Guidance Note on Corporate Social Responsibility

Introduction

Gone are the days when the CSR was used to be considered as a selfless donation or philanthropic act. Now the legislature of India wants the Companies (operating in India) to contribute mandatorily for the progress and development of the country. This hard imposition on the corporates may be because of its large structure, revenue generating capacities and unlimited potential in terms of growth, resources and wider presence in the market etc. 

Since its inception through the Companies Act, 2013, the concept of CSR has undergone many changes whether deletion of some provision or addition of something, interpretation and clarification by the MCA through circulars from time to time, constitution of high level committee on CSR and adoption of changes suggested by them etc. 

Although the term used is Corporate Social Responsibility, but it does not actually apply to each type of corporate. LLPs are still out of the CSR mandate.

1. Definition of Corporate Social Responsibility

Before proceeding ahead, let us first understand what scope of CSR we have been provided through the definition by the legislature.

Before 22nd January, 2021, CSR was used to be the projects or programmes of activities of schedule 7 or activities of the Board. 

post 22nd January, 2021, CSR is now defined as a sort of negative listed type. It has now been defined as the activities undertaken by the Company, in pursuance of its statutory obligation laid down in section 135 of the Act,  in accordance with the provisions contained in the rules. but shall not include the following:

Activities undertaken in pursuance of normal course of business by the company or CSR activities done outside india or contributions to political party as per section 182 or CSR activities benefiting employees or sponsorship activities for marketing benefits or CSR activities fulfilled as per the requirements of any other laws. [Source: Rule 2(d)]

Still, there are some exemptions also, in the above said definition, which will be dealt with later on. 

The amended definition is exhaustive as compared to the earlier one.    

2. Applicability of Corporate Social Responsibility

The applicability of CSR can be further classified into 2 types of categories: Eligibility for constitution of CSR Committee and Eligibility for spending of CSR funds. 

This bifurcation has been done since not every company which is eligible for constitution of CSR Committee would also be eligible for spending of CSR, it may also get exemption from CSR spending though. 

2.1 Eligibility for constitution of the CSR Committee

Every company having net worth of Rs. 500 crore or more or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more in the immediately preceding financial year. [Source: sec 135'(1)]

However, if the amount of CSR spending does not exceed Rs. 50 Lakh, then the Board itself can carry out the CSR Committee functions. [Source: sec 135(9)]

2.2 Eligibility for spending of the CSR 

All those companies which are eligible under sec. 135(1) are required to spend 2 percent of the average of net profits of immediately 3 preceding FYs. 

Sometimes, the Companies get covered under sec. 135(1) but at the time of spending, it is found that they are having nil amount to spend because of losses in the previous years. 

2.3 Clarity over applicability on types of Companies

CSR is applicable on each type of Company incorporated under any Companies Laws. it is applicable on the following types of Companies as well:

a) Foreign Company having its branch office or project office in India, 

b) Holding Company or Subsidiary Company [criteria to be fulfilled on standalone basis]

c) Section 8 Company [in view of the report of Corporate Laws Committee, the Committee, however, felt that it would not be appropriate to give differential treatment to section 8 companies in the matter of providing exemptions from compliance of CSR provisions, as there are certain areas where examples could be found of section 8 and other companies co-existing, for example, companies in microfinance business. Further, there should not be a difficulty in section 8 companies using the prescribed percentage of its surplus for CSR activities. Thus, it was decided not to recommend for exemption of Section 8 companies from the CSR provisions of the Act]

d) Producer Companies,

e) Joint Venture Companies,

f) Government Companies

CSR is NOT applicable on following categories:

a) LLPs

b) Every eligible Company [u/s 135(1)] which ceases to fulfil the 135(1) criteria for 3 consecutive FYs (but only till such time it meets the criteria specified in 135(1) again).

3. Spending of CSR Amount

Once the CSR becomes mandatory at the Company, then the Company should start compliance for the proper expenditure of it as per the provisions of Companies Act and the rules. The Company shall ensure that CSR activities can be undertaken either by itself or through any implementing agency.

3.1 Spending of CSR Amount by the Company

3.1.1 Spending of CSR Amount through owned section 8 Company/ Trust/ Society: An eligible Company can also form a section 8 Company or a public trust or a society for the purpose of spending of the applicable CSR amount through itself. The In-house section 8 Company is a very good tool for CSR spending for large corporations and groups of Companies. For this In-house option, the Company needs to mandatorily register the proposed vehicle under section 12A and 80G. Track record not required in case of in-house option.

3.1.2 Spending of CSR Amount by the Company Directly: The conventional method of spending over CSR activities, by doing necessary R&D, identifies the needy people or sector and grants the funds directly by the Company, without taking help of any institution or NGO.

Further, here spending of CSR Amount by the Company also includes two or more companies coming together and funding the spending together. 

