ANALYSIS OF Draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020

The MCA has invited public comments on the draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 at http://feedapp.mca.gov.in/csr/till the end of business hours on 10th April, 2020...

1. Corporate Social Responsibility (CSR) for companies has been mandated through the Companies Act, 2013 (the Act), which came into effect since 01.04.2014. Section 135 of the Act enumerates the provisions concerning CSR and the Companies (Corporate Social Responsibility Policy) Rules, 2014 prescribes the rules for implementation. All these were notified on 27th February 2014 and came into effect since 01.04.2014. The Companies (Amendment) Act, 2019 amended section 135 dealing with Corporate Social Responsibility. The Companies (Amendment) Act, 2019 received the President's assent and was published in the Official Gazette on 31st July 2019.

2. One of the salient amendments in Section 135 is the addition of Sub Section (6) which mandates every company to transfer unspent CSR amount within thirty days from the end of the financial year to a special account to be opened by the company on its behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

3. In order to operationalize the Companies (Amendment) Act, 2019, the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 has been drafted for carrying out amendments in the Companies (CSR Policy) Rules, 2014.

4. The draft also includes some of the earlier provided MCA guidance on CSR under Section 135 of Companies Act 2013. Some of the salient changes proposed are:

a. CSR definition has been altered to state that CSR shall not include the following, namely

i) Activities undertaken in pursuance of normal course of business of the company.
ii) Any activity undertaken by the company outside India.
iii) Contribution of any amount directly or indirectly to any political party under section 182 of the Act.
iv) Activities that significantly benefit the employees of the company and their families. Provided that in case of any activity having less than twenty five percent employees as their beneficiaries, then such activity shall be deemed to be CSR activity under these rules.”;

Author’s personal view: The mandate of 2% CSR when it was introduced as a concept & later enshrined in Section 135 was to ensure that money does not go from the left pocket to the right pocket. The earlier Rule 4(5) clearly stated “CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with Section 135 of the Act”. However, the proposed amendment states that “any activity having less than twenty five percent employees as beneficiary, then such activity shall be deemed to be CSR activity under these rules”.

In the absence of any clearly defined limits or check points, this addendum, if approved and passed finally, can provide ample opportunities for companies/organizations to validly and legally fund the learning and development of their employees under Education and Skills building aspect in Schedule 7, which can possibly even consume a big chunk of their mandatory 2% CSR expenditure funds. Maintaining less than twenty five percent employees as beneficiary is not a big deal.

In my personal view, if the rule gets passed as it is without any tweaks, then there is a fair possibility of misuse (left to right pocket) at least by some companies/organizations & it will not be an easy task to prove any kind of violation. Hence it would be better if this clause is tweaked to place in some checks and balances before approval else sooner or later, the MCA will have to come out with another Amendment/Policy FAQ on this.

b. Three additional definitions have been added for Net profit, Ongoing Projects and Public Authority. The most important amongst these three is that of Ongoing Projects which means 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 which shall also include such projects that were initially not approved as a multi-year project but whose duration has been extended beyond a year by the Board based on reasonable justification.

c. As regards Rule 4 on CSR Implementation, the prominent changes are:

i. As per proposed Rule 4(1) CSR activities can now be only undertaken by the company itself or through a company established under section 8 of the Act, or any entity established under an Act of Parliament or a State legislature and such Section 8 company/entity should be duly registered with the central government undertaking any CSR activity. The earlier rule had a proviso which permitted companies to undertake CSR activities through a company established under Section 8 of the Act or a registered trust or registered society which the company/trust/society has an established track record of three years in undertaking similar programs or projects. This proviso has been totally deleted in the new amendment. Thus, Registered Trusts or Registered Societies cannot be used for channeling the CSR Expenditure by the Companies in the revised Rules unless they have been established under an Act of Parliament.

Author’s personal view: Under the proposed change, only Section 8 Companies and any entity established under an Act of Parliament or a State Legislature, which are duly registered with the Central Government can be used for CSR implementation. A company may also engage an international organization for implementation of a CSR project subject to prior approval of the central government. However, existing NGOs that were either registered Trusts or Societies with track record of more than three years, but not established under an Act of Parliament or State Legislature now do not find their way into the list of entities authorized to undertake CSR under Section 135 of the Companies Act 2013. This has caused a lot of heart burn amongst the affected NGOs who have been duly serving in this sector for quite some time now and really making a difference to their End Beneficiaries. In my personal view, the MCA needs to relook at this deletion before passing the amendment

ii. In case of ongoing projects, 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.

iii. Sub Rules 5 (Activities that benefit employees and their families) 6 (capacity building of employees), & 7 (donation to political fund) have been deleted as all these have now been moved and included in the newly proposed definition of CSR.

d. Rule 7

i. The definition of CSR Expenditure under Rule 7 has been proposed to be changed to include upto five percent of total CSR expenditure of the company for the financial year as administrative overheads, which can go upto ten percent for companies undertaking impact assessment, in pursuance of sub-rule (3) of Rule 8.
ii. Any surplus arising out of the CSR projects or programmes or 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 the CSR policy and action plan of the company.
iii. CSR amount may be spent by a company for creation or acquisition of assets which shall only be held by a company established under Section 8 of the Act having charitable objects or a public authority. Assets created prior to the commencement of the Amendment, shall within a period of One hundred and eighty days from such commencement comply with the above changes, which period may be extended by a further period of not more than ninety days with the approval of the board based on reasonable justification.
iv. Unspent balance, if any, towards fulfilment of CSR obligation at the time of commencement of the Amended Rules shall be transferred within a period of thirty days from the end of Financial Year 2020-21 to special account viz., ‘Unspent Corporate Social Responsibility Account’ opened by the company and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year. (This is in sync with newly inserted Sub-section (6) in Section 135 of the Companies Act 2013).

e. New Rule 8(3) on Impact Assessment. “A company having the obligation of spending average CSR amount of Rs 5. Crore or more in the three immediately preceding financial years in pursuance of sub section 5 of Section 135 of the Act, shall undertake impact assessment for their CSR projects or programmes, and shall disclose details of the same in its Annual Report on CSR.”

f.Rule 9 Display of CSR activities on Website. The task now is to share composition of CSR Committee also on the website.

g. New Rule 10 on National Unspent Corporate Social Responsibility Fund. The Central Government shall establish a fund called the “National Unspent Corporate Social Responsibility Fund” (herein after referred as “the Fund”) for the purposes of sub-section (5) and (6) of section 135 of the Act. The Fund shall be utilized for the purposes of undertaking CSR projects in areas or subjects specified in schedule VII of the Act. Provided that until such fund is created the unspent CSR amount in terms of provisions of sub-section (5) and (6) of section 135 of the Act shall be transferred by the company to any fund as specified in schedule VII of the Act.

5. Public comments have now been invited by the MCA on the draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020. Comments, if any, may be submitted online at http://feedapp.mca.gov.in/csr/by end of business hours on 10th April, 2020.

Disclaimer – All views expressed are purely personal