Draft Amendment Rules: CSR under harsh Scrutiny

The e-Form CSR 1 is also prescribed in the said Draft Rules.

The Corporate Social Responsibility (CSR) landscape is bound to change radically as the Ministry of Corporate Affairs (MCA) has recently published the Draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 (Draft Rules) proposing certain amendments in the Existing Rules.

The eligibility of the Entity / agency to undertake CSR activities is likely to undergo a radical change once the Draft Rules are notified. To elaborate in the said context, Rule 4 of the Existing Rules is proposed to be substituted with a new rule, which dis entitles undertaking of CSR activities by companies through any registered trusts or registered societies. In other words, per the Draft Rules, CSR can only be implemented by a company itself or through (a) a company established under section 8 of the Act, or (b) any entity established under an Act of Parliament or a State legislature.

The enabling language in the proviso to the erstwhile Rule 4(2) of the Existing Rules permitted companies to achieve their CSR expenditure through registered trusts/ registered societies that fulfill the eligibility criteria. However, this proviso has been omitted in the Draft Rules. Therefore, it would appear that once the Draft Rules are notified to come into effect, a registered trust or registered society may not be an eligible entity to carry out CSR activities by companies. Irrespective of whether trusts/ societies are considered as legal entities, the test is whether they will be considered as an entity established under an Act of Parliament or a State legislature.

The proviso to Rule 4 (1) proposed in the Draft Rules states that the provisions of Rule 4(1) shall not affect the CSR projects or programmes that were approved prior to the commencement of the Draft Rules. Accordingly, existing projects or programmes which have been approved would not be affected and companies can continue with the same project/ programme to the extent approved.

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It would be relevant to also highlight that the Draft Rules require a Section 8 company or an entity registered under any Act of Parliament/ State legislature that is incorporated for channeling the CSR expenditure to register it self with the Central Government by filing e-Form CSR 1 with the ROC and that the registration has to be done before undertaking any CSR activities by such entity. There was no such requirement in the Existing Rules and is an additional requirement which will be applicable. The e-Form CSR 1 is also prescribed in the said Draft Rules.

Further, it is proposed topermit entities to seek aid from ‘International Organizations’ (i.e., organization notified by the Central Government as an international organization under section 3 of the United Nations (Privileges and immunities) Act, 1947 (46 of 1947), to which the provisions of the Schedule to the said Act apply) for designing, monitoring and evaluation of CSR projects / programmes and also for capacity building of company’s employees for CSR.

The Draft Rules also permit the International Organisation to implement any CSR project provided prior approval from the Central Government is obtained. This would mean that an entity which is recognized as an international organisation as aforesaid can implement any CSR project provided approval from the Central Government is obtained.

The Draft Rules also require the Board to be satisfied that the disbursed CSR funds are being utilized only for the purposes of implementation of CSR activities and additionally, the chief financial officer or a person responsible for financial management of a company is required to certify to that effect.

The Draft Rules further require the Board of the company to monitor the implementation of the ongoing projects with reference to approved timelines and also empowers the Board to make suitable modifications. The term ‘Ongoing Projects’ is defined as 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, and 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.

The Existing Rules only required the entities undertaking CSR activities to constitute a CSR Committee for smooth implementation of such activities. The Draft Rules now casts an additional responsibility on the a fore said CSR Committee to formulate and recommend to the Board an annual action plan in pursuance of the CSR Policy, such that the action plan shall cover all areas that are mentioned under Rule 5(2) of the Draft Rules.

 ‘CSR Policy’, as per the Draft Rules is defined to mean  a statement containing the approach and direction given by the board of a company, as per recommendations of its CSR Committee, for selection, implementation and monitoring of activities to be undertaken in areas or subjects specified in Schedule VII of the Act.

The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programmes or activities shall not form part of the business profits of the company. In this regard, a provision has been inserted under the Draft Rules that surplus of CSR activities shall be ploughed back or be transferred to an Unspent CSR account and shall not form part of the profits of the Company as given under the provisions of Rule 7(2).

The proposed change requires the surplus arising out of CSR to be spent only for CSR activities. Unspent balances of CSR funds as of the date of notification of the Draft Rules shall be transferred to an account designated as ‘Unspent Corporate Social Responsibility Account’ within 30 (thirty) days of end of Financial year 2020-21. Such unspent balance shall be spent within a period of three financial years from the date of such transfer i.e. three years from the date of transfer. Any unspent balance after the expiry of the three years prescribed shall be transferred to a Fund specified under Schedule VII in this regard within 30 (thirty) days.

Every company will also be required, as per the Draft Rules, to disclose the composition of CSR Committee, CSR Policy and Projects approved on their website for the purpose of public viewing. 

It is also relevant to note that given the current COVID 19 crisis, the MCA has issued a clarification on March 23, 2020 that spending of CSR funds for COVID-19will be an eligible CSR activity. Funds may be spent for various activities related to COVID-19 including activities relating to promotion of health care, including preventive health care and sanitation, and disaster management.