From 'Comply or Explain' to 'Comply or Suffer' | Amendments to Provisions related to CSR Law effective from 22nd January 2021
Author: CS Pradeep Kumar Parakh | Date: 03-March-2021
Introduction
- Mandatory CSR Implementation entity registration in Form CSR-1 w.e.f. April 1, 2021;
- Impact Assessment for big CSR projects;
- Carry forward and set off of CSR expenditure;
- Annual action plan for CSR by Board every year in addition to CSR policy;
- Tweaks in reporting format for the annual report on CSR activities forming part of the Board Report;
- Mandatory disclosure of CSR projects and activities on website of company, if any;
- Capital Asset acquisition and its ownership/ holding restricted to the three categories of non-profit bodies;
- Transfer of unspent amount to Govt notified fund in Schedule VII, unless specific fund is notified; etc.
The amendments impact both the set of entities, viz. Contributors (Companies) on the one hand and Implementers (Section 8 Companies, Trusts and Societies) on the other. The key provisions impacting the aforesaid two categories of entities are briefly analysed hereunder:
A. Provisions impacting the Contributors (Corporates):
1. CSR Funds spending and transfer to Unspent Account/ specified Funds
Pursuant to the amendment, the companies are now required to do either of the following:
- spend the required amount for CSR activities as prescribed under schedule VII or
- park the unspent amount of ongoing projects in a separate account within 30 days of the end of financial year or
- transfer unspent amount to such funds as mentioned in Schedule VII viz. Clean Ganga Fund or PMNRF or like within 6 months of the end of financial year.
3. Mandatory CSR impact assessment
Impact assessment has been introduced for CSR projects with higher outlays. Companies having minimum Rs. 10 Crore of average CSR obligation in last 3 years shall have to undertake mandatory impact assessment. Also, the report of such assessment is required to be formed a part of the annual report.
Although compliance with this amendment is primary responsibility of the respective companies, the Implementing Agencies will have the added responsibility of providing adequate and proper documents and records in regard to the projects/ programs carried out by them upon engagement by the companies.
4. Surplus out of CSR program
The surplus out of CSR activity has to be used back for CSR purpose only – either the same program from which such surplus has been generated or any other project as per CSR policy of the company. If remains unspent, such surplus is required to be transferred to the “Unspent Account” within 6 months from the end of financial year.
Clarification on the applicability of this provision on funds received by Implementing Agencies for company specific CSR activities, but that remain unspent as at the year end will have to be sought from MCA.
5. Title holder of CSR assets
Any capital asset acquired / created for the purpose of CSR has to be in the name of only a section 8 company or a registered public trust or registered society having CSR registration Number and cannot be held in the name of the company itself.
Considering the quantum of CSR spent being carried through in-house foundations, this is a very substantial change and will lead to revisit the plan of CSR activity.
180+90 days (extension with reasonable justification) time has been proposed for the compliance of this provision.
This will provide an opportunity to credible independent Implementing Agencies to undertake capital asset-based CSR projects.
B. Provisions impacting the Implementing Agencies (Non-profit Organisations):
The significant change made in the CSR Rules by the MCA pertaining to the Implementing Agencies is Mandatory registration of implementing agency with the MCA by filing e-form CSR-1 with the Ministry of Corporate Affairs (MCA).
On and from April 1, 2021, companies desiring to undertake CSR activity through implementing agencies can do so only through such entities which are registered with MCA; – the intention seems to be to govern the third leg of the economy which consist of not-for-profit organizations by requiring registration of these entities with MCA. Also, this would mean that, entities will not be hired as implementing agencies until they register themselves with MCA.
The key provisions of aforesaid amendments – relevant for the not-for-profit entities are as under: -
1. Type of implementing agencies permitted to be engaged by companies to carry out CSR activities
So far, a section 8 company, trust, or a society, having track record of three years in carrying out similar activity were qualified to be an implementing agency. Several amendments have been brought in the provisions relating to implementing agencies:
Following entities can only apply for such registration:
- Established by the company either singly or jointly with other company
- Section 8 company,
- registered public trust,
- registered public society (not private),
- Established by the Government
- Section 8 company
- registered trust (here both public and private),
- registered public society
- Established under an Act of Parliament or State Legislature – any entity;
- Established by anyone else-
- Section 8 company
- registered public trust
- registered public society (not private);
2. Manner of Registration
This is a fresh introduction. Registration has to be done by filing e-form CSR-1 with MCA, post which the implementing agencies will receive a unique CSR Registration Number. This e-form has to be verified by a practicing CA/ CS/ CWA; The template of the e-Form is provided in the rules.
