Key Amendments to Corporate Social Responsibility Framework

The Ministry of Corporate Affairs has overhauled the Corporate Social Responsibility framework by amending Section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014. The amendments are effective from January 22, 2021 and involve compliance in relation to the financial year ending on March 31, 2021. Set forth below is a brief summary of some key amendments and the way forward.

Key Amendments

Spend or Transfer: The Corporate Social Responsibility (‘CSR’) regime has been shifted from one of “comply or explain” to “spend or transfer”, including for the current financial year (ending March 31, 2021). In addition to providing an explanation for not meeting CSR spending obligations, companies are required to transfer any unspent amounts to one of the funds specified in Schedule VII of the Companies Act, 2013 (‘Schedule VII Funds’) within six months from the end of each financial year. The only exception granted is for amounts set aside by companies for “ongoing projects”, which are required to be transferred to a separate bank account called the ‘Unspent Corporate Social Responsibility Account’. However, amounts that are not used for such “ongoing projects’ within the relevant time period are also required to be transferred to one of the Schedule VII Funds. Therefore, it is important to take necessary actions (including the passing of appropriate resolutions) to categorize projects in the correct manner.

Ability to Set-off Excess CSR expenditure: Companies are now permitted to set-off excess amounts spent towards CSR obligations against the CSR spending requirements for the immediately succeeding three financial years.

Registration of Entities undertaking CSR Activity: From April 1, 2021, every entity that is eligible to carry out CSR activities on behalf of a company and intends to undertake such CSR activities has to register itself with the Central Government by filing Form CSR-1 electronically. Disclosures by companies in their annual reports must include the CSR registration numbers of such entities. The format of Form CSR-1 is provided as an annexure to the relevant rules, but has not been made available for filing yet.

Monitoring End-Use of CSR Funds: The board of a company is now required to satisfy itself that the amounts disbursed for CSR have been utilized for the purposes and in the manner approved by the board, and the chief financial officer or the person who is responsible for financial management must certify the same. This requires careful processes to be set in place.

Surplus Arising from CSR Activities: Any surplus funds arising out of CSR activities not forming a part of business profits of the company, must be (i) used for the same CSR project; or (ii) transferred to unspent CSR account of the company, and spent as per its CSR policy and annual action plan; or (iii) transferred to any of the Schedule VII Funds.

Capital Assets Created Using CSR Funds: CSR funds may be used to create capital assets, which may be held by specified third parties but not the company in question. Additionally, capital assets created from CSR funds and held by the companies prior to January 22, 2021 (‘Notification Date’) are also required to be held only by such approved third parties (which implies transfer of such capital assets) within timelines specified under law (180 days from the Notification Date, which may be extended by 90 days with board approval based on reasonable justification). This may also result in possible impairments.

Impact Assessment of CSR Projects: Companies having a CSR obligation of Rs 10 crore or more in the three immediately preceding financial years, have to undertake an impact assessment, through an independent agency, of CSR projects having outlay of Rs 1 crore or more, and which have been completed at least one year before undertaking the impact study.

Way Forward

There are several areas where the new CSR framework requires further clarity, including in relation to: (i) the definition of “ongoing projects” and its applicability to projects which were ongoing prior to the Notification Date; (ii) the scope and extent of monitoring required to be conducted by the board and management; (iii) transfer of capital assets already created and capitalised by companies prior to the Notification Date; (iv) compliance and disclosure requirements on CSR spend through implementing agencies; (v) registration requirements in Form CSR-1; and (vi) the scope and extent of the impact assessment. Carrying forward of unspent CSR funds, may also pose challenges.

Pending clarity on the above, companies must take some necessary steps including: (i) meeting their CSR obligations for financial year 2020-21 in light of the amendments; (ii) evaluating CSR policy and practices; (iii) conducting an impact assessment; (iv) evaluating capital assets, if any created from CSR funds; (v) procuring registration of CSR implementing agencies; and (vi) formulating a monitoring mechanism for the end use of CSR funds.