Analysis of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

Ministry of Corporate Affairs (MCA) on 22^nd January 2021 Notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021. With these Amendment Rules, significant changes have been made to the existing Companies (Corporate Social Responsibility Policy) Rules, 2014. Read here our detailed analysis demystifying each of the Amendment Rules.

Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 can be read or downloaded at: http://www.mca.gov.in/Ministry/pdf/CSRAmendmentRules_22012021.pdf

Amendment to Rule 2 (‘Definitions’)

Administrative overheads

Under the Amended Rules “Administrative overheads” will now mean expenses incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company but shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme.

Very clearly the reference is to expenses incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company.

Also, expenses directly incurred by the company for “designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme” shall be considered as CSR expenditure and not administrative overheads.

CSR activity to include R & D for new vaccine, medicines and medical devices

“Corporate Social Responsibility (CSR)” will now include activities undertaken in pursuance of normal course of business of the company PROVIDED that 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 organisations 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.

Thus, research and development activities will qualify as CSR activity if carried out in collaboration with: “incubators funded by Central Government or State Government or any agency or Public Sector Undertaking of Central Government or State Government, or public funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies (established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defense Research and Development Organization (DRDO), Department of Science and Technology (DST), Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine.”

CSR activity to include overseas training of Indian sports personnel

CSR will also include any activity undertaken by the company outside India PROVIDED it is for training of Indian sports personnel representing any State or Union territory at national level or India at international level;

The following would not be considered as CSR expenditure:

• activities undertaken in pursuance of normal course of business of the company;
• contribution of any amount directly or indirectly to any political party under section 182 of the Act;
• activities benefitting employees of the company;
• activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services;
• activities carried out for fulfilment of any other statutory obligations under any law in force in India.

The Rules now make it clear and explicit that activities benefitting employees of the company or activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services will not qualify as CSR.

International Organization

‘International Organization’ means an organisations 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;

Ongoing Project

‘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.

Amendment to Rule 4 (CSR Implementation)

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

• a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80 G of the Income Tax Act, 1961, established by the company, either singly or along with any other company, or
• a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government; or
• any entity established under an Act of Parliament or a State legislature; or
• a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.

Thus, what was proposed earlier under the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 has been revoked and status quo maintained.

Registered Public Trusts and Registered Societies, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities will continue to qualify as CSR Implanting Agencies’ and not just Section 8 Companies as was proposed earlier in March 2020.

Obtain CSR Registration Number (by 1^st April 2021)

Every entity referred to earlier, including a trust, society or section 8 company established by the company, either singly or along with any other company or a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities which intends to undertake any CSR activity, must register itself with the Central Government (MCA) by filing the form CSR-1 electronically with the Registrar, with effect from the 01^st day of April 2021, Provided that the provisions of this sub-rule shall not affect the CSR projects or programmes approved prior to the 01st day of April 2021.

Thus, ‘CSR implementing agencies’ (or all NGOs/NPOs which receive CSR grants) have until 1^st April 2021 to register on the MCA portal by filing Form CSR-1 which should be signed and submitted electronically by the NGO and verified digitally by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.

On the submission of the Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically.

Role of International Organisations

For implementing CSR, a company may also engage International Organisations 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.

To reiterate, ‘international organization’ means an organisations notified by the Central Government as an international organization under section 3 of the United Nations (Privileges and Immunities) Act, 1947.

Thus, Companies may now engage with International Organisations such as World Health Organization (WHO), International Labour Organization (ILO), Food and Agriculture Organization, United Nations Educational, Scientific and Cultural Organization (UNESCO) for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy as well as for capacity building of the company’s own personnel for CSR.

A company may also 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.

Company’s CFO must certify CSR utilization

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

Ongoing projects

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.

To reiterate, ‘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

Amendment to Rule 5 (CSR Committee)

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:

• the list of CSR projects or programmes that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act;
• the manner of execution of such projects or programmes as specified in sub-rule (1) of rule 4;
• the modalities of utilization of funds and implementation schedules for the projects or programmes;
• monitoring and reporting mechanism for the projects or programmes; and
• details of need and impact assessment, if any, for the projects undertaken by the company:

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

Thus, amendment to Rule 5 has introduced impact assessment for the projects undertaken by the company and companies may engage with International Organisations for the same.

