On 22nd January 2021, the Ministry of Corporate Affairs (MCA) announced amendments to the Corporate Social Responsibility (CSR) rules to enable businesses to undertake multi-year projects and to shift the emphasis from expenditure alone on impact assessment and modifying the reporting formats of the Board report.
According to a senior government official as reported in Economic Times, the intention of the decision was to boost the ease of doing business and the performance of CSR projects while enhancing disclosure and transparency under the new system. (Noronha,2021)
The major amendments include:-
1) CSR Implementation through registered companies
The CSR implementation would be through implementing agencies – registered Trusts, Societies and Section 8 companies who have an established track record of 3 years of implementing such activities. The new amendments give time to implementing agencies to register with the MCA 21 portal until April 1, 2021.
A senior government official reported to Business Standard saying ““It is a one-time registration in a simple single-page form where details of the members, PAN number etc. has to be provided which can help us to identify the implementing agencies on the MCA21 portal”. This will also help to generate a unique CSR registration number. This portal will also serve as a database of authentic implementation agencies and encourage accountability in the implementation of CSR activities. (Chitravanshi,2021).
Apart from this, international organizations who cannot act as implementing agencies however can be hired by companies to design, monitor and evaluate CSR projects or programs in compliance with its CSR policy, as well as to develop capacity for CSR for its own staff.
In the case of undertaking projects or programs or CSR operations, a corporate can also partner with other companies in such a way that the CSR committees of the respective companies are in a position to report separately, in compliance with these laws, on such projects or programs.
2) Multi-year Projects
Under the new rules, for the next three financial years, companies may set off any surplus CSR expenditure against their CSR obligations, which is the defined timeframe for “ongoing project.
To elaborate, “Ongoing Project” means a multi-year project conducted by a Company in compliance with its CSR obligation with a time period not exceeding three years, except the financial year in which it was engaged. It shall also include projects that was initially not accepted as a multi-year project, but whose term has been extended by the Board beyond one year based on reasonable justification.
3) Unspent amount and Monetary Penalty
Any surplus arising from CSR operations shall not be part of the company’s business profit and shall be returned to the same project or transferred to the Unspent CSR Account with justification or transferred to a Fund specified in Schedule VII within a period of six months from the expiry of the financial year.
For companies not investing 2 percent of net profit on CSR or not assigning unspent sums to defined accounts, the MCA has levied a monetary penalty.
The penalty is at least 1 crore for the defaulting company and at least 2 lakhs for each defaulting officer, was levied in 2020 to replace the limit of three years of imprisonment provision for defaulting officers. After corporates objected, the Centre decided to abolish imprisonment in lieu of penalty. With the 2021 update to the Companies Act taking effect, the monetary penalty for breaches kicks in.
4) Disclosures
The CSR Committees shall formulate and present to the Board an annual action plan and would also have to present an annual CSR report as part of their disclosures. The annual action plan would include modalities of utilization of funds, reporting and monitoring mechanisms of the projects and details of need and impact assessments for the projects and programs undertaken by the company.
The amendments also mandated that the Board of Directors should disclose the composition of CSR Committee, CSR policy and Projects on the website for public access.
5) Administrative expenses and acquisition of capital assets
The new rules mandated that administrative overheads shall not exceed more than 5 % of the total CSR expenditure of the financial year.
CSR amount can be spent on the creation or acquisition of a capital asset which shall be held by a 1) Section 8 company, a registered Public Trust/ society 2) Beneficiaries of the CSR project in the form of Self-Help Groups, Collectives, Entities 3) a Public authority
6) CSR Reporting- Need of a Third-Party Assessment
Companies with an average CSR obligation of above Rs 10 crore in the three preceding financial years will have to employ an independent agency to assess the impact of their CSR which has an outlay of 1 crore or more and have completed one year before undertaking the impact assessment.
The Company undertaking the impact assessment may report the expenditure towards their CSR for that financial year however it should not exceed more than 50 lakhs or more than 5 % of the CSR expenditure whichever is lower, the cost of hiring such an agency.
These impact assessments would be placed before the Board and shall be annexed to the annual report of their CSR.
Conclusion
The provisions of the CSR were brought into effect on 1 April 2014. CSR expenditure has risen from Rs 10,066 crore in FY 2014-15 to Rs 18,655 crore in 2018-19 and, according to data available to the Ministry, a cumulative total of Rs 79,000 crore has been spent across the country. It is hoped that the new rules be a game changer as socially responsible companies will try to improve their efforts with improved transparency and encourage a gradual and sustainable social change.
Author: Arunish Paul, Associate Consultant – NuSocia
References:
1) Ministry of Corporate Affairs notification, CSR Amendment rules 22 Jan 2021
2) Noronha G., ET bureau, (2021)” MCA amends CSR policy to allow multi-year projects and focus on impact assessment””
3) Chitravanshi R., Business Standard (2021) “ Trusts and societies have till April 1 to register with MCA under CSR rules”
