Analysing recent amendments to corporate social responsibility legislation

Introduction
COVID-19-related measures
Amendment to Schedule VII of Companies Act
Companies (Amendment) Act 2020

Introduction

The Companies Act 2013 is the exclusive legislation which deals with corporate social responsibility (CSR) provisions in India. The act provides that every Indian company with a net worth of Rs5 billion or more, a turnover of Rs10 billion or more or a net profit of Rs50 million or more during the immediately preceding financial year must:

• establish a CSR committee as part of its board;
• draft a CSR policy; and
• spend in every financial year at least 2% of the company's average net profits made during the three immediately preceding financial years on CSR activities in accordance with the terms of the CSR policy.

COVID-19-related measures

On 23 March 2020, in response to the COVID-19 pandemic, the Ministry of Corporate Affairs (MCA) issued a circular which clarified that the spending of CSR funds for activities relating to COVID-19 would be considered as eligible CSR expenditure as per the Companies Act. The circular further clarified that the funds may be spent by companies for various activities relating to COVID-19 under Items i and xii of Schedule VII of the Companies Act relating to the promotion of healthcare, including preventive healthcare and sanitation, and disaster management.

Further, in order to support the COVID-19 vaccine development programme, on 24 August 2020 the MCA issued the Companies (Corporate Social Responsibility Policy) Amendment Rules 2020, thereby further amending the Companies (Corporate Social Responsibility Policy) Rules 2014. The amendment rules allow companies engaged in research and development (R&D) activities for new vaccines, drugs and medical devices in their normal course of business to undertake and include R&D activities for new COVID-19-related vaccines, drugs and medical devices for the financial years 2020-2021, 2021-2022 and 2022-2023 under their CSR policy, subject to the following conditions:

• Such R&D activities must be carried out in collaboration with any of the institutes or organisations mentioned in Item ix of Schedule VII of the Companies Act (eg, the Indian Council of Medical Research, the Council of Scientific and Industrial Research, the Department of Biotechnology and the Department of Science and Technology).
• Details of such activity must be disclosed separately in the annual report on CSR included in the board's report.

Prior to the introduction of the amendment rules, activities undertaken by companies in their normal course of business (even if the activities were in the areas or subjects listed in Schedule VII of the Companies Act) were not considered as eligible CSR activities. However, given that various Indian companies are engaged in the field of COVID-19 vaccine development, the aforesaid amendment would certainly provide financial respite to such companies. All other companies (apart from those engaged in R&D activity for new vaccines, drugs and medical devices) would still be required to undertake CSR activities outside of their normal course of business.

Amendment to Schedule VII of Companies Act

On 24 August 2020 the MCA, in line with the amendment rules, issued a notification thereby substituting the entries in Item ix of Schedule VII of the Companies Act. Pursuant to the amendment rules and the aforesaid notification, contributions made by companies towards the following activities will now be considered as eligible CSR expenditure:

• Contributions to incubators or R&D projects in the field of science, technology, engineering and medicine, funded by the central or state government, a public sector undertaking or any agency of the central or state government.
• Contributions to public-funded universities engaged in conducting research in science, technology, engineering and medicine to promote sustainable development goals. Along with the existing list of ministries and departments for collaboration, there is the new addition of the Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy and the Department of Pharmaceuticals.

The aforesaid amendments appear to be of a temporary nature and were introduced by the government mainly to support the R&D activities of new COVID-19-related vaccines, drugs and medical devices.

Companies (Amendment) Act 2020

The Companies (Amendment) Act 2020 was passed by both houses of Parliament and received presidential assent on 28 September 2020. While the Companies (Amendment) Act has amended various Companies Act provisions (which primarily relate to the decriminalisation of various offences under the Companies Act), it has also introduced amendments to provisions concerning CSR under the Companies Act. However, the relevant sections under the Companies (Amendment) Act concerning CSR are yet to be notified by the government. The changes introduced by the Companies (Amendment) Act to the CSR provisions are summarised below.

Excess spending
The Companies (Amendment) Act provides that if a company spends an amount (on CSR activities) in excess of the requirements provided under the Companies Act, such company may set off this excess amount for succeeding financial years in such a manner as may be prescribed.

Penalty
The Companies (Amendment) Act replaces the sub-section concerning penalties under Section 135 of the Companies Act, which was inserted by the Companies (Amendment) Act 2019. The new sub-section provides that if companies default in complying with Sub-sections 5 (concerning CSR expenditure amounts) or 6 (concerning the transfer of unspent CSR expenditure amounts) of Section 135 of the Companies Act:

• they will be liable to a penalty of twice the amount required to be transferred to the fund specified in Schedule VII of the Companies Act or the unspent CSR account, as the case may be, or Rs10 million, whichever is less; and
• every officer of the company who is in default will be liable to a penalty of one-tenth of the amount required to be transferred by the company to such fund as specified in Schedule VII or the unspent CSR account, as the case may be, or Rs200,000, whichever is less.

CSR committee
The Companies (Amendment) Act has also inserted a new Sub-section 9 in Section 135 of the Companies Act, which provides that where the amount to be spent by a company on CSR activities is less than Rs5 million, the requirement with respect to constitution of a CSR committee will not apply and the functions of the CSR committee in such cases will be discharged by the company's board of directors.

On the one hand, the above amendments propose to provide ease of compliance to companies; however, on the other, they also seek to penalise companies and their officers for non-compliance with CSR provisions.

For further information on this topic please contact Neetika Ahuja or Vikrant Anand at Clasis Law by telephone (+91 11 4213 0000) or email (neetika.ahuja@clasislaw.com or vikrant.anand@clasislaw.com). The Clasis Law website can be accessed at www.clasislaw.com.