The long-awaited amendments to the corporate social responsibility (CSR) provisions brought in by the Companies (Amendment) Act 2020 (CAA 2020) have been made effective by the Ministry of Corporate Affairs (MCA) vide notification dated 22 January 2021. Along with this, MCA notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.
As CSR spending has been steadily increasing, the same has received a thorough review by the government’s regulators. With the recent amendments in place, including the amendments introduced by the Amendment Act 2019, the entire CSR regime has undergone a huge change, making an in-depth and clear understanding of the CSR law and the amendments thereto all the more important.
Team CauseBecause has been engaging in discussions with decision makers in the government as well as corporate leaders and domain veterans, and put together the questions that are going around. Read on to find out what these are, and the answers too.
1. When will the Amendment Rules become effective?
The Amendment Rules have been notified with immediate effect and will therefore be applicable from the date of the Gazette Notification – that is, 22 January 2021.
2. Are the Amendment Rules retroactive?
Going by the general principle, we are of the view that the amendments are not retrospective or retroactive. That, however, does not mean the amendments do not affect matters or things done in FY 2020-21. For example, any shortfall in spending in FY 2020-21 may well be covered by the amendments. Further, there is a view that impact assessment may be required even for projects undertaken in earlier years.
3. What are the implications of not spending post the amendments coming into effect?
The proposed amendments intend to switch the CSR mechanism from ‘comply or explain’ (COREX) to ‘comply or pay penalty’ (i.e., COPP provision).
Any non-compliance with the new requirements of law may attract the following penal provisions:
a) Penalty on company
Up to twice the amount required to be transferred to a fund specified in Schedule VII, or ‘unspent CSR account’, or Rs 1 crore, whichever is lower
b) Penalty on officers in default
1/10th of the amount required to be transferred to a fund specified in Schedule VII, or unspent CSR account, or Rs 2 lakhs, whichever is lower
Scope of CSR expenditure
4. Activities ‘benefiting employees’ have been excluded from the scope of CSR. Does that mean the company has to oust employees from any CSR activity it undertakes?
If the activities are intended for the larger good, and there is neither distinctive reservation for employees, nor distinctive exclusion, it does not offend the intent of CSR. In our view, if employees participate in activities which are generally open for all, they can also benefit themselves from such activity as it is not exclusively conducted for them only.
The ICAI FAQs on CSR further clarify that projects, programmes or activities that benefit only the employees of the company and their families will not be considered as CSR. However, programmes or activities that are for the generic benefit or good but which also cover some employees or their families will still be considered as CSR as long as such benefits are not exclusively for the benefit of such employees.
For example, recreational facilities provided for employees and their families in the employee quarters will not be considered as CSR. However, if the company maintains a stadium for promotion of sports which is used by residents of that place and not exclusively by its employees, then such spending will be considered as spending towards CSR, even if some of the company’s employees participate in the same, or derive benefits from the same.
CSR is a ‘social’ responsibility and not an ‘employer’ responsibility. The intent is that employer’s obligation to employees, or employee welfare activities, is not taken as CSR. The idea is not to deprive employees of social benefit programmes but to avoid making them the sole beneficiaries. Hence, if employees are not targeted beneficiaries solely, nor have any special status, the spirit of CSR is not breached.
5. Who are ‘employees’ in the context of the Amendment Rules? Can the company have CSR activities towards workers engaged in unskilled activities? What if the company spends towards apprentices/interns or contract labour?
Earlier, there was ambiguity as to who would be included under the term ‘employees’ and thereby be ineligible with respect to CSR spending. The same has been clarified by the Amendment Rules to include all employees as defined under the Code of Wages Act, 2019. Employees as defined under the Code of Wages Act, 2019, include all employees – skilled, unskilled, and semi-skilled. Accordingly, if CSR expenditure is made towards unskilled labour, the same will not be considered as CSR expenditure. However, apprentices and interns engaged under the Apprentices Act, 1961, are specifically excluded from the definition and will therefore be eligible for CSR expenditure.
6. What will be the actionable options if a company spends less than the amount required to be spent under its CSR obligation?
If a company spends less than the amount required to be spent under its CSR obligation, the Board will have to specify the reasons for not spending such amount in the Board’s report.
