On 22nd January 2021, the Ministry of Corporate Affairs notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (“Amendment Rules”). These amendment rules have brought into effect the amendments to Section 135 of the Companies Act, 2013 (“Act”) and have significantly changed the implementation of CSR activities.
A. Amended Definitions
1. CSR
Prior to the amendment, the rules provided for an inclusive definition of CSR. However, now the definition of CSR has been amended to give an exclusive definition, wherein a list of activities that do not constitute CSR are provided, which are:
- Activities in pursuance of the normal course of business. However, for financial years 2020-21, 2021-22 and 2022-23, for a company engaged in R&D of vaccines, drugs and medical devices, R&D related to COVID-19 and carried out in collaboration with an institute or organisation under Schedule VII of the Act would be considered as a CSR activity.
- Activities undertaken outside India except training of National or International level Indian sportspersons
- Contribution to a political party, directly or indirectly, under Section 182 of the Act
- Activities benefiting employees of the company
- Sponsorship activities for deriving marketing benefits for own products and services
- Activities for the fulfillment of obligations under any other law in force in India.
2. CSR Policy
Earlier, CSR Policy related to any activity undertaken by the company in an area specified under Schedule VII of the Act. However, as per the new definition, a CSR Policy includes:
- Approach or direction by the Board in consultation of the CSR Committee
- Principles guiding the company in selection, implementation and monitoring of CSR activities
- Annual action plan for CSR initiative of the company
B. New Definitions
1. Administrative Overheads
Administrative overheads have been defined as those expenses which are incurred by the company for the ‘general management and administration’ of CSR functions. However, expenses that are directly attributable to the designing, implementation, monitoring and evaluation of a particular CSR project do not constitute administrative overheads.
2. Ongoing Project
Pursuant to the amendment to Section 135 of the Act, the Amendment Rules have defined ongoing projects as multi-year CSR projects irrespective of whether initially approved as multi-year projects or not, wherein the maximum time limit is 4 years, inclusive of the year of commencement.
C. Amendment to CSR Implementation
According to the Amendment Rules, the CSR activities may be undertaken by:
1. The company itself
2. Through any of the following implementing agencies:
i. A company established under Section 8 of the Act, or a registered trust or a registered society, registered under Section 12A and 80G of the Income Tax Act, if it is:
a) Established by the company singly, or
b) Established by the company along with another company, or
c) Having established track record in similar activities for 3 years
ii. A company established under Section 8 of the Act, or a registered trust or registered established by the Central or State Government
iii. Any entity established under an Act of Parliament or State Legislature
3. Collaboratively with other companies, if the CSR committees of the companies report separately on the CSR activities
The Amendment Rules further provide that the implementing agencies undertaking CSR on behalf of a Company shall register with the Central Government by e-filling the CSR-1 form (effective from 1st April, 2021) which shall be digitally verified by a practicing Chartered Accountant or Company Secretary or Cost Accountant; subsequent to due fulfillment of these provisions, the implementing agency would be allotted a unique CSR Registration Number.
Further, the Amendment Rules clarifies the purposes for which an international organisation may be engaged by a company – for designing, monitoring and evaluation of CSR activities and capacity building of their CSR personnel. Here, it is pertinent to note that an international organisation means an organisation so notified by the Central Government under Section 3 of the United Nations (Privileges and Immunities) Act, 1947.
Proper utilization of the funds is to be ensured by the Board of the company and certified by the CFO or any other person responsible for financial management. Further, the Board of the company is also responsible for monitoring the proper implementation of an ongoing project as per the approved timelines and allocations and is also authorized to modify the same.
D. Responsibilities of CSR Committee
While there has been no change in the composition of the CSR Committee, the CSR Committee, apart from fulfilling its responsibilities under the Act, is required to formulate and recommend an annual action plan pursuant to the CSR policy. The annual action plan shall provide for a list of approved CSR projects, manner of execution, modalities of utilization of funds, implementation of schedules, monitoring and reporting mechanisms for the projects. It should also include details of the need and impact assessment of the projects so undertaken.
E. Amendments to CSR Expenditure
1. Administrative Overheads
According to the amended rules, administrative overheads should not account for more than 5% of the CSR expenditure of a financial year.
2. Surplus generating from CSR
It has been clarified that in case any surplus arises out of the CSR activities, it cannot be treated a business profit; rather, it should be utilized in any of the following manners within 6 months from the end of the financial year:
- Ploughed back in the same project
- Transferred to the Unspent CSR Account and utilized as per the CSR policy and annual action plan
- Transferred to a Fund under Schedule VII of the Act
3. Set-off of excess CSR expenditure
The Board of the company may pass a resolution for setting-off the excess amount spent for CSR; however, surplus arising out of CSR activities cannot be set-off. Set-off can be done for a maximum period of 3 succeeding financial years.
4. Capital Assets
Any capital assets created or acquired by the CSR amount cannot be held in the name of the company itself; rather, it shall be held in the name of any of the following:
- A company established under Section 8 of the Act or registered public trust or registered society having charitable objects and CSR Registration Number
- Beneficiaries of the CSR project, in the form of self-help groups, collectives, entities
- Public authority
Provided that any capital asset created by a company prior to the commencement of CSR Amendments Rules, 2021, all such companies are required to comply with this rule within 182 days from implementation of the Amendment Rules, and such timeline may be extended by not more than 90 days upon the Board’s approval based on reasonable justification.
F. Unspent CSR amount
Any unspent CSR amount shall be transferred to a fund specified under Schedule VII of the Act.
G. CSR Reporting
The Board’s Report of a company covered under the rules and the balance sheet of a foreign company filed according to Section 381(1)(b) of the Act shall contain an annual report on CSR, wherein particulars specified under Annexure I or Annexure II, as applicable, shall be specified and the impact assessment report shall be annexed, when applicable.
H. Impact Assessment
Companies with minimum Rs. 10 crore average CSR obligations in the three immediately preceding financial years according to Section 135(5) of the Act, have to conduct impact assessment of the CSR projects that have an outlay of Rs. 1 crore or more and which have been completed not less than 1 year before undertaking of the impact study. The impact assessment shall be conducted by an independent agency and the expense for the assessment in a financial year shall not exceed 5% of the total CSR expenditure for that financial year and Rs. 50 lakhs, whichever is less.
Furthermore, the impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR.
I. Display on website
The Board of the company is mandated to disclose on its website, if any, the following information related to CSR:
- Composition of the CSR Committee
- CSR policy
- Board approved projects
Rule 2(1)(d) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 2(1)(f) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 2(1)(b) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Section 21 of The Companies (Amendment) Act, 2019
Rule 2(1)(i) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 4(1) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 4(1) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 4(4) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 4(2) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 4(3) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 2(1)(g) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 4(5) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 4(6) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Section 135(3) of The Companies Act, 2013
Rule 5 of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 7(1) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 7(2) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 7(3) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 7(4) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 9 - 10 of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 8(1) and 8(2) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 8(3)(b) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 8(3)(a) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 8(3)(a) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 8(3)(c) of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021
Rule 9 - 9 of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021