This article is submitted by:
- S. Vishnu Ameya
In this day and age, companies have assumed a major role in the society and Corporate Social Responsibility (CSR) acts as a prime instrument for companies to play their part social and environmental concerns. CSR acts in including social interests into the ambit of corporate decision making.
The Supreme Court in the case of National Textile Workers Union v. P R Ramakrishnan( AIR 1983 SC 75), observed that a Company is not a property of the shareholders and the role of shareholders is providing capital. A Company is a social institution with its objective to maximize social welfare and common good.
CSR was introduced in India in the year 2010, when The Ministry of Corporate Affairs (MCA) had issued ‘Corporate Social Responsibility Voluntary Guidelines’ which made CSR voluntary for the companies.
But this was changed with the passage of The Companies Act, 2013, wherein Section 135 r/w Companies (Corporate Social Responsibility Policy) Rules, 2014 made CSR mandatory if a company met the following criteria:
a. Have a net worth of Rs. 500 crore or more. OR
b. Turnover of Rs. 1,000 crore or more. OR
c. Net profit of Rs. 5 crore or more
The companies meeting the aforementioned criteria had to spend at least 2% of net profits on CSR activities enumerated under Schedule VII. Non-compliance CSR was then a punishable offence.
The CSR Amendment Rules, 2021 issued by the MCA on 22nd January, 2021 ,w.e.f 23rd January, 2021, bought in major changes in the CSR regime in India right from the activities which would be considered as CSR to the means of implementing CSR.
Major revamp of provisions of CSR under the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.
The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, herein referred to as CSR Rules, 2021 was issued by the MCA wef from 23.01.2021. The changes are discussed in detail below.
New Definitions
CSR:
The CSR Rules, 2021 excludes certain activities from CSR activities, but 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 the rules, constitute CSR activities.
CSR Policy:
It includes:
- The approach and direction of the Board of the Company after taking into consideration the recommendations of CSR Committee.
- The guiding principles and the plan of action while selecting and executing activities relating to CSR including forming the Annual action plan.
Net Profit:
The profit shown in the financial statements of the company, but does not include the profit arising from overseas branch/ branches of the company and the dividend received from other companies in India.
Net Profit for Foreign Company:
Such profit as displayed in the Profit and Loss Account prepared under section 381 r/w section 198 of the Companies Act, 2013.
The provisions are discussed in detail below.
Companies to which the CSR provisions are applicable
1. Threshold limits: The Companies which meet any of the three criteria below during the immediately preceding financial year:
a. Have a net worth of Rs. 500 crore or more. OR
b. Turnover of Rs. 1,000 crore or more. OR
c. Net profit of Rs. 5 crore or more
Must constitute a CSR Committee which drafts the CSR Policy for the company.
2. Every Company in India if the threshold limit is met: CSR provisions would apply to ‘every company’ meaning that every company be it a Holding company defined under section , a Subsidiary company defined under section and a Foreign Company defined under section 384(2) or even a company under section 8. Provided the aforementioned threshold limits are met.
3. Applicability of CSR to a Foreign Company and Branch office/Project Office of a foreign company: CSR provisions are applicable to a foreign company defined under section 384(2) or a foreign company having a branch office/project office in India, provided the threshold limits are met for the business operations done by such entities in India.
Activities which are ‘excluded’ from CSR
The earlier CSR Rules, 2014 had an inclusive definition of CSR Activities and included the activities specified under Schedule VII. The CSR Rules, 2021 on the other hand, has an exclusive definition and the said CSR Activities must not fall within the usual course of business. The CSR Rules, 2021 excludes the following activities:
a) Any activity outside India, except training Indian sports persons representing India, or any state or union territory of India in national or international games.
b) Activities advocated through sponsorship to derive marketing benefits.
c) Fulfilment of a statutory obligation or any lawful obligation.
d) Benefit to employee, defined under section 2(k) of Code of Wages Act, 2019.
e) Contribution of any amount to any Political Party.
The activities included under CSR however still are the activities in Schedule VII of The Companies Act, 2013.
MCA Circular No. 21/2014 and MCA Circular No. 01/2016 clarified that the activities enumerated under Schedule VII must be interpreted liberally so as to capture the essence of the activities mentioned.
Covid-19 and CSR under the CSR Rules, 2021
The CSR Rules, 2021 excludes any activity which falls under the normal course of business as a CSR Activity. In view of the pandemic, a company which is engaged in research and development of any vaccine, medicine or drug for Covid-19 for Financial years, 2021-2022, 2022-2023, in collaboration with any Institute specified under Schedule VII would fall under CSR Activities. The details of the same must be disclosed in the CSR Report of the Directors’ Report in the Annual Report.
The MCA Circular No. 15 /2020 issued on 10-04-2020 clarified the CSR activities which would fall within the purview of Covid-19 related CSR activities.
