In order to operationalize the Companies (Amendment) Act, 2019, the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 has been drafted for carrying out amendments in the Companies (CSR Policy) Rules, 2014.
Definitions amended/ newly inserted
Amended Definition of Corporate Social Responsibility
The following activities have been specifically excluded from CSR Activities:
- Activities undertaken in pursuance of the normal course of business of the company.
- Any activity undertaken by the company outside India.
- Contribution of any amount directly or indirectly to any political party under section 182 of the Act.
- 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.';
Comments- The exclusion of the activities will provide a clear mandate of the activities which shall not be considered as CSR activity. True to its purpose, the CSR responsibility is to ensure the larger benefit of the society which is transparent and is spend for the upliftment of the needy people.
Amended Definition of CSR policy
The Draft Rules define CSR Policy as under:
'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
Comments- The new definition casts the responsibility on the Board of the Organization to provide all the stakeholders of the company the basis on which the CSR activities were approved or rejected based on the recommendations of the CSR committee. It just does not limit on the basis of selection, implementation and monitoring of the activities are the crucial parameters in the policy which will provide guidance on how well the activities performed have actually been received at the ground level and the change in the living index of the beneficiaries. Appropriate documentation of the change happened would provide a thumbs up to the Organization.
Definition of ongoing projects
'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.
This clause will give the flexibility to complete the projects which ideally take quite some time to ultimately reach the beneficiary. The time limit prescribed is 3 years excluding the financial year in which it was commenced within which the company should complete a particular CSR project undertaken. For example, setting up a school for the underprivileged children could be planned over a period of 3 years to be fully operational.
Also based on Board justification, a particular project which was not classified an ongoing project can be classified as a multi-year project. The justification would entail why the Board considers that a particular project needs to extend beyond a year to reach its ultimate objective.
Draft Rules 2020
Implementation of CSR projects
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 the prescribed fee.
Provided further that the provisions of this sub-rule shall not affect the CSR projects or programs that were approved prior to the commencement of the Companies (CSR Policy) Amendment Rules, 2020.
Comments- This rule mentions clearly on who should be the spender of the CSR funds from the company perspective. It is noteworthy to note that the entity established under an Act of Parliament is covered, which means that ICAI, ICSI, etc. are covered to spend CSR funds on behalf of the company. Additionally, a new e form has been introduced to track the company who would be spending the funds on behalf of the company. This will provide greater visibility and tracking mechanism on the government part to identify the source from which CSR funds are spent. Also, it is to be seen whether the filing fee would be one time exercise for each company year or shall be a yearly exercise. MCA should define the same.
Engagement of international organizations
A company may engage international organizations for designing, monitoring and evaluation of the CSR projects or programs as per its CSR policy as well as for the 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.
Comments- This is a wonderful move wherein international organizations who do have expertise in CSR projects can help to implement projects in India subject to prior approval of the central government (for tracking purpose).
International Organization has been defined as-
'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.'
The international organization can design, monitor and evaluate the CSR projects as per the company's CSR policy and also train personnel for the effectiveness of CSR projects.
This clause will enable companies to have a greater impact of the CSR initiatives undertaken by them.
Also, it is to be seen whether the International Organization would be allowed to spend on behalf of the company or would act as an intermediary between the company and the intended beneficiaries. Further, whether any form needs to be filed by such an International Organization or not.
Satisfaction by Board and Certification by CFO
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
Comments- For the first time, the Board would be under compulsion to report on the satisfaction of the release of the funds for the intended CSR projects. The parameters on which the satisfaction needs to be evaluated is not defined. Will the broad level satisfaction would be good enough or detailed project-wise satisfaction remarks needs to be provided or not is to be seen.
Further CFO or the person responsible for financial management need to certify to the effect cast an additional responsibility on the part of the Finance lead of the Organization. The form and manner of certification are not clearly provided.
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.
