Author: Kirthana Singh Khurana
Assistant Professor and Assistant Dean (Academic Affairs) at Jindal Global Law School
I. Introduction
The Companies Act, 2013 (“Act”) heralded a new and comprehensive corporate law regime in India. The Act has many pioneering provisions, but one epochal aspect stands out in Section 135, which requires companies to meet certain financial thresholds to make contributions towards Corporate Social Responsibility (“CSR”). The uniqueness of Section 135 does not lie so much in making India the first county of this size to introduce such an all-encompassing mandatory CSR law, as in proclaiming, in no specific terms, its intent of entrusting the Indian corporate fraternity with a decisive social role. The CSR provision also denotes the purposeful incorporation of public interest considerations into business decision-making.
On 22 January 2021, the Ministry of Corporate Affairs (“MCA”), Government of India notified the Companies (CSR Policy) Amendment Rules, 2021[1] (“Amendment Rules”), amending certain provisions of the Companies (CSR Policy) Rules, 2014. The regulatory monitoring and assessment of CSR programs, as well as the utilisation of CSR spending, now stands significantly enhanced.
The Amendment Rules symbolise a paradigm shift in the role of CSR projects executed by the companies in social development. So far, the CSR regime in India has faced criticism for being more of a marketing strategy, bureaucratic and a tick-box activity to meet compliance standards with no lasting sustainable impact. The Amendment Rules are a serious endeavour to bring in the ‘pay what it takes’ philanthropy approach where the social impact of CSR activities is reckoned as a yardstick for appraising Indian companies’ social contribution.
There are three distinct ways in which the Amendment Rules have registered their relevance –
enhanced clarity about various CSR provisions, dispelling the prevalent confusion;
curbed excess discretion wielded by the companies; and
introduced uniformity in the legal procedures to be followed.
The most salient changes, inter alia, can be encapsulated as follows:
II. Definitions
The revised definition of CSR is more wholesome and unambiguous. It not only reiterates that CSR refers to the activities carried out by a company in compliance with the statutory requirements under Section 135 of the Act but also clearly excludes six activities. It has thereby consolidated the essential features that were earlier a part of various MCA Circulars and FAQs issued between 2014-2020. The excluded activities include those undertaken by the company in its normal course of business (a three-year exemption has been granted to companies undertaking Covid-19 related research and development activities), activities undertaken abroad, any political contributions, activities to benefit the company employees, activities for marketing benefits and for fulfilling any other statutory obligations.[2]
Another noteworthy addition is the definition of an “Ongoing Project”, characterised as a project executed by a company over a few years, not exceeding three years (excluding the year of its inception). The definition also has an expanded meaning to include projects that were not originally conceived as extending to a period beyond one year for completion but, based on attendant circumstances, got the board’s approval for their completion beyond one year.[3] This is a welcome move because if any short-term project undertaken by the company turns out to be successful in its initial year, the company can continue to invest in that project and take advantage of the relaxations available to it in case of ongoing projects.
These definitions have cleared the air tremendously and repositioned CSR activities with an unblurred purpose.
III. CSR Implementation
Rule 4 of the Amendment Rules allows companies to carry out the identified CSR activities independently or through an outsourced implementing agency.[4] However, such an entity will be able to operate only after completing a registration process made mandatory from 1 April 2021.[5] This change requires the Registrar of Companies to maintain a record of such implementing agencies and ensures that the CSR project implementation is entrusted only to those agencies that have the necessary wherewithal to implement CSR policies of companies successfully.
IV. CSR Committee
The role of the CSR committee of the company has been recast significantly through the amendments in the rules. The committee has been mandated to develop, in line with the CSR policy of the company, an annual plan for the proposed CSR activities and submit it to the company’s board. The annual plan needs to clearly spell out the details about the CSR projects to be taken up, along with the requisite funding provisions and the execution plan encompassing supervision, reporting, and the impact assessment mechanism.[6] This change gives a much-needed professional approach to CSR activities and provides greater clarity about the goals being pursued.
V. CSR Expenditure
By capping the expense chargeable against administrative overheads at five percent of the total CSR spend, the Amendment Rules have addressed the anomalous situation wherein companies could book unlimited expenditure against this head if approved by the CSR committee or the company board.[7] Additionally, any surplus resulting from CSR initiatives must not be included in the company's business profit.[8]
If the CSR expenditure exceeds the statutory requirement in one financial year, the excess amount may be set off against the CSR expenditure for the next three financial years, subject to specific requirements stipulated in the rule.[9] In addition, the companies can deploy CSR funds into raising capital assets. However, the assets so raised can only be owned by either a company formed under Section 8 of the Act or else by a registered public, registered society, the CSR program beneficiaries, or a public authority.[10] This fulfils the sentiments of the High-Level Committee of CSR, which, in its report, cautioned against companies holding assets created out of CSR funds in their names.[11]
The above changes aim to arrest the deficiencies in financial reporting and ensure that the funds do not get swindled away into non-CSR activities.
