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17 May 2021
Constitution of CSR committee
Manner of implementation of CSR activities
Annual action plan
CSR expenditure and offset of excess amount
Transfer of unspent amount
The Ministry of Corporate Affairs (MCA) recently amended the Companies Act 2013 and the Companies (Corporate Social Responsibility Policy) Rules 2014, introducing a plethora of changes to the act's corporate social responsibility (CSR) provisions.
Definition of CSR
Compared with the previous brief definition of 'CSR', the amendments provide a more extensive and clearer definition, thereby providing a list of activities which do not constitute CSR activities. These include:
Definition of administrative overheads
The term 'administrative overheads' has been defined as the expenses incurred by a company in the "general management and administration" of CSR functions, excluding expenses directly incurred in designing, implementing, monitoring and evaluating a particular CSR project or programme. It has also been clarified that administrative overheads cannot exceed 5% of a company's total CSR expenditure in one financial year.
Definition of CSR policy
The definition of a 'CSR policy' has been revised to mean a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR committee. This includes guiding principles for the selection, implementation and monitoring of activities, as well as formulation of the annual action plan.
Definition of ongoing project
The term 'ongoing project' has been introduced and means a multi-year project (with a duration of three years excluding the financial year in which it is undertaken) which a company undertakes for the purpose of fulfilling its CSR obligations.
The requirement to constitute a CSR committee has been removed for companies whose CSR expenditure does not exceed Rs5 million. With regard to such companies, the functions of the CSR committee will be discharged by the board of directors.
As of 1 April 2021, entities undertaking CSR activities must register with the MCA by filing a CSR-1 Form. The Companies (Corporate Social Responsibility Policy) Rules 2014 further provide that a company may engage international organisations to design, monitor and evaluate CSR projects or programmes as per its CSR policy and to build personnel capacity for CSR.
Under the amended provisions, a company's CSR committee must formulate and recommend to the board an annual action plan in pursuance of its CSR policy. This must include:
A company's board can alter such plan at any time during the financial year, as per the recommendation of the CSR committee, based on a reasonable justification to that effect.
Any surplus arising from a company's CSR activities can be used for CSR purposes only, as prescribed under the Companies Act 2013, and cannot form part of a company's business profits.
The amended provisions also allow companies to offset any excess CSR expenditure against the amount required to be spent on CSR activities in the immediately succeeding three financial years by passing a board resolution to this effect.
The treatment of capital assets created or acquired from CSR expenditure is also now clearly set out in the act.
The amended provisions require every company with an average CSR obligation of at least Rs100 million in the previous three financial years to undertake an impact assessment, using an independent agency, with respect to their CSR projects which cost Rs10 million or more and were completed at least one year before undertaking the impact assessment. Further, the impact assessment report must be presented to the board and annexed to the company's annual report.
The manner of dealing with any unspent CSR expenditure has been clearly specified: companies must transfer any unspent amount relating to an ongoing project to a special account called 'Unspent CSR Account' (opened with any scheduled bank). The amount transferred to this account must be spent on the company's CSR activities within three financial years from the date of such transfer.
However, any other unspent CSR amount in a financial year must be transferred to a fund specified in Schedule VII of the Companies Act 2013, such as the prime minister's national relief fund, within six months of the end of the relevant financial year.
Previously, the CSR provisions applied to companies on a comply or explain basis. Where companies were unable to spend the requisite prescribed amount on CSR activities, they simply had to explain the reasons for not doing so in their board report. Following the amendments, in case of contravention, a company and every officer thereof will be liable to pay a monetary penalty.
The amended CSR provisions, which are much stricter and time bound, will ensure that companies which fall under their purview spend the requisite amount on CSR activities rather than just explaining why they have not done so and avoiding any consequences.
For further information on this topic please contact Neetika Ahuja or Sweta Sinha at Clasis Law by telephone (+91 11 4213 0000) or email (email@example.com or firstname.lastname@example.org). The Clasis Law website can be accessed at www.clasislaw.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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