The company will deal with the unspent amount in the following manner:
|Analysis of unspent amount||Actionable option||Timeline|
|Unspent amount pertains to ‘ongoing’ project||Transfer amount to a separate bank account to be designated as ‘unspent CSR account’||Within 30 days from the end of the financial year|
|Unspent amount does not pertain to ongoing project||Transfer amount to a fund prescribed under Schedule VII||Within 6 months from the end of the financial year|
The company will have to deal with the unspent amount in the following manner: While the time for transferring the unspent money to a fund prescribed under Schedule VII is six months, the Board will have to decide on the retention of money for ongoing projects and disclose reasons for not spending the amount in the Board’s report. Hence, the analysis of what may actually be retained by the company will have to be done before approval of the Board’s report.
Ongoing projects and unspent CSR account
7. What is the meaning of ‘ongoing project’?
Rule 2 (1) (i) of Amendment Rules defines the term ‘ongoing project’ as:
a) a multi-year project, stretching over more than one financial year
b) having a timeline not exceeding three years excluding the year of commencement
c) including such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the Board based on reasonable justification
The same should have commenced within the financial year to call it ‘ongoing’. This includes a project that was initially not approved as a multi-year project. The intent is to include a project which has an identifiable commencement and completion. The expenses which are recurring in nature should not be included in the ongoing project.
For example, if a company contributes to the annual running expense of a cancer hospital, the spending for the next year cannot be regarded as an ‘ongoing project’. However, if installation of a new facility at the same hospital is undertaken during the year, such expense should be regarded as an ‘ongoing project’.
8. Will a project with a gestation period of more than 5 years qualify to be an ‘ongoing project’?
In terms of the definition of ongoing projects prescribed u/r 2 (1) (i) of Amendment Rules, the project shall not stretch beyond three years excluding the year of commencement to qualify it as an ongoing project.
There can be projects that may stretch beyond 3 years – for example, building of a hospital or a school. In such cases, though the ongoing project is for a period of 5 years, in our view the company will be permitted to retain the CSR amount to be spent for the 3 years out of the total life of 5 years of the project. The rationale behind the restriction of 3 years is to avoid retaining the unspent amount indefinitely.
While the life of a project may extend for a period of 5 years, the same will not qualify as ongoing project for the purpose of CSR requirements.
9. Will the project be termed ‘ongoing’ only if a substantial amount is spent on such a project? Alternatively, does committed disbursement (a binding commitment for disbursement) of CSR amount mean that the project is ‘ongoing’?
There may be a situation where a company has agreed to disbursement of the amount before the end of the financial year but due to some reason the actual disbursement/implementation has not been made or the project for which the disbursement has been committed has not started. In such situations, while the actual amount is not disbursed or the project has not started, we may say that the project has commenced within the same financial year if the company has already made a binding commitment to disburse the amount. Thus, spending of CSR amount is not necessary if the company has committed to such a project and steps towards such commitment have been taken. Since the project has commenced within the same financial year, it is correct to regard the same as an ongoing project.
10. What is the responsibility of the Board towards the ongoing project/s by the company?
The Amendment Rules have put major responsibilities on the Board with regard to ongoing projects.
|Responsibilities of the Board for ongoing projects|
11. What if the company fails to spend the amount retained for ongoing projects?
The company will transfer such unspent retained amount to the fund prescribed under Schedule VII, within 30 days from the end of third financial year. For instance, if the company retained Rs 50 lakhs in 2019–20 to be spent in 2020–21, and only Rs 40 lakhs were spent towards the project in FY 2020–21, the balance Rs 10 lakhs will be transferred to the fund.
12. Are there restrictions on utilisation of the money in the special account or can it be used for regular business purposes of the company?
The whole purpose of segregation of the money into a separate a/c is to ensure that there is no commingling with the rest of the company’s finances. Hence, the amount parked in the Special Account is only to be used for expenditure on the project(s) for which the money was intended.
13. Can the funds earmarked for one project be used for another project, should there be excess spending in one and deficit funding in another?
It does not seem logical to contend that the outlay earmarked for each ‘ongoing project’ will be mutually ring-fenced. Hence, there is nothing wrong in using the outlay dedicated for one project against another.
14. Is non-expenditure considered as non-compliance post the amendments coming into force? What will be the role of auditor in case of non-compliance? Will he qualify his report?