Rule 6 deleted (Capacity building)

Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 has deleted Rule 6 which allowed Companies to “build CSR capacities of their own personnel as well as those of their ‘Implementing agencies’ through Institutions with established track records of at least three financial years but such expenditure[“including expenditure on administrative overheads,”] shall not exceed five percent of total CSR expenditure of the company in one financial year.”

By inference, this would mean companies can no longer use up to five percent of the total CSR expenditure of the company in one financial year to build CSR capacities of their ‘Implementing agencies’.

However, as explained earlier, a company may engage International Organisations for capacity building of the company’s own personnel for CSR and there appears to be no cap on such expenditure.

Amendment to Rule 7 (CSR Expenditure)

Administrative overheads

The board shall ensure that the administrative overheads shall not exceed five percent of total CSR expenditure of the company for the financial year.

As explained earlier, administrative overheads would mean expenses incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company. However, expenses directly incurred by the company for “designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme shall be considered as CSR expenditure and not administrative overheads

Surplus arising out of the CSR activities

Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be 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 six months of the expiry of the financial year.

This means in case the project is income generating by way of fees etc., such income should be ploughed back into the same project but not form part of the business profit of the company.

Excess CSR spends may be set off

Where a company spends an amount in excess of requirement provided under sub-section (5) of section 135, such excess amount may be set off against the requirement to spend under sub-section (5) of section 135 up to immediate succeeding three financial years subject to the conditions that the excess amount available for set off shall not include the surplus arising out of the CSR activities and the Board of the company shall pass a resolution to that effect.

Thus, excess CSR spend in any particular year can be set off against CSR expenditure over the immediate succeeding three financial years and the Board of the company passing a resolution to that effect.

Acquisition of capital assets

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

• a company established under section 8 of the Act, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number under Rule 4(2); or
• beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
• a public authority:

Provided that any capital asset created by a company prior to the commencement of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, shall within a period of one hundred and eighty days from such commencement comply with the requirement of this Rule, which may be extended by a further period of not more than ninety days with the approval of the Board based on reasonable justification.

Once again, what was proposed earlier under the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 has been revoked and status quo maintained.

CSR assets (e.g., schools, hospitals, skill development centers etc.) can be held by a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number under Rule 4(2) and not just Section 8 Companies as was proposed earlier in March 2020.

Amendment to Rule 8 (CSR Reporting to include Impact Assessment)

Impact Assessment

Every company having average CSR obligation of ten crore rupees or more in pursuance of subsection (5) of section 135 of the Act, in the three immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of one crore rupees or more, and which have been completed not less than one year before undertaking the impact study.

Impact assessment report to be annexed to annual report on CSR.

The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR.

How much can be spent on ‘impact assessment’?

A Company undertaking impact assessment may book the expenditure towards Corporate Social Responsibility for that financial year, which shall not exceed five percent of the total CSR expenditure for that financial year or fifty lakh rupees, whichever is less.

Amendment to Rule 9 (Display of CSR activities on its website)

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.

Amendment to Rule 10 (Transfer of unspent CSR amount)

Until a fund is specified in Schedule VII for the purposes of subsection (5) and (6) of section 135 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.”

Under Companies (Amendment) Act, 2020 a third proviso has been added to sub-section (5) of Section 135 whereby:  if the company spends an amount in excess of two per cent of the average net profits of the company made during the three immediately preceding financial years, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.

In other words, companies that spend more than the mandatory two per cent on CSR in a particular financial year may carry it forward as credit for fulfillment of CSR obligations for the block of the next three years.

Managing unspent CSR expenditure

Sub-section (6) to Section 135 which was proposed earlier under clause 21 of the Indian Companies (Amendment) Act 2019 appears to have been left unchanged.

Accordingly, any amount remaining unspent under sub-section (5) of Section 135, pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the “Unspent Corporate Social Responsibility Account”, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three 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 thirty days from the date of completion of the third financial year.

