COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) AMENDMENT RULES, 2021 – AN OVER VIEW

[Mr. M. GOVINDARAJAN]

Corporate Social Responsibility Committee

Section 135 of the Companies Act, 2013 (‘Act’ for short) provides that every company having net worth of ₹ 500 crore  or more, or turnover of ₹ 1000 crore  or more or a net profit of ₹ 5 crore  or more during the immediately preceding financial year] 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.

CSR Policy

The Corporate Social Responsibility Committee shall  formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company  in areas or subject, specified in Schedule VII.  The Board of every company shall after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website.

Threshold

The Board of every company shall ensure that the company spends, in every financial year, at least 2% 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.

Rule

The Central Government, for the purpose of implementation of CSR, made the Companies (Corporate Social Responsibility Policy) Rules, 2014 vide Notification No. 1/18/2013-CL.V - Dated 27-2-2014 - Companies Law, which came in to effect from 01.04.2014.

Amendment Rule

The said Rules have met amendments from the date of implementation to till date.  Now the Central Government made amendments to the said Rules vide Notification No. GSR 40(E), dated 22.01.2021, the Companies (Corporate Social Responsibility Police) Amendment Rules, 2021.

The Amendment brought a sea change to the main rule.  It substituted Rule 2, Rule 4, Rule 5(2), Rule 7, and Rule 9.  New Rule 10 was inserted.  Rule 6, dealing with CSR Policy, was omitted.  Annexure to the Rules was renumbered as Annexure I and Annexure II was inserted.

Effect date

The Rules shall come into force on the date of their publication in the Official Gazette i.e., 21.01.2021, unless explicitly provided elsewhere in this notification.

Definitions

The Amendment Rules substituted Rule 2 which contains definitions of various terms.  We may peruse the important definitions contained in the newly substituted Rule 2.

Corporate Social Responsibility

Rule 2(d) defines the expression ‘corporate social responsibility’ as 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-

• 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 organizations mentioned in item (ix) of Schedule VII to the Act;
• details of such activity shall be disclosed in Annual Report on CSR included in the Board’s Report;

• any activity undertaken by the company outside India except for training of Indian sports personnel representing any State or Union territory at national level or India at International level;
• contribution of any amount directly or indirectly to any political party under section 182 of the Act;
• activities benefiting employees of the company as defined in clause (k) of section 2 of the Code of Wages, 2019;
• activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services;
• activities carried out for fulfillment of any other statutory obligations under any law in force in India.

CSR Policy

Rule 2(f) defines the expression ‘CSR Policy’ as a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan.

Ongoing project

Rule 2(i) defines the expression ‘ongoing project’ as 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 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.   

CSR implementation

Newly substituted Rule 4 provides the procedure of CSR implementation.  According to this Rule the Board shall ensure that the CSR activities are undertaken by the company or through-

• Section 8 company;
• Registered public trust or registered society established by the Central Government or State Government;
• Any entity established under an Act of Parliament or State Legislature;
• Section 8 company or registered trust or society registered under section 12A and 80G of the Income Tax Act, 1961 having an established track record of at least 3 years undertaking in similar activities;

Registration

Every entity as discussed above, which intends to undertake CSR activity, shall register itself with the Central Government by filing CSR – 1 electronically with the Registrar with effect from 01.04.2021.  This will not affect the projects or programs approved prior to 01.04.2021.

CSR – 1 form shall be signed and submitted electronically.  The form shall be verified digitally by a practicing Chartered Accountant/Company Secretary/Cost Accountant.

Engaging international organization

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.

Collaboration with other companies

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.

Disbursement of funds

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.

Monitoring the implementation

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.

Annual Action plan

The amendment rule substituted a new rule 5(2) for the existing  one.  The newly substituted Rule 5(2) provides that 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-

• 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;
• 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

The 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.

CSR Expenditure

The amendment rule substituted a new Rule 7 for the existing one. Rule 7 deals with the expenses made for the CSR activities.

Surplus CSR amount

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.

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, if any, in pursuance of sub-rule (2) of this rule.
• the Board of the company shall pass a resolution to that effect.

Creation of capital asset

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 sub-rule (2) of rule 4; or
• beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
• a public authority.

Any capital asset created by a company prior to the commencement of these Rules  shall within a period of 180 days from such commencement comply with the requirement of this rule, which may be extended by a further period of not more than 90 with the approval of the Board based on reasonable justification.

CSR Reporting

The amendment Rules substituted a new Rule 8 for the existing Rule 8.  The new Rule requires the filing of Annual Return on CSR Accounting and impact assessment for the companies having the threshold limit.

Annual Report

The Board's Report of a company covered under these rules pertaining to any financial year shall include an annual report on CSR containing particulars specified in Annexure - I or Annexure  - II, as applicable.  In case of a foreign company, the balance sheet filed under clause (b) of sub-section (1) of section 381 of the Act, shall contain an annual report on CSR containing particulars specified in Annexure - I or Annexure - II, as applicable.

Impact assessment

Every company having average CSR obligation of ten crore rupees or more in pursuance of sub-section (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 ₹ 1 crore or more, and which have been completed not less than one year before undertaking the impact study.  The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR.

A Company undertaking impact assessment may book the expenditure towards Corporate Social Responsibility for that financial year, which shall not exceed 5% of the total CSR expenditure for that financial year or ₹ 50 lakhs, whichever is less.

Display of CSR activities

The amendment Rules substituted a new Rule 9 for the existing one.  The new Rule 9 provides that 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.

Transfer of unspent amount

The Rule 10 (newly inserted) provides that until a fund is specified in Schedule VII for the purposes of sub-section (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.