Where earlier the non-expenditure would only imply an explanation to be inserted in the Board’s report, the new provisions also impose a specific penalty on such non-spending. Penalty may be imposed on the company as well as the officer-in-default. This means that the regulator has intended to make non-compliance of CSR expenditure penalty-driven and the liability of the company does not end with only an explanation. Thus, in our view, non-expenditure will be treated as non-compliance and accordingly reports by auditors will be qualified.
‘Carry forward’ of excess CSR spending
15. Can CSR spending be carried forward to make up for shortfall in CSR spending in any year?
Pursuant to the third proviso to Section 135 (5) of the Act, if the company spends an amount in excess of the requirements provided under this subsection, such company may set off such excess amount against the requirement to spend under this subsection for such number of succeeding financial years and in such manner as may be prescribed. In this regard, Rule 7 (3) of Amendment Rules provides for a time frame of 3 immediately succeeding years for adjusting the excess CSR spending.
Therefore, in case a company spends any amount in excess of its CSR obligation and sets off such excess expenditure against shortfall in CSR spending in any of the immediately three succeeding financial years, it will be regarded as carrying backward of CSR shortfall. In other words, shortfall in CSR spending in any year can be adjusted against excess spending in any previous year.
16. What is the meaning of ‘capacity-building spending’ referred to in Rule 4 (6)?
This refers to expenditure on training the CSR staff regarding the CSR project. However, such expenditure is not to exceed 5% of the total CSR expenditure of the company in one financial year.
17. Will the benefit of carrying forward be available to a company that had zero CSR expense to be incurred on account of losses and yet voluntarily incurred certain CSR expenses?
Excess spending – that is, spending in excess of what is required – is allowed to be set off. If there was no spending required by the company on account of losses and the company had spent an amount, the said amount may be regarded as excess spending and may be carried forward.
Implementation of projects
18. Which entities qualify to be implementing agencies for CSR activities?
So far, a Section 8 company, a trust, or a society having a track record of three years in carrying out similar activities qualified to be implementing agencies. However, several amendments have now been brought into the provisions relating to implementing agencies.
On or from 01 April 2021, the following four types of agencies will be eligible to carry out CSR activities on behalf of the company:
a) Category I: Entity established by the company itself or along with any other company – a company established under Section 8 of the Act, or a registered public trust, or a registered society, registered under Section 12A and 80G of the Income Tax Act, 1961
b) Category II: Entity established by the Central Government or State Government (‘government agencies) – a company established under Section 8 of the Act, or a registered trust, or a registered society
c) Category III: Statutory bodies – any entity established under an Act of Parliament or a State legislature
d) Category IV: Public agencies – a company established under Section 8 of the Act, or a registered public trust, or a registered society, registered under Section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities
Registration of implementing agencies [CSR-1]
19. Is registration of every implementing agency mandatory?
On and from 01 April 2021, all four categories of eligible implementing agencies discussed above will mandatorily have to register themselves with MCA. In addition to this, income tax registration under Section 12A and 80G of the Income Tax Act, 1961, is mandatory for Category I and IV entities.
a) Category I: Entity established by the company itself or along with any other company – a company established under Section 8 of the Act, or a registered public trust, or a registered society
b) Category IV: Public agencies – a company established under Section 8 of the Act, or a registered public trust, or a registered society
Since the requirements of registration come into force on 01 April 2021, any ongoing projects approved prior to 01 April 2021 may be carried out by unregistered implementing agencies. Further, registration will also be needed where the implementing agency is used to hold ‘capital asset’ under Rule 7 (4) of the Amended Rules.
20. What are the requirements prescribed under the Rules for registration of implementing agencies with the MCA?
As discussed, on and from 01 April 2021, companies can undertake CSR activities only through implementing agencies that are registered with MCA.
Rule 4 (2) of the Companies (CSRP) Amendment Rules, 2021, mandates all four categories of implementing agencies to register with the Central Government on and from 01 April 2021 by filing Form CSR-1 electronically with the Registrar of Companies.
Form CSR-1 will be digitally verified by a practising CA/CS/CWA, post which a unique CSR registration number will be generated.
21. Considering that every eligible implementing agency undertaking CSR activities is required to register itself with MCA, is registration by filing CSR-1 mandatory in case the company carries out CSR activities directly without engaging any implementing agencies?
