Government amends Corporate Social Responsibility Rules with immediate effect

Background

The Government of India recently notified amendments to the existing Corporate Social Responsibility (“CSR”) Rules by notifying the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (“New CSR Rules”). The New CSR Rules come into force with effect from 22 January 2021.

The New CSR Rules lay increased emphasis on the involvement of the company in ensuring that its CSR policy is robust and the CSR spending is appropriately monitored. We discuss below certain significant changes introduced by the New CSR Rules.[1]

How the CSR activities be undertaken?

The New CSR Rules provide that a company can undertake CSR activities either by itself or through any of the following implementation agencies:

a) a Section 8 company, or a registered public trust or a registered society, established by the company either on its own or along with any other company; only if the section 8 company, trust or society is registered under section 12A and 80G of the Income Tax Act, 1961,

b) a Section 8 company or a registered trust or a registered society, established by the Central Government or State Government; or

c) any entity established under an Act of Parliament or a State legislature; or

d) a Section 8 company, or a registered public trust or a registered society, which are registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.

Key Takeaways:

1. Where a company carries out CSR activities through a third party, such third party necessarily has to be a section 8 company, a registered public trust or a registered Society. This entity must have registration under section 12A and 80G of the Income Tax Act, 1961. Based on the New CSR Rules, CSR activities cannot be carried out through a non-profit organisation which is not registered under section 12A and 80G of the Income-tax Act. That is to say, the New CSR Rules lay more emphasis on the third-party being a charitable organisation rather than a non-profit organisation

2. In addition to being registered under section 12A and 80G of the Income-tax Act, 1961, the third-party section 8 company, Trust or Society should have a track record of minimum three years in undertaking similar activities. This requirement effectively closes access to CSR funds to newly set up independent charitable organisations and could be seen as a significant detriment to organisations that are in nascent stage. This requirement also implies that a charitable organisation cannot be set up by being solely reliant on CSR funds; but should find independent sources of funding to kick-start its activities.

3. It is unclear what would be the fate of existing CSR projects which are being undertaken through entities that are not registered under section 12A and 80G of the Income Tax Act, 1961 or the entities that do not have an established track record of minimum three years.

4. The New CSR Rules do not provide any parameter to measure established track record. Therefore, scale of operations may not be a determinative factor to establish the track record of three years.

Mandatory registration requirement

§ The New CSR Rules provide that every entity that undertakes CSR activities (i.e., the implementation agency) shall register itself with the Registrar of Companies from FY 2021-22 by filing of Form CSR-1.

§ On submission of the CSR-1 form, the electronic portal shall generate a unique CSR Registration number.

§ Form CSR-1 is required to be certified by a Chartered Accountant, Company Secretary or a Cost Accountant.

§ CSR projects or programmes that are approved prior to 1 April 2021 shall not be affected with the registration requirement.

§ The time limit within which this registration is to be obtained has not been specified.

§ It is not clear whether the Form CSR-1 needs to be filed on an annual basis or is a one-time measure.

Responsibilities of the Board of Directors and Chief Financial Officer

The New CSR Rules provide that the Board of Directors of the company should satisfy itself that the funds disbursed under CSR have been utilised for the purposes and in the manner as approved by the Board. It is also implied that the utilisation of the funds should be aligned to the CSR policy approved by the Board.

The Chief Financial Officer or the person responsible for financial management of the company shall be required to certify that the funds disbursed under CSR have been utilised for the purposes and in the manner as approved by the Board.

Allocation of administrative overheads

The New CSR Rules provide that companies which undertake CSR activities on its own, cannot allocate administrative overheads in excess of 5% of total CSR expenditure for the financial year. This change appears to be aimed at ensuring that the CSR expenditure substantially constitutes direct project expenditure and is not artificially met through higher allocation of administrative expenses.

It has been clarified that the administrative overheads shall be expenses incurred for general management and administration and shall not include direct program or project expenses.

Acquisition of capital assets permitted

The New CSR Rules expressly permit spending of CSR amounts for creation or acquisition of a capital asset. Such capital assets can be held by:

a) a Section 8 company, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number

b) Beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities

c) A Public Authority

Any existing assets created by a company using CSR funds shall be required to be transferred to any of the above entities within a period of 180 days from 22 January 2021. The period of 180 days can be extended further by 90 days with the approval of the Board of Directors with reasonable justification.

Mandatory impact assessment through third parties

In cases of companies with significant CSR obligations, the New CSR Rules provide for mandatory impact assessment of CSR projects through independent third-party agencies. This requirement applies to companies having average CSR obligation of Rs. 10 crore or more in the three immediately preceding financial years. The third-party agency is required to review CSR projects having spending of more than Rs. 1 crore. The impact assessment should be completed within 1 year from the date of completion of the relevant project.

The impact assessment reports shall be placed before the Board of Directors and shall be annexed to the annual report on CSR. The cost incurred in engaging the third-party assessment agency can be considered towards CSR obligations up to 5% of total CSR expenditure for the year, subject to a maximum of Rs. 50 lacs.

Other changes

a) The New CSR Rules permit the company to engage international organisations for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy as well as for capacity building of its own personnel for CSR.

It is pertinent to note that this engagement is permitted to the company obligated to incur CSR expenditure. This relaxation does not expressly extend to the implementation agencies.

b) The New CSR Rules provide that 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.

c) Surplus arising from CSR activities is required to be ploughed back in the same project or should be spent in accordance with the CSR policy or should be transferred to the CSR fund, once created, under Schedule VII of the Companies Act, 2013

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The above discussion is for academic guidance and does not constitute a professional advice

[1] The discussion in this document is based on the language of the New CSR Rules, with suitable modifications/insertions made by us to facilitate ease of understanding for the reader