This sub-section now requires companies having ongoing projects to transfer unspent CSR funds within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the “Unspent Corporate Social Responsibility Account”, and such amount shall be spent by the company in pursuance of its obligation towards CSR within a period of three 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 thirty days from the date of completion of the third financial year.

Forms

Format for Annual Report

• Format for Annual Report on CSR Activities now requires details of the Number of meetings of the CSR Committee held during the year as also the number of such meetings attended by the Directors of the Company.
• Details of Impact assessment of CSR projects carried out (for companies having average CSR obligation of ten crore rupees or more).
• Details of the amount available for set off (in case company has spent more than two per cent on CSR activities).
• Details of Total Amount transferred to ‘Unspent CSR Account’ as per section 135(6) or Amount transferred to any fund specified under Schedule VII as per second proviso to section 135(5).
• Details of CSR amount spent against ongoing projects for the financial year.
• Details of CSR amount spent against other than ongoing projects for the financial year.
• Company is also required to provide location of the project and whether it is ‘local area’.
• Amount spent in Administrative Overheads.
• Amount spent on Impact Assessment, if applicable.
• Details of Unspent CSR amount for the preceding three financial years.
• Details of CSR amount spent in the financial year for ongoing projects of the preceding financial year(s).
• In case of creation or acquisition of capital asset, furnish the details relating to the asset(s) so created or acquired through CSR spent in the financial year with asset-wise details.
• Date of creation or acquisition of the capital asset(s).
• Amount of CSR expenditure for creation or acquisition of capital asset(s).
• Details of the entity or public authority or beneficiary under whose name such capital asset is registered, their address etc.
• Provide details of the capital asset(s) created or acquired (including complete address and location of the capital asset(s).
• Specify the reason(s), if the company has failed to spend two per cent of the average net profit as per section 135(5).

Form CSR1 (Registration of Entities for undertaking CSR Activities)

Form CSR1 seems simple and easy. The Entity for undertaking CSR Activities must:

1. Tick Nature of the Entity (Trust, society, section 8 company etc.)
2. Whether the Entity is established by any company or group of companies
3. Date of incorporation and address
4. Details of Directors / Board of Trustees / Chairman / CEO / Secretary / Authorized Representatives of the entity with Name, Designation, DIN/PAN Email ID
5. Copy of Certificate of Registration
6. Copy of PAN of entity

The Certificate by Practicing Professional (Chartered Accountant or Company Secretary or Cost Account) requires the following declaration (by the practicing professional):

I declare that I have been duly engaged for the purpose of certification of this form. It is hereby certified that I have gone through the provisions of the Companies Act, 2013 and Rules thereunder for the subject matter of this form and matters incidental thereto and I have verified the above particulars (including attachment(s)) from the original/certified records maintained by the Company/ applicant which is subject matter of this form and found them to be true, correct and complete and no information material to this form has been suppressed. I further certify that:

1. The said records have been properly prepared, signed by the required officers / authorized representatives of the entity and were found to be in order;
2. All the required attachments have been completely and legibly attached to this form;
3. It is understood that I shall be liable for action under Section 448 of the Companies Act, 2013 for wrong certification, if any found at any stage.

Penalties for Noncompliance

Companies (Amendment) Act, 2020 has done away with some of the draconian changes proposed earlier under clause 21 of the Indian Companies (Amendment) Act 2019 ‘criminalizing’ certain defaults in compliance under the Indian Companies Act 2013.

The Amendment Act can be read/downloaded at:

https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf

The Amendment Act has made spending two per cent of the average net profits of the company during the three immediately preceding financial years mandatory, albeit with certain relaxations.

According to the new sub-section (7) to Section 135: “If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the 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 one crore rupees, whichever is less, and every officer of the company who is 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 two lakh rupees, whichever is less.”

Earlier under Article 21 of The Companies (Amendment) Act 2019 it was proposed that if a company contravenes the provisions of sub-section (5) or sub-section (6), the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

Noshir H. Dadrawala

Note

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