Since the introduction of the Companies Act, 2013 (act), and the Companies (Corporate Social Responsibility Policy) Rules, 2014, there have been significant changes in the legal framework for corporate social responsibility (CSR) . From a “comply-or-explain” regime, we have transitioned to a “comply-or-pay” regime following changes introduced by the Companies (Amendment) Act, 2019, and the Companies (Amendment) Act, 2020.
Following are the relevant amendments:
A new definition of CSR: A negative list, or a list of activities that do not constitute CSR, has been introduced, which includes: (a) activities undertaken in the normal course of business. However, companies involved in R&D of vaccines, drugs and medical devices may include covid-19-related R&D as part of CSR, subject to specific conditions; (b) any activity undertaken outside India except in the case of training of Indian sportspersons representing at national or international levels; (c) direct or indirect contribution to any political party; (d) activities that benefit the employees of the company; (e) activities such as company sponsorships that derive marketing benefits; and (f) activities carried out for the fulfilment of any statutory obligation.
Implementation of CSR: The modes through which a company can implement its CSR activities include: (a) itself; (b) a section 8 company under the act or a registered trust or society established by the company either singly or along with other companies or by the central or state governments; or (c) an entity established under an act of Parliament or State Legislature. Every implementing entity shall register itself by filing an e-form, CSR-1, with the Registrar of Companies.
Annual action plan: The CSR committee is required to formulate a detailed annual action plan that will include: (a) a list of CSR projects or programmes that are approved to be undertaken in prescribed areas or subjects under the act; (b) the manner of execution of such projects or programmes; (c) implementation schedules; (d) reporting mechanisms; and (e) impact assessment.
Cap on administrative overheads: Administrative overheads for CSR activities have been capped at 5% of the total CSR expenditure of the company for the financial year.
Creation of capital assets: Companies cannot own capital assets created or acquired through the amount spent on CSR. It will have to transfer it to either a section 8 company, a registered public trust or society, beneficiaries in the form of self-help groups, or a public authority.
Impact assessment: Companies with an average CSR obligation of INR100 million (USD1.3 million) or more in the three immediately preceding financial years shall undertake an impact assessment (through an independent agency) of their CSR projects that have outlays of INR10 million or more. The impact assessment report shall be placed before the board and annexed to the annual CSR report.
The Companies (Accounts) Amendment Rules, 2022, have also introduced e-form CSR-2, which requires disclosure of company details, its CSR committee, ongoing projects, transfer of unspent CSR amounts, etc. It is key to note that the act already mandates CSR reporting in the board’s report.
The concept of CSR has evolved from directional to mandatory. The lawmakers’ intention seems to be mandating companies to give back to the society from which they derive their profits to facilitate societal growth.
This article was originally published in Indian Business Law Journal on 28 March 2022 Co-written by: Arvind Sharma, Partner; Manan Kapoor, Associate. Click here for original article
Contributed by: Arvind Sharma, Partner; Manan Kapoor, Associate
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm
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