VI. CSR Reporting
The most ground-breaking change introduced by the Amendment Rules is the requirement for the company to conduct an impact assessment through an independent agency. However, this obligation applies to only those companies that have had an average CSR obligation of Rs. 10 crores or more in the three immediately preceding financial years. Additionally, only those CSR initiatives, with financial outlays of Rs. 1 crore or more, shall be subject to impact assessment.[12] The impact assessment report has to be mandatorily presented before the company’s board and a copy thereof has to be affixed to the company’s CSR activities annual report.[13]
Impact assessment can be a game-changer as it helps the board secure optimum utilisation of the funds by helping it segregate the projects offering the most significant impact from those with limited impact. Greater insights about the social rate of return on its investment towards CSR activities can help improve the overall effectiveness of the company’s social initiatives, enabling it to contribute meaningfully towards accomplishing the nation's sustainable development goals.
Even before the requirement for impact assessment was included in the Amendment Rules, many companies like NMDC Ltd.[14], ITC Ltd.[15], and the Tata Group[16] have consistently employed impact assessment to appraise their CSR project’s performance regularly. They have benefitted from this tool for better evaluation of projects.
VII. Transfer of Unspent CSR Amount
The Amendment Rules provide that at the end of a financial year, any unspent CSR amount, other than that linked to an ongoing project, shall be transferred to a fund maintained within Schedule VII of the Act.[17] This provision is an ad-hoc arrangement for parking the unspent CSR amount and shall eventually make way for a fund especially earmarked to receive such amounts to accommodate the purpose of sub-sections (5) and (6) of Section 135 of the Act. The rationale behind this provision is to have a consistent practice of aggregating all unspent CSR funds.
Much before the revised rules came, the MCA had in the year 2020, very prudently done away with the amendments introduced by the Companies (Amendment) Act, 2019, which had provided for imprisonment up to a term of three years for violations of CSR related obligations. The above amendment had received a serious backlash from the industry. The decriminalisation of CSR defaults, fortified by the changes brought in by the Amendment Rules, has restored the desired groundswell for the CSR regime in India.
VIII. Drawbacks
Despite all the positive measures introduced to reinforce the CSR movement in India, a few flaws remain. Section 135 of the Act and the Amendment Rules seem rather prescriptive and fail to provide much flexibility to companies. The inclusion of the impact assessment requirement is a brilliant move, but the Amendment Rules prescribe no standard procedure or format. This fantastic tool may not yield desired outcomes unless the MCA clarifies the method to be followed for carrying out an impact assessment. The five percent cap on the administrative overheads may be seen as an impediment by most companies as this could be too restrictive in the case of many proposed CSR projects.
IX. Conclusion
The mandatory CSR regime introduced in India has catapulted it as a trailblazer among the world community. It promises to go a long way in consolidating India as a shining example of the corporates spearheading the social transformation as true collaborators of the Government. It will be a test of the steadfastness of both the companies and the government agencies engaged in facilitating the establishment of a successful CSR regime in our country. Here is hoping India comes out triumphant in this test.
[1] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021. http://www.mca.gov.in/Ministry/pdf/CSRAmendmentRules_23012021.pdf. [2] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 2(1)(d). [3] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 2(1)(i). [4] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 4(1). [5] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 4(2)(a) makes it mandatory for implementing agencies to register themselves with the Central Government by filing Form CSR-1 w.e.f., 1 April 2021. [6] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 5(2). [7] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 2(1)(b). [8] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 7(2). [9] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 7(3). [10] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 7(4). [11] Government of India Ministry of Corporate Affairs, ‘Report of the High Level Committee on CSR 2018’ (2019). [12] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 8(3)(a). [13] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 8(3)(b). [14] ‘A Report on Impact of NMDC’s CSR Initiatives in Kirandul’ (National Institute of Rural Development & Panchayati Raj, 2017) <https://www.nmdc.co.in/CSR/NMDC_Kirandul.pdf> accessed on 29 May 2021. [15] ‘Summary of Impact Studies’ (ITC Ltd.) <https://www.itcportal.com/sustainability/impact-studies.aspx> accessed 29 May 2021. [16] ‘Tata CSR Assessment Framework 2016’ (Tata Sustainability Group, 2016) <https://www.tatasustainability.com/pdfs/TataCSRAssessmentFramework.pdf> accessed 29 May 2021. [17] The Companies (Corporate Social Responsibility Policy) Amendment Rules 2021, Rule 10.