obligations on the CSR committee and makes the committee more accountable.
  • Any unspent CSR amount in a particular financial year is now required to be spent within a period of six (6) months from the end of the financial year for the planned CSR activities. If such surplus amount remains unspent at the expiry of the prescribed period, the company is now required to transfer the surplus amount to a fund specified in Schedule VII of the Act. These funds include the Clean Ganga Fund, the Prime Minister's National Relief Fund and the PM CARES fund. This move will impact corporate balance sheets, especially in these uncertain times. Previously, if a company did not spend its CSR amount in a financial year, the board of directors ("Board") of the company was required to provide the reasons for failing to spend the CSR amount in the report for that financial year. By forcing a transfer of the unspent amounts, the government is making CSR mandatory and almost akin to a surcharge.
  • The Board of a company (required to comply with the CSR obligations) is now required to disclose the composition of the CSR committee, the CSR policy and CSR projects approved by the Board on the company's website. Further, the Board's annual report for each financial year is now required to include a report on its CSR efforts in the format prescribed in the amended CSR Rules.
  • If a company spends an amount in excess of its prescribed CSR obligations in a particular financial year, such a company is now permitted to set off the excess CSR expenditure against its CSR obligations in the next three (3) financial years. This is a positive change.
  • Any amount spent by a company for the creation or acquisition of a capital asset will be considered as expenditure towards its CSR obligations only if such a capital asset is held by: (i) a company established under section 8 of the Act, a registered public trust or a registered society, having charitable objects and a CSR registration number; (ii) beneficiaries of the CSR project such as self-help groups or collectives; or (iii) a public authority.
  • Any capital asset created by a company prior to the amendment to the CSR Rules is required to fulfil the foregoing criteria within a period of one hundred and eighty (180) days from the date of the amendment so as to be considered towards the company's CSR expenditure. This compliance period may be extended by the Board of the company for a further period of ninety (90) days. This change may be difficult to comply with.
  • Every company having average CSR obligations of at least INR100 million (approx. US$1.3 million) is now required to undertake an impact assessment of its specified CSR activities through an independent agency. This seems unnecessary and will increase the cost of CSR compliance.

Conclusion

The changes made to the CSR regime in India introduce several new obligations for companies that have to undertake CSR activities. Most importantly, companies will no longer be able to merely provide reasons for failing to spend the stipulated amount in the Board report and will necessarily have to spend the prescribed amount towards planned CSR activities. If they do not do so, the surplus funds will have to be transferred to a fund notified by the Indian government. At the same time, companies will now also able to set off any excess spending against future CSR obligations.

Given the foregoing, companies should take a detailed look at their CSR policies to reassess their CSR obligations and plan their CSR expenditure accordingly.

Rukshad Davar is a Partner and Head of M&A and Rahul Datta is an Associate at Majmudar & Partners, India. Views are personal.

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