Action points pursuant to CSR Amendments
Some major amendments were proposed in
Section 135 under Companies (Amendment) Act, 2019 which had
Pursuant to these amendments, various actionable have triggered. In this note, we have tried to bifurcate the same based on milestones / cut off dates as follows:
A. Actionable up to 31st March, 2021
1. CSR Spending:-
- Evaluate
- If not, then decide whether you want to spend by 31st March 2021 or you want to carry forward.
- If you want to spend by 31st March 2021, and CSR amount is disbursed / to be disbursed to any Section 8 Company / Registered Trust / Registered Society, ensure that it spends complete 2% by 31st March 2021.
- If you want to carry forward, then identify a project, seek approval of Board of Directors that it shall be a multi-year on-going project, put forth reasonable justification why spending is to be carried forward, with tentative timelines of spending in FY 2021-22, 2022-23 or 2023-24.
- Commence that on-going project, i.e., do some part of the spending before 31st March 2021.
2. Implementing Agencies
In case CSR projects / activities are implemented through a registered NGO, either established by the company, singly or along with any other company OR which has an established track record of at least three years in undertaking similar activities, then in order to continue implementing CSR projects/ activities through these entities, below mentioned registrations need to be obtained (preferably by 31st March 2021 so as to accept CSR funds from 1st April 2021):-
(a) Section 12A
registration under Income Tax Act, 1961
(b) Section 80GA
registration under Income Tax Act, 1961
(c) Registration with MCA as an Implementing Agency by filing Form CSR-1 (yet to be deployed on MCA) and securing CSR Registration Number from MCA.
In case CSR projects / activities are implemented through registered trusts, then it must be ensured that they are registered public trusts, to act as Implementing agencies from 1st April 2021.
3. CSR Policy
The definition of CSR policy has been changed and now it is prescribed to provide for the approach and direction for CSR projects / activities which needs to be given by the Board of Directors, taking into account the recommendations of the CSR Committee. Further now, CSR Policy also needs to include includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan.
Hence, it is recommended to amend the CSR policy by 31st March 2021, so that the amended CSR Rules can be given effect to for CSR spending from 1st April 2021.
4. Website updation
Pursuant to this amendment, now in addition to CSR Policy, the composition of the CSR Committee and the Projects approved by the Board also need to be hosted on website of the Company, if any. Earlier, the Annexure / Annual Report on CSR attached to Board’s Report was to be hosted on website, and hence projects where Company spent CSR amount would have been hosted. But now, it appears that irrespective of whether spending has been done or not, once the projects are approved by the Board, they need to be hosted on the website of Company, if any.
B. Actionable up to 30th April, 2021
1. On-going project – Earmarking of funds
In case Company has an on-going multi-year
project approved by Board of Directors and company has not spent full amount
for F.Y. 2020-21 towards CSR obligation on or before 31st March, 2021, then a
special Account needs to be opened in a Scheduled Bank called as “Unspent CSR
Account” for F.Y 2020-21, and the unspent CSR amount needs to be transferred to
this account by 30th April 2021.
2. Engaging Independent Agency for impact
assessment
In case Company had average CSR obligation
of Rs. 10 crore or more, in three immediately preceding financial years, i.e.,
for FY 2020-21, FY 2019-20 and FY 2018-19, then the Company needs to undertake
impact assessment, through an independent agency, of their CSR projects having
outlays of Rs. 1 crore or more, and which have been completed not less than one
year before undertaking the impact study. The impact assessment reports need to
be placed before the Board and also need to be annexed to the annual report on
CSR. Hence, independent
C. Other actionable in 1st Quarter (1st April, 2021 to 30th June, 2021) OR at 1st CSR Committee meeting of F.Y. 2020-21 (whenever held)
- Amendment in CSR Policy (if not done by 31st March 2021). This is recommended to be done latest by the first CSR Committee meeting of FY 2021-22.