The manner in which CSR activities are to be undertaken
Under Rule 4(1) of CSR Rules, 2014 as amended by CSR Rules, 2021; the board shall ensure that the CSR Activites are undertaken either by itself or through:
a) An entity established by a law enacted by Parliament or State Legislature.
b) A section 8 Company, or a society, or a trust registered under the Income Tax Act, 1961 which is established either by the company itself or along with another company.
c) A Company under section 8 or a registered trust or a registered society setup by the Central Government or State Government.
d) A registered trust, registered society or a company under section 8 having a good track record for a period of 3 years in such activity.
CSR Policy
‘CSR Policy’ is a statement given by the Board which contains approach and directions given by the Board. It also takes into account the recommendations of the CSR Committee and acts as a guiding light in selection and implementation of CSR Activities under Schedule VII.
CSR Committee
Under section 135(1), a Company to which CSR is mandatory must constitute a CSR Committee comprising three or more directors, out of which at least one must be an independent director. In case of an unlisted public company or a private company covered under the provisions of CSR, the CSR Committee must two or more directors, but need not have an independent director.
The primary functions of the CSR Committee is to:
(a) Formulate and recommend the CSR policy which enumerates the activities to be undertaken as CSR under Schedule VII.
(b) Recommend the expenditure likely to be incurred in implementing the CSR Policy.
(c) Monitor the CSR Policy of the Company from time to time.
Disclosure of CSR Activities
Board’s Report: The Board’s Report under section 134 shall disclose the composition of the CSR Committee and shall also include an Annual Report containing the CSR particulars must be in form Annexure II.
Website: Under Rule 9, The Board of Directors shall display the CSR Policy, composition of the CSR Committee and the projects approved by the board, on the website of the company.
Foreign company: In case of a foreign company, under Rule 8(2), the balance sheet filed under section 381(1)(b) shall be attached with the annual report on CSR in form Annexure II.
In case of collaboration for CSR: If a company collaborates with another company for the purpose of CSR activities, the disclosure for the same must be done separately by each of the companies in their respective Board Reports.
Impact Assessment: Impact Assessment is a new concept introduced by the CSR Rules, 2021. Under this, a company which is under an obligation to spend Rs. 10 crore or more for CSR for the immediately preceding financial years under section 135(5) is bound to undertake Impact Assessment. Impact Assessment is done through an independent body with respect to those CSR Activities involving at least Rs. 1 crore and have not been completed one year before undertaking such Impact Assessment. The Impact Assessment Reports are to be placed before the Board and shall be annexed to the Annual Report.
Minimum amount to be spent on CSR
The Board of Directors are under a lawful obligation to ensure that at least 2% of the company’s Net Profits for the immediately preceding three financial years are spent on CSR activities. In case the company had not completed three financial years, the immediately preceding financial year would be taken into account.
Net Profit: MCA circular No. 01/2016 clarifies that ‘Net Profit’ means the profits made before deduction of tax. However, this is subject to section 198 and section 135 of the Companies Act, 2013; which say certain sums, as prescribed may not be included in ‘Net Profit’.
International organisations may be engaged for CSR projects
The CSR Rules, 2021 allow companies to engage with 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 their own personnel for CSR.
Restrictions, Carry Forward and Set off on CSR Expenditure
Restrictions on CSR Expenditure: The Board of Directors shall ensure that the expenses over administrative overheads, i.e., expenses incurred by the company for general management and administration do not exceed 5% of total CSR expenditure.
Carry Forward: In case a company spends excess amount than that required statutorily under section 135(5), the surplus amount spent may be carried forward for such number of financial years as prescribed.
Set off: In case a surplus amount arises due to CSR activities, the same shall be transferred to the same project or to the unspent CSR Account and shall not in any circumstance be part of the Business profits of the company.
Penalty for non-compliance of CSR provisions
The CSR Rules, 2021 had removed the imprisonment for a period of three years specified in the erstwhile CSR Rules, 2014 and imposed a penalty of at least Rs. 1 crore for the defaulting company and a penalty of at least Rs. 2 Lakh for every defaulting officer.
Miscellaneous
In order to reduce siphoning of funds, a company carrying CSR activities through a section 8 company or through a registered trust or registered society, such registered society, registered trust or section 8 company is bound to register with MCA under rule 4(2).
If the amount spent on CSR activities, except in cases of ongoing projects, is less than 2% of net profits of the company, such unspent amount is to be transferred into a specified fund.
CSR funds may be used for Capital Assets, but such Capital Assets should be transferred to a specified entity under Rule 7(4), to a registered trust or a registered society or a section 8 company.
“The views of the authors are personal“
Reference
1. The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, Ministry of Corporate Affairs, Government of India. Accessed at: http://www.mca.gov.in/Ministry/pdf/CSRAmendmentRules_22012021.pdf.
2. V.S. DATEY, Corporate Social Responsibility (CSR) Provisions revamped, [2021] 124 taxmann.com 7 (Article).
3. Companies (CSR Policy) Amendment Rules, 2021-Detailed Analysis, https://taxguru.in/company-law/companies-csr-policy-amendment-rules-2021-detailed-analysis.html#:~:text=Annexure%2DII%20(w.e.f.,fy%202021%2D22).,Act%2C%20shall%20undertake%20impact%20assessment.
