On January 22, 2021, the Government of India brought into effect the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (“Rules”). The Rules amended the exiting Companies (Corporate Social Responsibility Policy) Rules, 2014 (“Existing Rules”).

Amended Definitions

To address the pandemic, the Rules have amended the definition of Corporate Social Responsibility (“CSR”) to clarify that activities undertaken in pursuance of normal course of business of the company shall not be included under the ambit of CSR. However, the Rules do make an exception. 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 as CSR1. The Rules have further clarified that any activity undertaken by the company outside India shall not be considered as CSR unless such an activity pertains to training of Indian sports personnel representing the country at an international level or representing any state or union territory at a national level2.

The Rules have also clarified that any donation to a political party under Section 182 of the Companies Act, 2013 (“Act”)3 or any activities carried out for fulfilment of any other statutory obligations under any law4 shall not be considered as CSR. Further, the Rules have clarified that activities benefitting employees of the company as defined in clause (k) of section 2 of the Code on Wages, 20195 or activities supported by companies on sponsorship basis for deriving marketing benefits for its products or services6 shall not be considered as CSR.

CSR Implementation

The Rules have completely amended Rule 4 in the Existing Rules. The amended Rule 4 states that a Company can undertake CSR activities by itself or through any (a) company incorporated under Section 8 of the Act; (b) registered pubic trust; (c) registered society under Sections 12A and 80G of the Income Tax Act, 1961; (d) any entity established under an Act of Parliament or a State legislature; or (e) any company incorporated under Section 8 of the Act, registered pubic trust, registered society under Sections 12A and 80G of the Income Tax Act, 1961 which has an established track record of at least three years in undertaking similar activities7.

Every entity that needs to undertake any CSR activity will have to register itself with the Central Government. These entities would be required to fill the CSR-1 Form electronically with the Registrar of Companies from April 1, 20218.

The amended Rule 4 ensures that it is the responsibility of the board of the company to monitor the implementation of CSR projects in accordance with project timelines and to ensure that the funds are utilized for the approved purpose. The board has been granted the power to make alterations to the projects if deemed necessary, to ensure better implementation with the prescribed time period9. The amended Rule 4 places an additional obligation on the Chief Financial Officer of the company. Any funds disbursed for a CSR Project is required to be utilized to the satisfaction of the board in the manner approved by it and shall be certified by the Chief Financial Officer (CFO) or the ‘person' in charge of financial management10. Engagement of external organizations, international or national for design, evaluation, capacity building and monitoring of CSR projects as well as collaboration with other companies to undertake CSR projects so long as the reporting mechanism remains individualistic, has also been permitted under the said rule11.

As a result of the amended Rule 4, the Rules have now omitted Rule 6 as the relevant provisions have now been incorporated in Rule 4 itself.

CSR Committee

Through Rule 5, companies are mandatorily required to constitute a CSR committee. While no changes have been made to Rule 5 (1), the Rules have substituted Rule 5 (2). In accordance with the amended Rule 5(2), the CSR committees shall be required to formulate an annual action plan in consonance with the company's CSR policy and recommend the same to the board of the company. This annual action plan may be alerted at any time during the financial year, as per the recommendation of its CSR committee and is required to include (a) approved list of CSR projects; (b) manner of execution of the listed projects; (c) implementation schedule/timeline and method of fund utilization; (d) mechanism of monitoring and reporting ongoings of the project; and (e) details of need for project and impact assessment, if any12.

CSR Expenditure

Rule 7 on CSR expenditure has been expanded to provide for rules regarding management of funds allocated to CSR. The rules clarify that the amount allocated by a company in a financial year to the administrative aspects of CSR cannot exceed five percent of total CSR expenditure13. The amended Rule 7 also clarifies that in case there remains excess funding arising out of a CSR project undertaken by a company, the amount cannot be utilized for any business profits or ancillary purposes other than those prescribed in the rules and must be reinvested into the same CSR project or may be transferred into the unspent CSR Account in furtherance of other CSR policies or annual action plans of the company or transferred to a fund as specified under Schedule VII of the Act14.

Through the amendment to Rule 7, companies are now allowed to set off CSR expenditure above the required two per cent expenditure in any financial year against the required expenditure for up to three financial year, if a company spends an amount in excess to their CSR requirements. However, in order to do so, the board must pass a resolution to that effect and ensure that the excess amount available for set off shall not include the surplus arising out of the CSR activities, if any15.

The amended Rule 7 also allows companies to spend the CSR amount for creation of capital asset or acquisition of one, to be held by either the beneficiaries of the CSR project such as entities, collectives or self-help groups; a public authority; or a company incorporated under Section 8 of the Act or a registered public trust, registered society with a charitable objective16.

CSR Reporting

The Rules have altered the CSR reporting mechanism to include an annual report on CSR by the Board in the manner prescribed under Rule 8 of the Rules17. In the case of a foreign company, the Rules require the balance sheet submitted to the Registrar as per the requirements of Section 381 (1)(b) of the Act, to be included in the annual report on CSR in the manner prescribed in the Rules18. In accordance with Rule 8 companies having an average CSR obligation of Rupees Ten Crore or more are required to undertake an impact assessment for their CSR projects of Rupees One Crore or more, that are completed less than a year of the impact study via an independent agency, within three immediately preceding financial years19. Further, a company is permitted to book expenditure up to Rupees Fifty Lakh or five percent of the total CSR expenditure (whichever amount to less) where the expenditure arises from undertaking an impact assessment of the said company20.

Footnotes

1 Rule 2 (d) (i) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

2 Rule 2 (d) (ii) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

3 Rule 2 (d) (iii) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

4 Rule 2 (d) (vi) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

5 Rule 2 (d) (iv) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

6 Rule 2 (d) (v) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

7 Rule 4 (1) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

8 Rule 4 (2) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

9 Rule 4 (6) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

10 Rule 4 (5) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

11 Rule 4 of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

12 Rule 5 (2) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

13 Rule 7 (1) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

14 Rule 7 (2) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

15 Rule 7 (3) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

16 Rule 7 of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

17 Rule 8 (1) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

18 Rule 8 (2) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

19 Rule 8 (3) (a) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

20 Rule 8 (3) (c) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

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