3.2 Spending of CSR Amount through the Implementing agency: An eligible Company can also spend through following types of Implementing agencies (and not any other type):

a) Section 8 Company/Trust/Society established by Government(s)

b) Any entity established under an Act of Parliament

c) Section 8 Company/Trust/Society + Regd. under section 12A and 80G + having an established track record of at least three years in undertaking similar activities [it can be established by anyone other than the Company itself and the Govt.] 

Basically in this mode, the Company engages some outside professional agencies to undertake the work of CSR on their behalf, these professionals are called Implementing agencies. 

However, merely making a contribution to an Implementing Agency would not be part of CSR unless such activities are undertaken by the Implementing Agency in pursuance of CSR Policy of the company.

Essential Summary on CSR

1. Earlier the CSR provisions were on Comply or explain basis, either you spend or to just give us the reason that why you were not able to spend the money. But in a surprise move, through Companies Amendment Act, 2019 MCA introduced penal provisions by way of imprisonment (for officers of the Company-in default) in case of non spending of the requisite funds. 

2. The industries reacted to this heavily, and the MCA made the CSR burden a little lighter by removing the fine and imprisonment and substituted it with the penalties. but the penalties are even more stricter. the penalties are DOUBLE OF THE AMOUNT REQD TO BE SPEND or 1 CRORE RUPEES, whichever is lower. and also every officer in default is reqd. to pay penalty of 1/10th of requisite CSR spending or 2 lakh, whichever is lower. [through CAA, 2020 w.e.f. 22.01.2021]

3. Entire rule 2, 4, 7, 8 & 9 of CSR policy rules has been substituted. Majorly under rule 2, definition of the term "CSR" has been changed and some new terms has also been defined like ongoing project and administrative overheads [through CSRPARules, 2021 wef 22.01.2021]

4. In case of deficit of spending, the company is required to transfer the amount to unspent CSR account or to a schedule VII fund or to pay penalties at last. But, in the case the Company has spent excess funds then in this case it can set-off such excess amount spent for the upcoming 3 IMMEDIATE SUCCEEDING FYs

- such set off shall not include surplus arising out of CSR profits and 

- to pass a Board resolution. 

5. Entire CSR provisions of the Companies Act, 2013 is based on CSR Committee, CSR policy and CSR spending. MCA here also made a small change by introducing the provision that those Companies whose CSR spending as calculated as per 135(5), is not more than 50 lakh rupees, then here the Board may discharge the functions of CSR committee and hence constitution of CSR committee is made optional on these class. 

6. So, w.e.f. 22nd January, 2021 there has been a major amendment with regard to the spending of CSR is introducing the concepts of unspent CSR account and ongoing projects. From now on, a company is reqd. to calculate the requisite CSR spending amount and to identify through which type of project it wish to spend the same. If the Company wish to spend it through a multi-year project then the Company needs to open a special bank account named as UNSPENT CSR ACCOUNT and is reqd. to transfer the CSR spending fund to this bank account mandatorily within 30 days from end of FY. (means 30th April).

7. Further, in case the Company wish to spend the same directly or through an Implementing Agency then it has such time limit till 30th Sept. of next year. Since, in case the company not able to transfer the funds to unspent CSR account or could not able to spend though itself or through an IA or for any other reason, the Board was unable to spend the same, then the MCA has now made it mandatory for any reason if the Board was not able to spend the same, it has to MANDATORILY TRANSFER THE REQUIRED AMOUNT TO A SCHEDULE VII FUND by 30th Sept. THEREFORE THE COMPANY HAS NO OPTIONS LEFT, THEY ARE NOW MANDATORILY LOOSE FUNDS FROM IT POCKET. 

8. On-going project is a Multi-year project of upto 3 years only. It can not be of more than 3 years but yes for the calculation of these 3 years, we can exclude the financial year in which this project was initiated. This project is to be undertaken by the Company itself for CSR obligations and spending and not through any IA. Further, ongoing projects shall also include those projects that was initially intended to be done within shorter timelines and were not multi-year projects but due to some sufficient cause and  reasonable justifications, the Board extended its timeline by more than 1 year.          

9. An interesting concept of NATIONAL UNSPENT CSR FUND has also been introduced by inserting a new rule 10 to CSR rules, as discussed above, if a Company fails in all 3 possible source of CSR spending (i.e. through an on-going project or through an unspent CSR account or through an IA) then it has to mandatorily transfer the reqd CSR amount to this National CSR fund by 30th Sept. Only till such time, the govt. is not notifying the National CSR fund, we have to keep it transferring to a Sch. VII fund to avoid penalties.

10. If the Company is standing in the month of Dec. or Jan. and it has not yet spent the CSR funds, then it has to at-least undertake two activities. One is to identify an On-going project and second is to transfer the funds to Unspent CSR Account, so that the Company may get time to spend the CSR Funds strategically and after due diligence. 

11. Who does the CSR spending, is it Board or Committee? It is the Board of Directors of the Company which spends the CSR funds in actual. The committee recommends the amount to be incurred, likewise the activities wherein the spending can be made should also be recommended by the Committee and finalized by the Board.