Comments- This clause is in line with the definition of ongoing projects newly introduced. The Board needs to provide year-wise allocation and is also allowed to do modifications wherever required to ensure effective implementation of the multi-year CSR projects. This is subject to the overall permissible time period available under the rules.
Action plan by Board in accordance with CSR policy
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 programs 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 programs as specified in sub-rule (1) of Rule 4;
(c) the modalities of utilization of funds and implementation schedules for the projects or programs; and
(d) monitoring and reporting mechanism for the projects or programs.
(e) Details of need and impact assessment, if any, undertaken by the company.'
This rule lays down the action plan by the CSR committee to be presented before the Board of the company detailing out the list of CSR projects, the manner of execution, the utilization of funds, implementation aspects, monitoring the implementation, impact assessment, etc.
Overall, this action plan in pursuance of the CSR policy will help to figure out the effectiveness of the ultimate implementation at the ground level ( for the betterment of public at large ) when compared to the action plan document (Budget document with details).
Administrative Overheads as a % of Total CSR Spend, Surplus arising out of CSR programs, Creation of Asset through CSR funds and Unspent CSR amount treatment
(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.
Comments- This clause is to ensure that in the garb of CSR funding, the costs incurred for public welfare outclass its benefits. Therefore a limit of 10% including impact assessment has been fixed.
(2) 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.
Comments- This clause will ensure that the mandatory percentage of the net profits which need to be earmarked as a CSR liability will ultimately have to reach out to the masses as per the CSR policy which should be undertaken in areas or subjects specified in Schedule VII of the Act.'
(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.
Comments- This clause will ensure that the assets are not utilized other than the purpose of what has been intended for. The company established under section 8 of the Act having charitable objects or public authority is only authorized to hold the assets created or acquired by the company through CSR funds.
(4) Unspent balance, if any, towards the 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.'
Comments- This is an obvious clause and one can easily relate to the recent change in Companies Auditors Report Order, 2020 which mandates CSR reporting, The unspent amount of the CSR liability needs to be transferred to special account viz. 'Unspent Corporate Social Responsibility Account' and the spend from the same should be done 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. It means the companies will have a month's time to transfer the unspent CSR amount from the end of the financial year (FY 2020-21) to ensure compliance.
The form and manner of utilization from the Fund specified in Schedule VII is not specified and the same needs to be seen in due course of time. Also, the list of the banks where the account can be opened is not specified along with the formalities required for withdrawal is not stated. Will there be due diligence on part of the bank while withdrawal is to be seen in due course of time.
Further, the most important point with respect to this clause is the unspent amount only for the financial year FY 2020-21 is not to be considered for transfer purpose but the total unspend amount till date which is accumulated since the inception of the CSR rules (i.e. April 1, 2014) is to be considered. This becomes evident from the revised CSR annual report format which will become part of the Board's report. This is quite onerous and will face challenges/ roadblocks since there would be many companies with large unspent CSR amount.
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 subsection 5 of Section 135 of the Act, shall undertake impact assessment for their CSR projects or programs, and shall disclose details of the same in its Annual Report on CSR
Comments- For the first time ever, the impact assessment will feature in the Annual report on CSR by the companies who were supposed to have an average spend of INR 5 crores or more in the three immediately preceding financial years. This report will evaluate the success of the CSR projects and the impact which the CSR initiatives have created on the beneficiaries in terms of various parameters such as living index, education, behavioral aspects, etc. Since there is no specified parameters for impact assessment, the disclosure under this compliance would be interesting to watch out for.
Display of CSR activities on its web site
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
Comments- The website of the company now needs to mandatorily disclose the composition of the CSR Committee, CSR Policy and the projects approved by the Board.
In case a company does not have a website to date, say a private limited company, how the compliance can be taken care of. Can the holding company of the subsidiary be allowed to disclose the above details on behalf of the subsidiary? This to be seen. Or each company would be mandated to have its own website. Also, does this clause requires disclosure of all past approved projects or the existing and forthcoming ones that needs to be seen. Since the CSR committee and the CSR policy may change now and then as per the requirements, the updation at the website is of utmost significance.
