Corporate Social Responsibility (CSR) – A forced measure By CA Jaslin Kaur & Payal Garg

Corporate Social Responsibility policy (Amendment Rules), 2021

Comparison to the old Rules and Impact

Definition of CSR:

The amended definition defines CSR as the activities undertaken by the company under the Companies Act, 2013 except the following:

– activities are undertaken in pursuance of the normal course of business of the company (an exception has been created for research and development of COVID-19 vaccine for the current and the next two financial years);

– any activity is undertaken by the company outside India (an exception has been created for the training of Indian sports personnel representing any state or union territory at national level or India at international level);

• contribution to political parties;
• activities benefitting employees of the company;
• activities supported by the companies on a sponsorship basis for deriving marketing benefits for its products or services; and
• activities carried out for fulfillment of any other statutory obligations under any law in force in India.

The new amendments widen the scope of CSR activities in respect that it now includes Research and Development for COVID-19 Vaccine and training of sports personnel outside India.

At the same time, it also limits the scope to some extent as it specifically excludes:

1. activities that derive marketing benefits (such as sponsoring of events like football games which derive more marketing benefit than the social impact thereof)
2. activities carried out for the fulfillment of any other law (such as activities are done as per the provisions of Water (Prevention and Control of Pollution) Act 1974, etc.)

Definition of Administrative Overheads:

The Amendment Rules define this term as “the expenses incurred by the company for ‘general management and administration of CSR and excludes expenses towards:

• designing,
• implementation,
• monitoring, and
• evaluation of a particular CSR project or programme”.

The previous version of the Rules did not define the term ’administrative overheads’. However, clarification of the same in the amended rules is a welcome step.

Definition of Ongoing Projects:

“Ongoing Project” is a multi-year project undertaken by a Company in fulfillment of its CSR obligation having timelines of Four Years including the year of its commencement.

An important condition relating to an ongoing project is that it must be a ‘Project’ not merely an ‘Activity.’

For example, the Construction of a hospital shall be considered as an ongoing project, while mere contribution to an entity that is constructing the hospital is not a project, it is an activity.

The term ‘Ongoing Project’, was never defined in the old rules.

The introduction of this ongoing project seems to widen the scope of CSR as companies can now invest in long-term projects and plans.

While ambiguity remains regarding various aspects, the following are some possible views that the authors believe could be the interpretation:

What about projects the implementation of which goes beyond the stipulated time period of 4 years (eg. Construction of a school building)? 

The interpretation here can be made that the time-bound frame is to limit the dragging of unspent money irrespective of the life of the project.

What will be the impact of the amount set aside for these projects in the financial statements of the company throughout the stipulated time? 

Since the expenditure on CSR is a mandatory provision, any amount set aside for CSR shall be treated as a ‘Liability’ or a ‘Provision’ (depending on the company’s policies) and not as a ‘Contingent Liability’.

When will an ongoing project regarded as ‘commenced’? 

There is some tangible activity relating to a project and it is not merely an idea, or there is a firm commitment (i.e. in writing which is irretrievable) on part of the company towards a project.

Corporate Social Responsibility policy (Amendment Rules), 2021

Comparison to the old Rules and Impact

The Board shall ensure that the CSR activities are undertaken by the company itself or through –

· Section 8 Company;

· Registered Public Trust;

· Registered Society registered u/s 12A & 80G of Income Tax Act, 1961; or

· Company with an established track record of at least 3 years.

· or any entity established under an Act of Parliament or a State legislature.

No significant changes relating to the implementing agencies were made in the new amended rules as compared to the old rules.

However, the new amendment Rules make way for the engagement of national and International Organisations for the implementation of CSR. This means that companies can now collaborate with organizations like WHO, UNICEF, etc for design, evaluation, capacity building, and monitoring of CSR projects. This does not mean that international organizations can act as implementing agencies.

A major provision added in amendments rules is the requirement of Mandatory registration of implementing agency with the MCA

This is a fresh introduction.

This implies that these entities will not be hired as implementing agencies until they register themselves. This would lead to increased transparency and proper regulation of such implementing agencies.

The amended Rule 4 places an additional obligation on the Chief Financial Officer of the company.

Any funds disbursed for a CSR Project are required to be utilized to the satisfaction of the board in the manner approved by it and shall be certified by the Chief Financial Officer (CFO) or the ‘person’ in charge of financial management.

No such provision existed in the older version of CSR Rules.

This is an extremely important provision. In addition to the monitoring by the board, it requires the CFO or alike to give utilization certificate of the disbursements made. This makes the role of monitoring all the more crucial.

Corporate Social Responsibility policy (Amendment Rules), 2021

Comparison to the old Rules and Impact

As per the new rules, the CSR committees shall be required to formulate an annual action plan in consonance with the company’s CSR policy and recommend the same to the board of the company. This annual action plan may be altered at any time during the financial year, as per the recommendation of its CSR committee, and is required to include:

1. approved list of CSR projects;
2. manner of execution of the listed projects; implementation schedule/timeline and method of fund utilization;
3. mechanism of monitoring and reporting ongoings of the project; and
4. details of the need for project and impact assessment, if any.

A major change in the amended rules is regarding the constitution of the CSR committee.

Companies with CSR obligations below ₹50 lakhs will now be exempt from forming a CSR committee. They will now be allowed to fulfill this responsibility through their respective boards.

Corporate Social Responsibility policy (Amendment Rules), 2021

Comparison to the old Rules and Impact

Another amendment relating to expenditure towards CSR states that any surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company and shall be plowed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and action plan of the company.

Any excess spending may be allowed to set off against CSR expenditure for the succeeding three financial years subject to Board’s Resolution.

The surplus arising out of CSR activity was prohibited to form part of business profits of the Company even in the previous version of the rules.

However, now the companies have an option to either transfer such surplus to an unspent CSR account or utilize it towards the same project.

Another provision in the amended rules states that the CSR amount may be spent by a company for the creation or acquisition of assets which shall only be held by a company established under section 8 of the Act having charitable objects or a public authority

This is another important provision that says that any asset acquired/created for the purpose of CSR has to be in the name of a section 8 company or a public authority and cannot be held in the name of the company itself.

Also, a period of 180 days is provided to comply with the requirements of this rule.

Corporate Social Responsibility policy (Amendment Rules), 2021

Comparison to the old Rules and Impact

Impact Assessment

A major amendment to new rules relates to the provision of impact assessment which states that:

A company having the obligation of spending average CSR amount of Rs 10 Crore or more in the three immediately preceding financial years, shall undertake impact assessment for their CSR projects or programs, and shall disclose details of the same in its Annual Report on CSR.

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

No impact assessment was required in the old rules.

This is a welcome step as it will be very useful for projects with higher outlays. This will help in bringing forth the areas requiring more attention, for their development.

However, various questions arise on this issue, which is addressed as follows:·      

Who all are eligible to conduct such an assessment?

An Independent agency may conduct such an assessment as a social audit. Such independent agency may be an NGO doing similar work or a Chartered Accountant or an Academic or Research Entities.

Whether such assessment is to be conducted on a regular basis or once in a lifetime of a project?

 Such assessment may vary from project to project and at the discretion of the company.

Corporate Social Responsibility policy (Amendment Rules), 2021

Comparison to the old Rules and Impact

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.

Earlier the board was only required to display the approved CSR Policy.

This amendment requires the companies to mandatorily disclose the CSR projects approved by the board. So far, this was only known from the annual report much after the end of the FY. This indicates that the board will have to make a thought-through plan on the recommendation of the CSR Committee as the same will be displayed on its website.