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Every company that fulfils the conditions set out under Section 135 of the Companies Act, 2013 (‘Act’) has to spend at least 2% of their average net profits made during the three previous financial years towards the Corporate Social Responsibility (CSR) in the current financial year.
The companies will have to spend on CSR as per the provisions of the Act and the CSR Policy Rules. The Ministry of Corporate Affairs (MCA) notified the Companies (CSR Policy) Amendment Rules, 2021 (‘Rules’) through a notification dated 22 January 2021. These Rules provide amendments to the Companies (Corporate Social Responsibility Policy) Rules, 2014. The amendments in the Rules are stated below.
The following definitions were amended in the Rules:
Administrative overheads mean the company expenses incurred for administration and general management of the CSR functions. However, it will not include the direct expenses incurred for implementing, designing, evaluating, and monitoring a particular CSR project or programme.
CSR means the activities that a company undertakes in accordance with the statutory obligation laid down in Section 135 of the Act and in accordance with the provisions contained in the Rules, but shall not include the following:
CSR policy means a statement containing the direction and approach given by the companies’ board, after taking into consideration the recommendations of its CSR committee, and includes implementation and monitoring of activities, guiding principles for selection and formulation of the annual action plan
Net profits mean the net profit of a company according to its financial statement prepared under the applicable provisions of the Act, but it will not include the following:
An ongoing project means a multi-year project that a company undertakes to fulfil its CSR obligation within three years, excluding the financial year it was commenced. It will also include projects that were initially not approved as multi-year projects but whose duration is extended beyond one year by the board based on reasonable justification.
The Board should ensure that the CSR activities are undertaken either by the company itself or through:
The above entities who intend to undertake CSR activity should register themselves with the Central Government by filing the Form CSR-1 with the Registrar, effective from 1 April 2021. The entities must sign and submit form CSR-1 electronically. It should be digitally verified by a Company Secretary, Chartered Accountant or Cost Accountant in practice.
Upon submitting Form CSR-1 on the MCA portal, the system will automatically generate a unique CSR Registration Number. A company can engage international organisations for monitoring, designing and evaluating the CSR programmes or projects as per its CSR policy and for capacity building of its personnel for CSR.
The Board of a company should satisfy that the funds disbursed are utilised for the purposes and in the manner as approved by them. The person responsible for financial management or the Chief Financial Officer should certify to the effect.
In case of any ongoing project, the Board should monitor the implementation of the project in the approved timelines and year-wise allocation. It can make any modifications for smooth implementation of the project within the permissible time.
The CSR Committee should recommend and formulate to the Board, an annual action plan in pursuance of its CSR policy, including the following:
The Board of a company must ensure that the administrative overheads will not exceed 5% of the company’s total CSR expenditure for the respective financial year. The surplus arising out of the CSR activities will not form part of the business profit of a company and shall be transferred to the Unspent CSR Account or ploughed back into the same project.
The company should spend the unspent CSR amount in pursuance of the annual action plan, the CSR policy of the company or transferred to a Fund specified in Schedule VII within six months of the expiry of the financial year.
Where a company spends an amount above the requirement provided under Section 135(5) of the Act, the company can set off such excess amount up to the immediate succeeding three financial years. However, the excess amount available for set-off should not include the surplus arising out of the CSR activities in pursuance of these Rules, and the Board should pass a resolution to that effect.
A company can spend the CSR amount for the acquisition or creation of a capital asset held by
The Board report covered under the Rules relating to any financial year should include an annual report on CSR having the particulars specified in Annexure I or Annexure II, as applicable.
In the case of a foreign company, the balance sheet filed under section 381(1)(b) of the Act should contain an annual report on CSR containing particulars specified in Annexure I or Annexure II, as applicable.
Every company with an average CSR obligation of Rs.10 crore or more should undertake impact assessment through an independent agency for the CSR projects with outlays of Rs.1 crore or more and completed within one year of undertaking the impact study.
The impact assessment reports should be placed before the Board and annexed to the annual report on CSR. A company undertaking impact assessment can book the expenditure towards CSR for that financial year, which should not exceed 5% of the total CSR expenditure for that respective financial year or Rs.50 lakh, whichever is less.
The Board of Directors should mandatorily disclose the CSR Policy and Projects approved by the Board and composition of the CSR Committee on their website, if any, for public access.
The unspent CSR amount, if any, should be transferred by the company to any fund included in schedule VII of the Act until a fund is specified in Schedule VII in pursuance of Section 135(5) and Section 135(6) of the Act.
Generally, the amendments are not retrospective. However, it does not mean the amendments will not affect matters or things done in FY 20-21. For example, any shortfall of spending in FY 2020-21 may be covered by the amendments. Further, there is a strong view that even the impact assessment may be required for CSR projects undertaken in earlier years.
The company Board can include a project undertaken and abandoned by the implementing agency due to lack of additional funds as a multi-year project based on reasonable justification. Further, the Board can also alter the annual action plan for the project at any time during the financial year as per the recommendation of the CSR committee based on reasonable justification.
An ongoing project is considered as commenced when concrete steps are taken towards such a project. However, the requirement of spending on the project is not necessary when the company has undertaken a binding commitment towards such a project.
As per Rule 4 of the Rules, a company can undertake CSR activities through the following three modes of implementation:
Yes. Impact assessment study needs to be done by an independent agency and there is no restriction that an international organisation cannot be appointed.
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