Rule 4 (2) (a) of the Amended Rules states: “Every entity, covered under sub-rule (1), who intends to undertake any CSR activity shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar, with effect from the 01st day of April 2021.”
Accordingly, where the company carries out its CSR activities through the implementing agencies as specified in Rule 4, such agencies will be required to file e-form CSR-1 for registering themselves.
However, in case the company carries out CSR activities directly, the question of registration by filing e-form CSR-1 does not arise.
22. Which all companies are required to undertake impact assessment?
The idea is to obligate only a certain class of companies – those that are spending large sums of money on CSR and have the capacity as well, since impact assessment is cost-intensive and time-consuming.
Accordingly, Rule 8 (3) of the Amended Rules requires the following class of companies to conduct impact assessment:
a) companies with minimum average CSR obligation of Rs 10 crore or more in the immediately preceding 3 financial years; and
b) companies having CSR projects of outlays of minimum Rs 1 crore and which have been completed not less than 1 year before undertaking impact assessment.
23. Are companies required to undertake impact assessment for FY 2020–21?
Since the requirement applies immediately, companies will determine if they come under the prescribed criteria and conduct impact assessment accordingly. CSR targets for FY 2017–18, 2018–19 and 2019–20 will be relevant to determine the requirement of impact assessment for FY 2020–21.
24. Who can conduct impact assessment?
Rule 8 (3) of the Amended Rules requires the impact assessment to be conducted by an independent agency.
While the Amended Rules have not clarified about eligible independent impact-assessment agencies, academic or research entities capable of doing field surveys and with understanding of the objectives of CSR compliance can conduct impact assessment.
25. What are the actionable points arising out of CAA 2020 and the Amendment Rules?
Time for action
To amend CSR Policy, recommendation of CSR Committee (CSRC) and approval of the BoD will be required
To formulate an annual action plan for FY 2021–22, recommendation of CSRC and approval of the BoD will be required
|In the first meeting of CSRC & BoD for 2021–22|
1. To calculate the minimum CSR spending to be done for FY 2020–21
2. To check the current CSR activities for FY 2020–21
3. To see if there will be any deficit in the spending
4. If yes, then to identify if there is any ongoing project
5. If there is any such ongoing project, then open a bank account (‘unspent CSR account’) and transfer the deficit amount within 30 days of end of FY 2020–21
6. If there is no such ongoing project, then transfer the deficit amount to a Schedule VII Fund within 6 months from end of FY 2020–21, read with Rule 10. To be discussed both at CSRC & BoD meetings. The implementing agencies will be required to be registered with CG w.e.f. 01.04.2021. The company may intimate the existing implementing agencies
New items before BoD:
a. Confirmation by the Board with respect to utilisation of the CSR expenditure
b. Monitoring of ongoing projects, if any, as per approved timelines and year-wise allocation
c. Placing of the certificate of CFO/person responsible for financial management about the utilisation of CSR fund
CSR Committee to revisit its budget for FY 2020–21 so as to align with the requirements of the annual action plan as mentioned in Rule 5 (2)
To check if there is any profit arising out of CSR expenditure, and if there is any, the same is to be (i) ploughed back into the same project, or (ii) shall be transferred to the unspent CSR account and spent in pursuance of CSR policy and annual action plan of the company, or (iii) such surplus amount shall be transferred to a fund specified in Schedule VII, within a period of six months of the expiry of the financial year
|In the first meeting of CSRC and BoD for 2021–22|
To check if there is any excess spends done and then the same is to be set off within three immediate subsequent FYs, for which a Board resolution has to be passed. Should be placed before CSRC as well
|In the first meeting of CSRC and BoD for 2021–22|
To check if there is any capital asset created by the company for undertaking CSR expenditure, the same has to be held by such entities as mentioned in Rule 7 (4), and this has to be complied with within 180 days of commencement of the Amendment Rules, or an additional period of 90 days with the approval of Board
Annual CSR Report to be prepared as per the revised format along with the Impact Assessment Report as required under Rule 8 (3), and these to be placed before CSRC as well as BoD
|In the meetings held for the purpose of approving the Board’s report|
a. Composition of the CSR Committee
b. CSR policy
c. Projects approved by the Board