- Ensuring registration of implementing agencies under Section 12A and 80G of Income Tax Act, and with MCA for receipt of CSR Registration Number – before engaging them for CSR spending
- Formulation of Annual Action Plan for F.Y 2021-22 as per the details prescribed under Rule 5(2) of CSR Rules.
- Monitor implementation of on-going projects, if any with reference to the approved timelines and year-wise allocation of CSR spending.
- Companies may engage
independent persons for verifying the utilization of CSR amounts disbursed and
D. Actionable by 21st July, 2021
- Identify whether any Capital asset is created out of CSR amounts (since 1st April, 2014 till 22nd January, 2021)?
- If yes, then to transfer the capital asset to any of the below mentioned entities within 180 days of commencement of CSR Amendment Rules, i.e., within 180 days from 22nd January 2021, i.e., by 21st July, 2021.
- Entities to whom capital assets can be transferred are as follows:
- Section 8 Company o Registered Public Trust
- Registered Society having charitable objects
- Beneficiaries of CSR project (in the form of Self-help groups, collective entities)
- Public authorities
- In case companies are not able to transfer the capital asset by 21st July 2021, then they need to do so within additional time period of maximum 90 days, i.e., latest by 19th October 2021, if Board of Directors approve this extension and mention reasonable justification in the Board minutes.
E. Actionable at the Board meeting where Board’s Report for FY 2020-21 is approved
- Annual Report on CSR from FY 2020-21 onwards needs to be given in new format as per Schedule II of CSR Rules.
- If there is any unspent CSR
amount which is not earmarked for any on-going project, then details of
transfer of the fund referred to in Schedule VII need to be mentioned in this
annexure. Hence, companies may transfer the amount first and then give
disclosure in this Report OR it would have to be mentioned
- CFO or person responsible for financial management needs to certify to the Board that the CSR funds disbursed to Implementing Agencies have been spent in the manner approved by the Board. (There should not be mismatch between Annual Report on CSR and CFO certification)
- If, Impact assessment is applicable to the Company based on average CSR obligation of Rs. 10 crore or more, in three immediately preceding financial years, i.e., in FY 2020-21, FY 2019-20 and FY 2018-19 then the impact assessment report need to be placed before the Board and also need to be annexed to the annual report on CSR.
F. Actionable by 30th September 2021
- If the Board of Directors of a Company has not approved any multi-year on-going project and the Company has not spent 2% of profits, i.e., CSR liability for FY 2020-21 fully by 31st March 2021, then such unspent amount needs to be transferred to any of the funds specified in Schedule VII by 30th September 2021.
- If Company has appointed implementing agency to carry out CSR obligations, the CSR amount disbursed by the Company to the said implementing agency but not spent by such implementing agency by 31st March 2021, then it might be treated as “Unspent CSR Amount” and will be required to be transferred to any funds specified in Schedule VII Funds specified under Schedule VII are as follows:
- Prime Minister's National Relief Fund
- Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) o Clean Ganga Fund setup by Central Government for rejuvenation of river Ganga
- Swach Bharat Kosh set up by Central Government for promotion of sanitation and making available safe drinking water
For transferring funds to Clean Ganga Fund or Swach Bharat Kosh, it is recommended that the relevant activity head under Schedule VII, under which these funds are covered be part of the CSR Policy of the Company.
Conclusion
With the coming into force of this amendment, the penal provisions for non-compliance CSR provisions have also come into force, changing the very nature of the CSR provisions from “comply or explain” to “comply or suffer”.
While the amended rules are quite technical, considering the intent of CSR, it should be broadly principle based and the CSR committee could be laden with the onus of compliance of the provisions in such case.
The mind of the government seems to be loud and clear that gone are those days when the companies used to take the CSR provisions lightly by putting cliché explanations in the annual report for all the gaps for unspent amount. Additionally, as per CARO-2020, the auditor is also required to comment on the CSR provisions specifically with respect to the amount unspent and whether transferred to the unspent account.
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Disclaimer: This note is based on the research and contains the views of the author on the above subject. This information is intended to initiate sharing of knowledge only and shall not be construed to be any professional or legal advice. In no event the author shall be held liable for any direct, indirect, specific or incidental damages resulting or arising out of or in connection with the use of this information.
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