CSR Amendment Rules 2020 - Changing CSR Ecosystem

MCA Proposes Amendments in CSR Rules-Invites Comments till 28th March 2020 

The Ministry of Corporate Affairs (MCA) has published draft CSR Rules Amendments. There are many changes and developments that will impact India’s CSR ecosystem.  Here are a few key insights from the notification of Amendment in CSR Rules issued by Ministry of Corporate Affairs under the Companies Act Amendment Rule 2020, proposed on 13th March, 2020

Change in the definition of corporate social responsibility
The Draft rules have defined the term Corporate Social Responsibility more elaborately by a generally inclusive definition and a few exclusions:
  • All activities undertaken by the Company in pursuance of its statutory obligation laid down under Section 135 and in accordance with the Rules made thereunder
  • The following activities have been specifically excluded from CSR Activities:
    • Activities undertaken in pursuance of normal course of business of the company – This is covered under existing 4(1) of the Rules – Covered under Rule 2(c)(i) of the existing rules
    • Any activity undertaken by the company outside India – This was covered under Rule 4(4) of the Existing Rules
    • Contribution of any amount directly or indirectly to any political party under section 182 of the Act – This was covered under Rule 4(7) of the Existing Rules
    • activities that significantly benefit the employees of the company and their families.
Provided that in case of any activity having less than twenty five percent employees as its beneficiary, then such activity shall be deemed to be CSR activity under these rules;

While the existing rules provides a blanket ban on the expenditure for the benefit only   for the employees of the company and their families to be considered as CSR Expenditure, the amended Rule prescribes a threshold up to which such expenditure can be considered as CSR expenditure and if the threshold is exceeded then such expenditure will not be covered as CSR Expenditure. Only such activities which cover less than 25% of its employees as its beneficiaries will be covered as CSR activity as per the revised rules.

In the FAQs on the old CSR Policy, the following activities were not covered under CSR Expenditure:

One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.

Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act

Since there is no specific exclusion of these activities in the definition, one can interpret that these activities are now covered under the Definition of CSR Activities if such activities fall within the scope of the activities prescribed under Schedule VII of the Companies Act.

Change in definition of CSR policy

The Draft Rules define CSR Policy as under:

“CSR Policy” means a statement containing the approach and direction given by the board of a company, as per recommendations of its CSR Committee, for selection, implementation and monitoring of activities to be undertaken in areas or subjects specified in Schedule VII of the Act

The definition indicates that CSR Policy is a
  • Statement containing the approach and direction given by the Board of the Company
  • As per the recommendation of the Company’s CSR Committee
  • For Selection, implementation and monitoring of activities
  • To be undertaken in areas or subjects specified in Schedule VII of the Act
This definition is more elaborate than the earlier definition and explicitly mentions what should be covered under CSR policy and how should the CSR Policy be made.

Two new definitions have been added as follows:

“Ongoing Projects” means a multi-year project undertaken by a Company in fulfillment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall also include such projects that were initially not approved as a multi-year project but whose duration has been extended beyond a year by the Board based on reasonable justification.

“Public Authority” means ‘Public Authority’ as defined in sub-clause (h) of section (2) of Right to Information Act, 2005.

Implementation of CSR projects: 
1)   The Board shall ensure that the CSR activities are undertaken by the company itself or through:
a)   a company established under section 8 of the Act, or 
b)   any entity established under an Act of Parliament or a State legislature. 
Provided that such company/entity, covered under clause (a) or (b), shall register itself with the central government for undertaking any CSR activity by filing the e-form CSR-1, with the Registrar along with prescribed fee.

whereas the statement as per the points under currently applicable CSR rules in the Company’s ACT 2013 are:

2)   The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through
a.     company established under section 8 of the Act or a registered trust or a registered society, established by the company, either singly or along with any other company, or
b.     a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State legislature:
Provided that if, the Board of a company decides to undertake its CSR activities through a company established under section 8 of the Act or a registered trust or a registered society, other than those specified in this sub-rule, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilisation of funds of such projects and programs and the monitoring and reporting mechanism”.

Inferences from the draft CSR Rules Amendments 2020:

  • The amendment in CSR Rule 2020 indicates that the Ministry are bringing a central monitoring system for CSR spent, and each implementing agency will have to get themselves validated through filling up of CSR-1 form.
  • A newly registered section 8 companies after submitting CSR Form 1 will become eligible for implementation of CSR projects as there is no requirement of the track record of the implementing agencies (Section 8 companies)
  • There is grandfathering provision, therefore the amendment will not affect the CSR projects or programmes that were approved prior to the commencement of the Companies (CSR Policy) Amendment Rules, 2020
Engagement of International Organizations in CSR projects
Another interesting point is that, the international organizations will not only be eligible in designing, monitoring and evaluation of CSR project and capacity building of its own CSR personnel but will also be allowed to directly implement CSR projects through direct funding by the company (subject to approval by Central Government)

The proposed statement by Ministry requires further clarification as the section under implementing agencies mentioned above clearly states that CSR project can either be implemented by company itself, or by a section 8 company or an entity registered under Act of Parliament or a State legislature, additionally the international organizations will also become eligible in this case, but it will require clarity from MCA.

Formation of Unspent Corporate Social Responsibility Account by the Company (donor)

Unspent balance, if any, towards fulfilment of CSR obligation at the time of commencement of these Rules shall be transferred within a period of thirty days from the end of Financial Year 2020-21 to special account viz., ‘Unspent Corporate Social Responsibility Account’ opened by the company and shall be consumed within three years from the date of transfer.

National Unspent Corporate Social Responsibility Fund by Central Government

If the company fails to spend the unspent amount accumulated in its unspent CSR account within three years, then the unspent amount will have to be transferred to the National Unspent Corporate Social Responsibility Fund.

Transparent and Well-Structured CSR Reporting

  • The companies with yearly CSR budget is above 5 Crore in 3 consecutive years, will have to undertake a third-party impact assessment survey. The details of the surveys will also have to be reported and disclosed under company’s annual report.
  • All companies shall have to mandatorily disclose their CSR activities on their websites under public domain
Ownership of  the Assets

The CSR amount may be spent by a company for creation or acquisition of assets which shall only be held by a company established under section 8 of the Act having charitable objects or a public authority.

The points which are unchanged from the previous law:

  • The administrative overheads incurred by a company shall not exceed over 5% of the total CSR budget for the financial year. 
  • The impact assessment fee of the project shall not exceed over 10% of the total budget for the financial year.
  • Any surplus arising out of the CSR projects shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and action plan of the company

Download Full CSR Amendment Rules 2020

Download Full CSR  Rules 2014

For any query/suggestion on CSR and draft rules, please send us an email at vivek@skagrawal.co.in.