MCA Notification

MCA proposed the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020

Corporate Social Responsibility for companies has been governed through the provisions of Companies Act, 2013, which came into effect since 1^st April 2014. Section 135 of the Act prescribes the rules for implementation of the provisions concerning CSR and the Companies (Corporate Social Responsibility Policy) Rules, 2014. This notification was brought on 27^th February 2014 and came into effect since 1^st April 2014.

Section 135 was amended by the Companies (Amendment) Act, 2019 which dealt with the CSR (Corporate Social Responsibility). The President gave assent for the Companies (Amendment) Act, 2019, which was published in Official Gazette on 31^st July 2019. For operating Companies (Amendment) Act, 2019, the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 has been drafted along with all the amendments in the Companies (CSR Policy) Rules, 2014.

Public comments are, therefore, solicited on the draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020. The MCA has drafted Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 which may be accessed at the web link and suggestions are submitted online therein by the end of business hours till 28^th March 2020. Stakeholders are requested to note down that the comments should be sent only through the web link created for this purpose. One must not send it separately through e-mail or any hard copy.

Other highlighted points

• Under the Companies Act, certain classes of companies have to shell out at least 2% of the average net profits, made during the three immediately preceding financial years, towards CSR activities.
• Among other changes, the Ministry has proposed to set up the ‘National Unspent Corporate Social Responsibility Fund’. This fund would be utilised for the purposes of undertaking CSR projects in the areas or subjects specified in Schedule VII of the Act.
• As per the draft rules, the funds are created and the unspent CSR amount in terms of provisions of sub-section (5) and (6) of Section 135 of the Act shall be transferred by the company to any fund as specified in schedule VII of the Act.
• Under Section 135, every company which has a net worth of at least Rs. 500 crore, turnover of Rs. 1,000 crore or more, or a minimum net profit of Rs. 5 crore during the immediately preceding financial year has to make the CSR expenditure.

Change in the definition of corporate social responsibility

The Draft rule has defined the term CSR more elaborately by an inclusive definition and with a few exclusions:

• The activities undertaken by the Company in lieu of its statutory obligation laid down under Section 135 and in accordance with the Rules made hereunder
• The following activities have been excluded from CSR Activities:
• The activities are undertaken in pursuance of the normal course of business of the company which is covered under existing 4(1) of the Rules
• Any activities are undertaken by the company outside India  which was covered under Rule 4(4) of the Existing Rules
• The contribution of the amount directly or indirectly to any political party under Section 182 which was covered under Rule 4(7) of the Existing Rules
• The activities that significantly benefit the employees of the company

While the existing rules provide 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.

Also, Read: Applicability of CSR Under Companies Act 2013.

Change in definition of CSR policy

The Draft Rules define CSR Policy as follows:

• The CSR Policy means the 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.

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.

New Definition of International Organisation

The draft rules have introduced a new definition of INTERNATIONAL ORGANISATION as under:

• The International Organization means any organization notified by the Central Government as an international organization under section 3 of the United Nations (Privileges and immunities) Act, 1947 (46 of 1947), to which the provisions of the Schedule to the said Act apply.

Net Profit

Except for the change in Clause numbering from 2(f) of the Old Rules to Clause 2(g) in Draft Rules, there is no change in the Definition of Net Profit.

Two new definitions have been added as follows:

• The Ongoing Projects means a multi-year project taken by a Company in fulfilment of its CSR obligation having timelines which shall not exceed beyond 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.
• The Public Authority is the same as defined in sub-clause (h) of section (2) of Right to Information Act, 2005.

Increased Monitoring of CSR Projects

The existing Corporate Social Responsibility framework splits responsibility of implementation and monitoring of projects between the CSR committee and the board of directors. It requires the board to specify reasons for not spending the required amount under CSR. The MCA has sought increased involvement of the board by proposing that:

• The board must satisfy itself that funds disbursed under CSR activities are utilised as per approved plans. A certification requirement reflecting this compliance has been proposed.
• It must monitor and ensure that ongoing CSR projects are implemented within permissible timelines. The proposed time limit for ongoing projects under CSR rules is three years after which any unspent amount must be transferred to a dedicated account.

Ownership of Assets Generated Through CSR

The existing Corporate Social Responsibility rules specify that any surplus generated by a company through its CSR activities will not be considered as business profit. The existing rules, however, were silent on treatment assets generated by a company through CSR funds. To address this, the MCA has proposed that:

• Surplus generated out of CSR activity or project can be ploughed back into the same project. Alternatively, such surplus can be transferred to an account designated to hold unspent CSR amounts.
• Companies can utilise CSR funds for the creation or acquisition of new assets. However, the proposed rules mandate that such assets can only be held by a “not-for-profit company”. Companies making CSR spends cannot own such assets. Existing assets created by companies using CSR funds must meet this requirement within 270 days.

Conclusion

The activities involving usage of Corporate Social Responsibility funds only for the benefit of its employees or their relatives isn’t considered a CSR activity under existing rules. The MCA has now proposed a relaxation in this requirement, according to which CSR amounts spent by a company in activities benefiting its employees would be deemed to be a Corporate Social Responsibility activity if certain conditions are met. Such beneficiaries must not be more than twenty-five per cent of the company’s headcount. The ministry has set a deadline of March 28 for public comments on the proposed rules.

More Reading: Companies may be Penalized For not Meeting CSR Rules.