An Overview of CSR Regulations and Its Proposed Amendments By Jaya Sharma And Sunita Choudhary


                                               From Voluntary To Mandatory


INTRODUCTION


Corporate Social Responsibility, or commonly referred to as CSR, is a way for corporate entities to give back to the society they are functioning in for the welfare of the same. Corporate Social Responsibility (CSR) means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of Companies Act, 2013. In this write- up we shall discuss about the various changes taken place in the recent times to the provisions dealing with the CSR in the Act.
 
APPLICABILITY:

As per section 135(1) of the Companies Act, 2013 (“the Act”) CSR is applicable to  the following companies and they shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. Provided that where a company is not required to appoint an independent director, appointment of such director is not required. If a private company having only two directors on its Board shall constitute its CSR Committee with two such directors.



AMENDMENTS IN CSR PROVISION THROUGH THE COMPANIES (AMENDMENT) ACT, 2019

  • Section 135(5): The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

 

  • Newly inserted Section 135(8): The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions.
AMENDMENTS TO THE COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) RULES, 2014 (YET TO BE NOTIFIED):

These Rules may be called the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020.
Let us have a look at the proposed amendments through the following table:

SR NO. PARTICULARS COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) RULES, 2014 COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) AMENDMENT RULES, 2020
1. Rule 2(1)(c) Corporate Social Responsibility (CSR) means and includes but is not limited to :- (i) Projects or programs relating to activities areas or subjects specified in Schedule VII to the Act; or (ii) Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will include activities, areas or subjects specified in Schedule VII of the Act. Corporate Social Responsibility (CSR) means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Act in accordance with the provisions contained in these Rules, but shall not include the following, namely- i) Activities undertaken in pursuance of normal course of business of the company. ii) Any activity undertaken by the company outside India. iii) Contribution of any amount directly or indirectly to any political party under section 182 of the Act. iv) activities that significantly benefit the employees of the company and their families. Provided that in case of any activity having less than twenty five percent employees as its beneficiary, then such activity shall be deemed to be CSR activity under these rules.
2. Rule 2(1)(e) “CSR Policy” relates to the activities to be undertaken by the company in areas or subjects specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of a company. "CSR Policy" means a statement containing the approach and direction given by the board of a company, as per recommendations of its CSR Committee, for selection, implementation and monitoring of activities to be undertaken in areas or subjects specified in Schedule VII of the Act.
3. Rule 2(1)(f) “Net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely :- (i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and (ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section135 of the Act: Provided that net profit in respect of a financial  year for which the relevant financial -statements were prepared in accordance with the provisions of the Companies Act, 1956 (1 to 1956) shall not be required to be re-calculated in accordance with the provisions of the Act: Provided further that in case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381 read with section 198 of the Act. International Organization means an organization notified by the Central Government as an international organization under section 3 of the United Nations (Privileges and immunities) Act, 1947 (46 of 1947), to which the provisions of the Schedule to the said Act apply.        
4. In Rule 2(1) after clause (f)   (g) "Net profit" means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely: - (i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and (ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act: Provided that net profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956, (1 of 1956) shall not be required to be re-calculated in accordance with the provisions of the Act:Provided further that in case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381 read with section 198 of the Act. (h) “Ongoing Projects” means a multi-year project undertaken by a Company in fulfillment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall also include such projects that were initially not approved as a multi-year project but whose duration has been extended beyond a year by the Board based on reasonable justification. (i) “Public Authority” means ‘Public Authority’ as defined in sub-clause (h) of section (2) of Right to Information Act, 2005
5. Rule 3(2)(b) comply with the provisions contained in sub-section (2) to (5) of the said section comply with the provisions contained in sub-section (2) to (8) of the said section
6. Rule 4 The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.(2) The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through(a) 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(b) 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 utilisation of funds of such projects and programs and the monitoring and reporting mechanism.(3) A company may also collaborate with other companies for undertaking projects or programs 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 programs in accordance with these rules.(4) Subject to provisions of sub-section (5) of section 135 of the Act, the CSR projects or programs or activities undertaken in India only shall amount to CSR Expenditure.(5) The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act.(6) Companies may 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.(7) Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity.  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.(2) 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.(3) A company may engage international organizations 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.Provided that a company may also engage an international organization for implementation of a CSR project subject to prior approval of the central government.(4) Board of a company shall satisfy itself that the funds so disbursed have been utilized for the purpose and in the manner as approved by it and Chief financial Officer or the person responsible for financial management shall certify to the effect.(5) In case of ongoing projects, 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. “
