What the new CSR regime means

Companies have a short window of time to meet new compliances. Here is a guide

SINCE India became the first country to mandate Corporate Social Responsibility in 2014, it has followed a “comply or explain” approach. No longer. With the 2019 and 2020 amendments to Section 135 of the Companies Act, 2013, the CSR regime has changed to a “comply or face consequences” model. Very few jurisdictions adopt such a strict and mandatory approach, and none seeks to levy fines for failure to expend CSR funds. 

However, till last month, the amendments had not been implemented as detailed rules were missing. Now, through a notification on January 22, 2021, India’s Ministry of Corporate Affairs has added the Amendment Rules, 2021, pertaining only to the 2019 amendments. 2020 amendments are yet to be implemented. 

In this blog, we analyse some of the key changes, its impact, and suggest steps required for ensuring compliance. 

1. CSR Computation

 The rule is that companies with net worth of  ₹500+ crore, or a turnover of  ₹1,000+ crore, or net profit of  ₹5+ crore are obliged to expend a minimum 2% of the average net profits made during the previous three financial years (FYs) towards CSR activities. This left room for companies, which had not completed three FYs since incorporation, to argue that they did not have to allocate CSR funds as they do not have net profits for three years to calculate the average. Now, these companies are obligated to compute 2% CSR funds based on average net profits earned in the preceding FYs.  

2. CSR Definition

The definition of CSR has been revised to include COVID related activities and training of sportspeople internationally. Companies undertaking R&D activities of new vaccines, drugs and medical devices in their normal course of business may do it for COVID related purposes till FY23 subject to the conditions that it is done in collaboration with listed organizations and is disclosed separately in the annual report.

Political contributions, activities benefiting employees, company sponsored activities for marketing products and services, activities to fulfil statutory obligations and activities carried outside India have been excluded. 

3. CSR Utilization

Earlier, companies who failed to expend CSR funds could carry it forward to subsequent FYs with suitable explanations in the board report, which allowed organizations to take time in constituting a CSR Committee and choosing projects & implementation partners.

Going forward, an explanation in board report will not suffice and companies will be obligated to transfer the unspent CSR funds to either government funds mentioned in  Schedule VII of Companies Act, 2013, or to a separate bank account. 

4. Consequences for Non-Compliance

According to the 2020 amendment, defaulting companies will be penalized with twice the sum required to be transferred or INR 1 Cr, whichever is less. 

For defaulting officers, every person can be penalised with 1/10th of such amounts or INR 2 L whichever is less.

In the interim, till the 2020 amendment is implemented, non-compliance will be subject to fines between  ₹50,000 to ₹25 lakh, and every officer-in-default can be punished with imprisonment up to three years or fined or both.

5. Administrative expenses, excess spends, surplus and capital assets

Earlier, companies could build their own and implementing partner’s CSR capacity and total administrative expenses couldn’t exceed 5% of total CSR spend.

Now, administrative overheads are defined as expenses incurred by the company for ‘general management and administration’ of CSR functions but exclude those that are directly incurred for designing, implementation, monitoring and evaluation of a particular CSR project.

Excess CSR Spend may be set off against the obligation to spend CSR funds in the future, up to 3 FYs.

Any surplus must be ploughed back into the same project, transferred to Unspent CSR Account or to public funds.

When CSR amount is expended for creation or purchase of a capital asset, the same shall be owned and will vest with the implementing partner, beneficiaries or public authority. 

6. CSR Annual Action Plan 

According to the new rules, the CSR Committee will have to recommend an Annual Action Plan to the Board. The plan must include a list of approved projects, manner of execution, modalities of funds utilization, implementation schedules and monitoring & reporting mechanisms. 

This will allow companies to have stricter benchmarks for implementation and explain any lapses in implementation. 

7. Internal Compliance and Disclosures on Company Website

The Board of the Company will be responsible to monitor the implementation of ongoing projects and to ensure that the funds are utilized for approved purposes. This will have to be certified by the CFO. 

Companies are obligated to disclose details like the composition of the CSR Committee, CSR Policy and Projects approved by the Board on their website. 

8. CSR Reporting 

The new Rules mandate companies to report using a prescribed format added as an Annexure that will be appended to Annual Reports.

Companies need to disclose details of ongoing projects and funds used for admin overheads, surplus, assets acquired and transferred funds.

9. Impact Assessment 

Earlier, there was no requirement to conduct any impact assessment study for CSR projects.

Now, conducting impact assessment for projects worth ₹1 Cr or more has been made mandatory. The impact study must be undertaken by an independent agency.

10. Implementation Partners

Companies can undertake CSR activities through (i) not-for-profit entities established by the company on its own or with other companies registered under Section 12A and 80G of Income-Tax Act, or (ii) not-for-profit entities created by government under any legislation, or (iii) any not-for-profit entity registered under Section 12A and 80G of Income-Tax Act with an established track records of at least 3 years. 

These implementation partners have to register for a unique CSR registration number w.e.f. April 1, 2021, although this requirement would not apply for projects approved prior to April 1, 2021.

IMPLICATION FOR CORPORATES 

-Corporates will have to identify all CSR projects’ original timeline, total duration contemplated, commencement date, current progress made and reasons for delay

-For projects with a duration of 1 year or less, the reason for delay has to be assessed if it is reasonably justified. If the delay is reasonably justified, 1 year projects can be transferred to multi-year ongoing projects, which will enable corporates to transfer unspent CSR funds as per an ongoing project

-If multi-year projects are beyond 3 years, CSR committee to restructure the projects to comply with the maximum permissible duration for ongoing projects, and transfer unutilized amounts to the Unspent CSR Account

-Companies that have created capital assets prior to 2021 CSR Rules must transfer the assets within 180 days of FY end.

Urgent action required

The implementation comes without any buffer period, and consequently, organisations have a short window before end of FY 2021 to align the existing practices. While undertaking revision exercises, it will be critical for the CSR committee to discuss the implications with auditors as well as implementation partners. Alongside, it will be essential that a reasonable approach is followed and adequate documentation is created for implementing the changes. 

If you have further enquiries, please get in touch at csr@giveindia.org. We’d be happy to help!

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