There have been amendments to the Companies Act, 2013 more so with respect to Corporate Social Responsibility. Ministry of Corporate Affairs, Government of India has invited suggestions and public comments on Draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020.
The current draft has as many eleven amendments be it with redefining Corporate Social Responsibility, enhancement of administrative overheads or accountability of the Board. However, the draft also deviates on original set of ideas on modes of implementation, registration of implementing agencies and creating another entity to deposit unspent Corporate Social Responsibility amount. It is going to be a challenge with proposed changes and below is summary and suggested changes to the draft from a practitioner’s point of view.
The first and foremost amendment is redefining Corporate Social Responsibility. It is a welcome note to see the progressive and inclusive definition of Corporate Social Responsibility (CSR) however it is important to have measures to control CSR spend for exclusive employee benefits.
The draft also defines CSR Policy in the context of the amendment. CSR policy has to list a clear approach and direction given by the board of the company. Henceforth CSR Board will have to go beyond directional role to be strategic in planning and executing activities listed in Schedule VII for CSR program implementation. It further strengthens intent of CSR in letter and spirit.
It is refreshing to read ‘Ongoing Projects’ definition as the statement further strengthens CSR means a long-term commitment. The three-year commitment seems to encourage donation to ‘Unspent Corporate Social Responsibility Account’ opened by the company. However, it may not benefit the company or community but largely to the ‘National Unspent Corporate Social Responsibility Fund’. It would be ideal to have a five-year cycle with year-on-year allocations and moving the unspent to Prime Minister’s National Relief Fund rather than creating another set up.
Unlike previous amendments on implementing CSR activities, current draft suggests three very different modes for program implementation, one through Companies established under Section 8, second through addition of international organizations through proper approvals and, third through any entity established under an Act of Parliament or a State legislature. It may be a setback for many companies that have already established systems and processes working with either a registered Trust or Society Foundation for CSR program execution. It is ideal to have an existing practice of including Foundations, Trusts and Societies along with suggested new practice. Any amendment should be progressive and any iota of regression makes challenging for companies to take a detour and accommodates abrupt change in the direction.
Unlike previous amendments on implementing CSR activities, current draft suggests mandatory registration of implementing agency with the Ministry of Corporate Affairs, Government of India. Unless registered, entities will not be hired as implementing agencies. It would complicate the process as it would lead to unnecessary regulation of implementing agencies and additional eye on companies that have obliged to serve immediate communities.
It is refreshing to include engagement of international organizationsfor designing, monitoring and evaluation of the CSR projects. However, it further elucidates that it is subject to prior approval of the central government. It is recommended that inclusion of international organizations should be without any strings attached to make it easy engage with their time tested services.
One of the important suggested amendments is accountability of the Board by Chief Financial Officer or the person responsible for financial management. It further enhances role of close monitoring of CSR program management. However, it may be too cumbersome to practice having the Board report and also certified by Chief Financial Officer or the person responsible for financial management.
It is a welcome note to have an active role of the committee to draw detailed annual action plan to undertake CSR program. It will ensure close attention, support and monitoring of the top management for CSR similar to any other business process.
In addition to existing administrative overheads of five percent, it is heartening to earmark ten percent towards administrative overheads to undertake impact assessment. It would be ideal to include other aspects of impact assessments such as need and interim assessment and social audits. It is welcome input to include engagement of international organizations for designing, monitoring and evaluation of the CSR projects.
The initial draft did speak about close monitoring of CSR activities by the Board. However, suggested amendment, categorically mentions that a company having the obligation of spending average CSR amount of Rs 5 Crore or more in the three immediately preceding financial years to undertake impact assessment of CSR projects and disclose details of the same in the Annual Report on CSR. The draft also recommends earmarking up to ten percent towards administrative overheads to undertake impact assessments.
The draft also speaks about ownership of assets created or acquisition of assets as part of CSR implementation. CSR is meant to benefit communities therefore it is appropriate to tag CSR assets to the community. However, recommending ownership CSR assets to Section 8 company will create trust issues in the community and companies may discourage companies in building such long lasting assets for the greater good.
The proposed amendment to, unspent amount of ongoing projects, to be transferred to ‘Unspent CSR Account’ is ambiguous on with effect date or year. It is also not clear on whether it is applicable immediate year onwards. The close reading of the draft does suggest that it is applicable for the surplus of the immediate year.
The draft reads the unspent balance, if any, towards fulfilment of CSR obligation be transferred within a period of thirty days from the end of Financial Year to ‘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 CSR Policy within a period of three financial years, failing, 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. It is administratively cumbersome and adds unnecessary protocols to follow up and ensure spend it met over three years.
It would be ideal to have a five-year cycle with year-on-year allocations and moving the unspent to Prime Minister’s National Relief Fund rather than creating another set up.
There’s a proposed amendment with respect to additional disclosures on the website. It is an important recommendation to have a functional website that discloses the composition of the CSR Committee, CSR Policy and projects approved by the Board. It also puts check on taking up adhoc projects and the Board has to think through prior to approval of any such projects.
Ministry of Corporate Affairs is seeking suggestions and public comments on Draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020. The draft can be accessed at the web link here: http://feedapp.mca.gov.in/csr/ and last date for submission of suggestions is end of business hours on March 28, 2020.
Nirbhay Lumde is a CSR practitioner and views are personal.