7. Rule 5(2) The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company. 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:(a) the list of CSR projects or programmes that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act;(b) the manner of execution of such projects or programmes as specified in sub-rule (1) of Rule 4;(c) the modalities of utilization of funds and implementation schedules for the projects or programmes; and(d) monitoring and reporting mechanism for the projects or programmes.(e) Details of need and impact assessment, if any, undertaken by the company
8. Rule 6 (1) The CSR Policy of the company shall, inter-alia, include the following namely :-(a) a list of CSR projects or programs which a company plans to undertake areas or subjects specified in of the Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same; and(b) monitoring process of such projects or programs:Provided that the CSR activities does not include the activities undertaken in pursuance of normal course of business of a company.Provided further that the Board of Directors shall ensure that activities included by a company in its Corporate Social Responsibility Policy are related to the areas or subjects specified in Schedule VII of the Act.(2) The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company. OMITTED
9. Rule 7 CSR expenditure shall include all expenditure including contribution to corpus, or on projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity or not in line with activities which fall within the areas or subjects, specified in Schedule VII of the Act. CSR Expenditure: (1) The board shall ensure that the administrative overheads incurred in pursuance of sub-section (4) (b) of section 135 of the Act shall not exceed five percent of total CSR expenditure of the company for the financial year.Provided that a company undertaking impact assessment, in pursuance of sub-rule (3) of Rule 8, may incur administrative overheads not exceeding ten percent of total CSR expenditure for that financial year.(2) Any surplus arising out of the CSR projects or programmes or 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 action plan of the company.(3) The CSR amount may be spent by a company for 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.Provided that any asset created by a company prior to the commencement of Companies (CSR Policy) Amendment Rules, 2020, 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.(4)Unspent balance, if any, towards fulfilment of CSR obligation at the time of commencement of these Rules shall be transferred within a period of thirty days from the end of Financial Year 2020-21 to special account viz., ‘Unspent Corporate Social Responsibility Account’ opened by the company 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.
10. After Rule 8(2)   (3) A company having the obligation of spending average CSR amount of Rs 5 Crore or more in the three immediately preceding financial years in pursuance of sub section 5 of Section 135 of the Act, shall undertake impact assessment for their CSR projects or programmes, and shall disclose details of the same in its Annual Report on CSR.
11. Rule 9 The Board of Directors of the company shall, after taking into account the recommendations of CSR Committee, approve the CSR Policy for the company and disclose contents of such policy in its report and the same shall be displayed on the company’s website, if any, as per the particulars specified in the Annexure. 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 for public viewing, as per the particulars specified in the Annexure
12. Newly inserted Rule 10   National Unspent Corporate Social Responsibility Fund : (1) The Central Government shall establish a fund called the “National Unspent Corporate Social Responsibility Fund” (herein after referred as “the Fund”) for the purposes of sub-section (5) and (6) of section 135 of the Act. The Fund shall be utilized for the purposes of undertaking CSR projects in the in areas or subjects specified in schedule VII of the Act.Provided that until such fund is created the unspent CSR amount in terms of provisions of sub-section (5) and (6) of section 135 of the Act shall be transferred by the company to any fund as specified in schedule VII of the Act.(2) The manner of administration, authority for administration of the Fund shall be in accordance with such guidelines as may be prescribed by the Central Government from time to time.
 
CONTRIBUTION TO PM CARES FUND- ELIGIBLE FOR CSR

The Government of India has set up the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund’ (PM CARES Fund) with the primary objective of dealing with any kind of emergency or distress situation such as that posed by COVID 19 pandemic. MCA vide its Office Memorandum No. CSR-05/1/2020-CSR-MCA dated March 28, 2020 has clarified that any contribution made by the Companies to the PM CARES Fund shall qualify as CSR expenditure under the Companies Act 2013. Further, MCA vide its notification dated May 26, 2020 has amended item no. (viii) of Schedule VII of Companies Act, 2013 by inserting contribution to Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund(PM CARES Fund) as eligible CSR activity with effect from March 28, 2020.

CONCLUSION

It is evident from the amendments that now the companies would not be in a position to take the advantage for not spending the CSR amounts by putting cliché explanations in the annual report. The amendments have introduced penalty provisions for not complying with the CSR regulations, thus it has moved to comply or penalty from comply or explain. Also, as per CARO-2020, the auditor is also required to comment on the CSR provisions specifically pertaining to the unspent amount and whether it has been transferred.
 
SOURCE

 
Jaya Sharma
Founder
Jaya Sharma & Associates
 
Sunita Choudhary
Jaya Sharma & Associates

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