Amendments to Corporate Social Responsibility (CSR)

Section 135 of the Companies Act, 2013 mandates that companies having a net worth of INR 500 crore or more/ turnover of INR 1000 crore or more/ net profit of INR 5 crore or more during any financial year, spend at least two per cent of the average net profits of the company during the three immediately preceding financial years, towards CSR activities. The CSR Rules provide for means of undertaking the CSR activities.

• Changes brought under the Companies (Amendment) Act, 2020Bill passed by Lok Sabha on 19^th September, 2020
• Exemption to companies with a CSR liability of up to Rs 50 lakh a year from setting up CSR Committees.
• If the company spends an amount in excess of the requirements provided under the Act such company may set off such excess amount against the requirements of CSR spends in future years.
• Penalty for non-compliance of the CSR requirement decriminalized with only fines upto Rs.1 crore on the breaching Company & liability of officer in default upto Rs. 2 lakh.
• Key Changes Proposed in the Draft CSR RulesNot yet introduced in the Parliament – only released by the Ministry of Corporate Affairs for public comments
• CSR that benefits employees: Activities which benefit less than 25% of its employees as its beneficiaries will be covered as CSR activity.
• Board Responsibility: The responsibility is on the board of a company to give directions for selection, implementation and monitoring of activities based on the recommendations of the CSR committee.
• International Organizations: A company may engage international organizations for: 
• designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy 
• capacity building of their own personnel for CSR. 
• implementation of CSR project subject to prior approval of the central government.
• CSR Implementation not allowed through Trusts /Societies: Proposes to restrict CSR to be conducted through the instrumentality of the company by itself through a Section 8 Company or any entity established under an “Act of Parliament” or a “State legislature”. The Draft Rules do not allow collaboration of one or more Companies for forming a Section 8 Company nor does it recognize a registered trust or registered society for the purpose of carrying out CSR activities. The entities which receive the CSR are to be specifically registered for this purpose. 
• Certification by CFO: Chief financial Officer or the person responsible for financial management shall certify that the funds so disbursed have been utilized for the purpose and in the manner as approved by the company.
• Action Plan: The Draft Rules calls for a more detailed and specific formulation of an annual action plan by the CSR Committee based on the CSR projects/programs undertaken by the company, the manner of execution of such projects/programs, modalities of utilization of funds, implementation schedules, monitoring and reporting mechanism and impact assessment undertaken by the company.  Companies can no longer look at CSR spending as a part of routine procedure to comply with the law but are now forced to strategize and select CSR activities and are held accountable by impact assessments. 
• Multi-year projects recognised: A multi-year project is one that is undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding 3 years excluding the financial year in which it was commenced.
• Impact Assessment: This is an interesting introduction. Annual reports will now have to provide an impact assessment by companies which are spending an average CSR amount of Rs. 5 Crore or more in 3 immediately preceding financial years. This also lines up with the design of the proposed stock exchange. 
• Cap on Administrative overheads: Administrative overheads incurred not to exceed 5% of the total CSR expenditure of the company for the financial year. In case of companies undertaking impact assessment, administrative overheads not to exceed 10% of total CSR expenditure for that financial year.
• Display of CSR activities on the website: In addition to displaying the CSR policy under the existing CSR Rules, 2014, the companies are now required to mandatorily display the composition of CSR Committee, and the projects approved by the board along with the CSR Policy on the company website.
• National Unspent Corporate Social Responsibility Fund: The Central Government shall establish a fund called the “National Unspent Corporate Social Responsibility Fund”. Any unspent CSR funds is required to be transferred to this Fund which will be utilized in accordance with the guidelines that will be prescribed by Central Government.

The Draft Rules have not yet been notified, bit it appears that an alignment of multiple laws affecting non-profits are taking place. This includes laws on taxation, foreign contribution, CSR and SEBI’s proposed social stock exchange. Some are criticising this move as being more "control" than "regulatory" based. Excluding trusts and societies as being the instrumentalities of the CSR has created panic within the non-profit sector, causing many to incorporate Sec 8 companies. The existing law mandates that to receive CSR funds, the entity must be at least 3 years old.Traditionally in India and globally, philanthropy and charity is executed through public charitable trusts. We will have to see if the draft rules are modified before taking effect of a law.