Potentially hazardous changes proposed under CSR Rules

A news item published in the Business Standard today (17th Match 2020) titled: “New draft rules set to clamp down on CSR activities through trusts” has caused mass panic and pandemonium since morning. While it is good to be vigilant and leave no scope for ambiguity and address any vagueness in the language of the proposed new Rules (while we still can), let’s not get unduly alarmed either. There is time and adequate scope for amendment.

Let’s understand some facts first:

  • Ministry of Corporate Affairs (MCA) has recently drafted the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020.
  • These are still DRAFT Rules and not final or Notified.
  • It is not even clear as to when these Rules will come into force or effect.
  • However, public comments are solicited online by end of business hours on 28th March, 2020 and thus we all have ample opportunity to request amendment.
  • Comments/suggestions can be submitted online at: http://feedapp.mca.gov.in/csr

Current Rule

Under Rule 4 of the existing Companies (CSR Policy) Rules 2014 (As amended by Notification of 23rd May 2016):

The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through:

  1. A company established under section 8 of the Act or a registered trust or a registered society, established by the company, either singly or along with any other company, or
  2. 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:

Provided that if, the Board of a company decides to undertake its CSR activities through a company established under section 8 of the Act or a registered trust or a registered society, other than those specified in this sub-rule, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilization of funds of such projects and programs and the monitoring and reporting mechanism.

In other words as of now (and since the last five years) a company can carry our CSR activities:

  • directly or
  • through its own corporate foundation (which could be registered as a Trust, Society or Section 8 Company and not necessarily having an established track record of three years in undertaking similar programs or projects) or
  • an “implementing agency” registered either as a company established under section 8 of the Act or a registered trust or a registered society having an established track record of three years in undertaking similar programs or projects

Proposed New Rule

Under the proposed new Rules, Rule 4 is sought to be substituted as follows:

“CSR Implementation

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

(a) A company established under section 8 of the Act, or

(b) Any entity established under an Act of Parliament or a State legislature.

Provided that such company/entity covered under clause (a) or (b), shall register itself with the central government for undertaking any CSR activity by filing the e-form CSR-1 with the Registrar along with prescribed fee.

Provided further that the provisions of this sub-rule shall not affect the CSR projects or programmes that were approved prior to the commencement of the Companies (CSR Policy) Amendment Rules, 2020.”

Implications

This would mean:

A company may carry our CSR activities on its own or a section 8 Company or any entity established under an Act of Parliament or a State legislature.

The narrow interpretation could be that henceforth a company can carry out CSR activities:

  • On its own
  • Through its own foundation only if it is established under section 8 of the Indian Companies Act 2013 or
  • An implementing agency only if it is established under section 8 of the Indian Companies Act 2013 or
  • An entity established under an Act of Parliament or a State legislature (i.e. a body corporate formed by a special act of parliament or by the central or state legislature.)

And as a sop, these new provisions would not affect the (ongoing) CSR projects or programmes that were approved prior to the commencement of the Companies (CSR Policy) Amendment Rules, 2020.

This would be absurd

If this is MCA’s intent, it is absolutely absurd.

How can Public Charitable Trusts and Societies Registered under the Act of 1860 be left out?

Some of the oldest corporate foundations and well-known NGOs are registered as Public Charitable Trusts. In fact more non-profits in India are registered as trusts and societies than as Section 8 Companies.

Section 8 companies (old section 25 companies) have become popular only in recent history.

The Non-profit sector in India mainly comprises trusts and societies.

All three entities (trust, society or section 8 company) are eligible for tax exemption u/s 12AA of Income tax, donations to all three entities are eligible for tax deduction u/s 80G and all three are eligible to register under FCRA 2010 and neither Income tax nor MHA (under FCRA) offers preferential treatment to a section 8 company over a trust or society.

Possible drafting error

Could this just be an inadvertent error in drafting?

Should the proposed new Rule 4(1)(b) which is drafted as: “any entity established under an Act of Parliament or a State legislature” be read as “any entity registered under an Act of Parliament or a State legislature”?

A Public Charitable Trust or a Society registered under the Act of 1860 would then qualify as an entity registered under an Act of Parliament or a State legislature. For example the Maharashtra Public Trusts Act 1950 is an Act of the Maharashtra State Legislature and entities registered under it (both trusts and societies) should qualify.

Also, please notice that even the present Rules state: “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”. And yet trusts, societies and section 8 companies which are not established by the Central Government or State Government have qualified as “implementing agencies”.

Our Advisory

It could be a simple drafting error or ambiguity. However, one can never be too sure and therefore every single company which is required to carry out CSR activities and all the trusts and societies which have in any case done a marvelous job as “CSR implementing agencies” should post their suggestions online to amend this provision.

What we should suggest

We should suggest that the proposed new Rule 4 should read as follows:

“CSR Implementation

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

(a) A company established under section 8 of the Act, or a registered public charitable trust or a society registered under the Act of 1860 (as may be amended by state legislature) 

(b) Any entity established under an Act of Parliament or a State legislature or any entity registered under an Act of Parliament or a State legislature including a public charitable trust or a society registered under the Act of 1860 (as may be amended by state legislature).

Provided that such company/entity covered under clause (a) or (b), shall register itself with the central government for undertaking any CSR activity by filing the e-form CSR-1 with the Registrar along with prescribed fee.

Provided further that the provisions of this sub-rule shall not affect the CSR projects or programmes that were approved prior to the commencement of the Companies (CSR Policy) Amendment Rules, 2020.”

Please submit what we have suggested (you are welcome to make changes) online at

http://feedapp.mca.gov.in/csr

Please remember to submit before 28th  March 2020. The earlier the better.

If you still have doubts or questions please write to: advisory@capindia.in

Noshir H. Dadrawala

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