Towards Robust & Transparent Corporate Social Responsibility (CSR) Regime
May 24, 2023
Ministry of Corporate Affairs (MCA) with effect from 1st April 2014 introduced provisions pertaining to the applicability of Corporate Social Responsibility in the Companies Act, 2013 (“the Act).
The intention behind introducing the said provisions was to make it obligatory for certain companies to contribute a nominal percentage of their profits towards CSR activities.
According to Section 135(1) of the Act, every company which meets any of the following criteria, during the immediately preceding financial year shall comply with the Corporate Social Responsibility norms:
- A net worth of INR 500 Crore or more;
- Turnover of INR 1000 Crore or More; or
- Net Profit of INR 5 Crore or More
Introduced as a “Comply or explain” model but with the passage of time, it has been made a mandatory obligation for companies to which CSR norms are applicable.
The idea behind introducing these norms was to put greater responsibility on bigger companies/corporates to contribute to society. The Government’s endeavor has been to make a balance between the social responsibilities of Companies and compliance.
Coming back to the provisions of the said law/enactment, the CSR provisions i.e. Section 135(5) further prescribes that the board of directors of every company referred to in sub-section (1) shall ensure that the company spends in every financial year at least two percent of the average net profits of the company earned during the 3 (three) immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years.
MCA through the Companies (Amendment) Act, 2020, (with effect from January 22, 2021), relaxed the provisions of the said Act by inserting a new sub-section (9), wherein, if the amount to be spent by the Company under section 135(5) does not exceed INR 50 Lakhs, the requirement under 135(1) for the constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.
Further, as per section 135(6) of the Act any amount remaining unspent on account of CSR expenditure related to an ongoing project, the Company is required to open a special account to be called the unspent corporate social responsibility account that financial year in any scheduled bank and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
MCA vide notification dated September 20, 2022, amended Companies (Corporate Social Responsibility Policy) Rules, 2014 by introducing Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022
Key highlights of the 2022 Amendment Rules:-
- Mandatory constitution of CSR Committee in case of unspent CSR amount: The amendment is made with the aim to strengthen governance around the implementation of CSR and to make it mandatory for the Companies to constitute a CSR Committee in case there is any amount left unspent in the Unspent Corporate Social Responsibility Account.
- Additional institutions such as section 8 companies, public charitable trusts,s and a society exempted under sub-clauses (iv), (v), (vi), and (via) of section 10(23C) of the Income Tax Act, 1961 now eligible to be appointed as implementation agency: This opens up more spending avenues for companies to contribute towards CSR activities.
- The threshold for permitted expenditure towards mandatory impact assessment changed: CSR Policy Rules provided that companies on whom Impact Assessment was applicable, were allowed to book expenditure towards CSR for the relevant financial year, which should not exceed 5% of the total CSR expenditure or 50 lakhs, whichever is less. Now, with the amendment, this limit to book expenditure towards impact assessment has now been amended to 2% of total CSR expenditure for that financial year or INR 50 lakh, whichever is higher (which earlier was “whichever is lower”).
- Amendment to the mandatory disclosures: Since 20 September 2022, MCA has made the below changes in the disclosures to be made in the format of the annual report on CSR.
A few important changes are:
- Additional disclosures in unspent CSR amount: In the disclosure of details of unspent CSR amount for the preceding three Financial Years, Companies are now also required to disclose the balance amount in unspent CSR account, and deficiency, if any,
- Executive summary: Companies are now required to provide an executive summary along with the web links of impact assessment of CSR projects carried out;
- Aggregation of disclosure on CSR spent: Earlier, Companies were required to disclose details of each project undertaken by the company (both ongoing projects as well as other projects). However, now after the amendment, companies need to disclose only the total amount spent on ongoing and other CSR projects.
Last, but not least, any non-compliance with provisions of Section 135 of the Companies Act, 2013, could attract a hefty fine from the office of the Registrar of Companies (ROC). The extracts of Section 135(7) of the Act are mentioned as under:
Company shall be liable to a penalty of an amount twice the amount required to be transferred by the Company to the Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.
The government is focused to bring in a more robust and transparent CSR Governance and all the amendments from time to time are aiming to strengthen the CSR regime in India. To conclude, the goal behind this is to make the stakeholders more aware of the whole object and necessity of the provisions and also to enlighten the seriousness of the government to enforce the provisions of the said section.
Last updated: 24/05/2023
Article contributed by:
Manager – Corporate Secretarial