The Ministry of Corporate Affairs (“MCA”) vide its notification bearing no. CG-DL-E-
22012021-224640, dated January 22, 2021 introduced amendments to the Companies
(Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”) through the Companies
(Corporate Social Responsibility Policy) Amendment Rules, 2021 (the “CSR Amendment Rules”), with effect from January 22, 2021. The new CSR Amendment Rules has introduced
sweeping changes to the existing Corporate Social Responsibility (“CSR”) regime by
introducing the concepts like administrative overhead, ongoing project, impact assessment
study etc. and by requiring the companies to mandatorily disclose their CSR policy and the
composition of the CSR committee on their website.
The key changes brought in by the CSR Amendment Rules are as follows:
Specific exclusion of activities, which will not constitute a CSR activity
The existing inclusive definition of the CSR under Rule 2 of CSR Rules is substituted
with a new definition of CSR, which specifically excludes the following activities from
the ambit of the CSR definition:
activities undertaken in pursuance of normal course of business of the company,
provided that companies involved in the research and development of the new
vaccine and medicine in their normal course of business, may undertake research
activities related to COVID-19 for financial year 2020-21, 2021-22, 2022-23 as
their CSR activity subject to compliance of the following:
such research and development activities shall be carried out in collaboration
with any of the institutes or organisations mentioned in item (ix) of Schedule
VII to the Companies Act, 2013 (“Act”);
details of such activity shall be disclosed separately in the annual report on
CSR included in the report of the board of directors of the company
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 benefitting employees of the company as defined in clause (k) of section
2 of the Code on Wages, 2019 (29 of 2019);
activities supported by the companies on sponsorship basis for deriving marketing
benefits for its products or services;
activities carried out for fulfilment of any other statutory obligations under any law
in force in India;
Requirement for formulation of specific board approved CSR policy
A new definition of ‘CSR Policy’ has been introduced under Rule 2 of CSR Rules, which requires every company to formulate a written CSR policy containing a Board approved approach and direction for the selection, implementation, monitoring of the CSR activities after taking into account the recommendations received from the CSR committee, which also includes the formulation of an annual action plan.
Implementation of CSR activities
The existing Rule 4 of the CSR Rules is substituted with an amended Rule 4, which provides for the following:
Change in the Eligibility Criteria of Implementation Agencies:
The new CSR Amendment Rules prescribes that the Board shall ensure that the CSR activities are undertaken by the company either directly or through the following entities:
- a company established under section 8 of the Act; or a registered public trust; or a registered society registered under section 12A and 80G of the Income Tax Act, 1961 (“IT Act”), either established by the company singly or jointly with any other company, or
- 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; or
- a company established under section 8 of the Act or a registered public trust or a registered society under section 12A and 80G of the IT Act and having an established track record of at least three years in undertaking such activities.
Mandatory Registration of CSR Implementation Agencies:
Every entity which intends to engage in the implementation of CSR activities, is required to register with the Central Government by filing ‘Form CSR-1’ electronically with the Registrar of Companies after getting the same verified through a practicing chartered accountant or a practicing company secretary or a practicing cost accountant with effect from April 01, 2021 and obtain a unique ‘CSR Registration Number’, after successful registration on the portal. However, this will not affect CSR projects or programmes approved prior to April 01, 2021.
End Use Certification:
The new CSR Amendment Rules mandates that the Board of the company to satisfy itself that the funds disbursed by the company have been utilized for the purposes and in the manner as approved by it. It has been further provided that the Chief Financial Officer or the person responsible for the financial management of the company shall certify to the effect that the funds disbursed for the CSR activities have been utilised for the purposes and in the manner as approved by the Board.
Timely Implementation of the CSR Activities:
In case of ongoing project (“Ongoing Project”) which has been defined to mean a multi-year project undertaken by a company for fulfilling its CSR obligation, having timelines not exceeding three years excluding the financial year in which it was commenced and includes a project which was initially not approved as a multi-year project but whose duration has been extended beyond one year by the Board, based on reasonable justifications, it shall be the responsibility of the Board to monitor the implementation of the project in terms of approved timelines and year-wise allocation. The Board of the company shall be competent to make modifications, if required, for the smooth implementation of the projects undertaken by the company, within the overall permissible time period. It appears from the definition of an Ongoing Project that the maximum period for the implementation of such Ongoing Projects shall be three years.
Cap on Administrative Overheads:
The CSR Amendment Rules has amended the existing Rule 7 of the CSR Rules to provide that the Board shall ensure that the administrative overheads shall not exceed five (05) percent of total CSR expenditure of the company for the financial year. Also, what constitute an administrative overhead has now been defined under the CSR Rule through amendment to Rule 2 to mean the expenses incurred by the company for ‘general management and administration’ of CSR functions in the company, which does not include the expenses directly incurred for the designing, implementation, monitoring and evaluation of a particular CSR project or programme.
Treatment of Surplus Funds
Further 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 of the company and shall be spent in pursuance of CSR policy and annual action plan of the company or transferred to a fund specified in Schedule VII of the Act, within a period of six (06) months of the expiry of the financial year.
Mandatory Impact assessment Study and Cap on the Cost of Impact Assessment Study:
Every company having average CSR obligation of ten (10) crore rupees or more in pursuance of section 135 (5) 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 one (01) crore rupees or more, and which have been completed not less than one year before undertaking the impact study. The cost incurred on the impact assessment study shall not exceed 5 % of the total CSR expenditure for that financial year or fifty (50) lakhs rupees, whichever is lesser.
Provision for Setting Off the Excess Amount Spend on the CSR Activity:
Where a company spends an amount in excess of requirement provided under sub- section 135 (5) of the Act, such excess amount may be set off against the requirement to spend under section 135 (5) 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 the CSR Rules.
- the Board of the company shall pass a resolution to that effect.
Creation or Acquisition of a Capital Asset:
The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by –
The capital assets created prior to the commencement of CSR Amendments Rules shall comply with this within a period of 180 days from the effective date of the CSR Amendments Rules and the period may be further extended on the with the approval of the board for a period not more than 90 days.
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 rule 4 (2) of CSR Rules; or
beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
a public authority.
CSR reporting and display of CSR activities
The CSR Amendment Rules mandates that the Board of the company shall mandatorily disclose the composition of the CSR committee, CSR policy and the projects on their website.
The new CSR Amendment Rules is a step in the right direction. It is not only expected to bring more transparency in the CSR activities undertaken by the companies but also bring more accountability on execution of such CSR activities on a time bound manner.