Further, the website only needs to mention the projects approved and not the detailed status with respect to its implementation, monitoring and impact assessment needs to be provided.
National Unspent Corporate Social Responsibility Fund:-
(1) The Central Government shall establish a fund called the 'National Unspent Corporate Social Responsibility Fund' (hereinafter referred to as 'the Fund') for the purposes of subsection (5) and (6) of section 135 of the Act. The Fund shall be utilized for the purposes of undertaking CSR projects 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 the administration of the Fund shall be in accordance with such guidelines as may be prescribed by the Central Government from time to time.'
Comments- The unspent CSR funds would ultimately be transferred to the 'National Unspent Corporate Social Responsibility Fund' and the utilization from the same would be in accordance with the guidelines prescribed by Central Government from time to time.
Revised format of Annual report on CSR activities to be part of the Board's Report to contain the following disclosures-
1. CSR Policy of the Company
2. Composition of CSR Committee
3. Web-link where Composition of CSR committee, CSR Policy and CSR projects approved by the board is disclosed on the website of the company
4. Details of Impact assessment of CSR projects carried out in pursuance of sub-rule (3) of Rule 8 of Companies (CSR Policy) Rules, 2014, if applicable (attach the report)
5. Average net profit of the company as per section 135(5)
(a) Two percent of Average net profit of the company as per section 135(5)
(b) Surplus arising out of the CSR projects/programs or activities for the financial year
(c) Total CSR obligation for the financial year (6a+6b)
7. a) CSR amount spent / unspent for the financial year:
b) Details of CSR amount spent against ongoing projects for the financial year
c) Details of CSR amount spent against other than ongoing projects for the financial year:
d) Amount spent in Administrative Overheads
e) Total Amount Spent for the Financial Year (7b+7c+7d)
8. a) Details of CSR amount spent/ unspent for the preceding three financial years
b) Details of CSR amount spent for ongoing projects of the preceding financial year(s)
9. Amount transferred to 'Unspent CSR Account' pursuant to sub-rule (4) of Rule 7 of Companies (CSR Policy) Rules, 2014 for the financial year 2014-15 to 2019-20
10. In case of creation or acquisition of an asset, furnish the details relating to the asset so created or acquired through CSR spent in the financial year.
(a) Date of creation/ acquisition of the asset(s)
(b) Amount of CSR spent for creation /acquisition of asset
(c) Details of the entity/ public authority under whose name such asset is registered, address etc.
(d) Provide details of the property or asset(s) created/ acquired (including complete address and location of the property)
11. Specify the reason(s) if the company has failed to spend two percent of the average net profit as per section 135(5):
The annual report needs to be signed by Chief Executive Officer or Managing director or Director, Director or Chief Financial Officer and Person specified under clause (d) of sub-section (1) of Section 380 of the Act) (wherever applicable)
The detailed disclosures in the report can be seen in Corporate Social Responsibility Policy) Amendment Rules, 2020 published on 13 March 2020 by the Government of India, Ministry of Corporate Affairs.
Overall, the reporting and disclosures mandated in the new rules will ensure that the purpose of the spend is well defined and reaches out to the masses who are needy, who can, in turn, would prove to be a boon to the economy and the society at large. While this is envisaged, it goes without saying that the additional and elaborate disclosures would cast additional responsibility on the Board, Management, Auditors to have adequate due diligence done both before and after the implementation of any CSR project. Well its time, Organization needs to be more diligent in its CSR Compliance.
Disclaimer - Draft CSR amendment rules, 2020 as published at the MCA portal has been referred while preparing this article. This article is meant for understanding purposes only and in no way be deemed to be advice or solicit any marketing whatsoever. Any decisions based on this article would not hold me liable for any action whatsoever. Please get in touch with your legal consultants to understand the scope and impact pertaining to your industry.
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