MAJOR CHANGES IN CSR PROVISIONS

As many of you may be aware that recently new CSR rules have been brought by Ministry of Corporate Affairs. We provide below a summary of major change for your reference.

Societies & Trusts allowed to implement CSR projects

Draft rules proposed that only S.8 companies could implement CSR projects, thus denying a large number of NPOs, which were otherwise qualified. This could have dragged the law into courts, and also would have caused huge hardships on such entities, it seems better sense has prevailed and now such restriction has been removed. Only requirement remains is of 3 year track record of successful implementation of similar programs.

However all those who wish to implement CSR projects, must obtain a CSR Registration No. by filing Form CSR 1 on through MCA portal. The Form has following major requirements which a NGO must have

• 12A & 80G registrations
• If not a company promoted entity, then at least 3 year track record of similar activities
• Directors/Trustees/CEO/Authorised representatives details, including their PAN/DIN
• Registration Certificate copy
• Copy of PAN Card
• Details of Board Resolution giving authority to fill & sign the Form
• DSC of the person signing the application
• Certificate by CA/CS, etc. to confirm accuracy of details given in the Form

CSR funds must be ‘spent’ though can be done in more than one year

Changes made in 2019 in Section 135, have now been made effective and rules made. The provision requires that projects be identified between ongoing and otherwise. An ongoing project being a multi-year project, but should not be more than three years. The provision now allows funds relating to ongoing project to be spent in 1+3 years. That is funds remaining unspent in the year project has been initiated, can be transferred to a separate Unspent CSR Account within 30 days of the year-end, and can be spent over next three years. [S.135(6)]

If funds allocated remain unspent under any other project, the unspent amount would need to be deposited in one of the ‘funds’ specified under Sch VII, within 6 months of the year-end.  Thus now any ongoing project can be completed in 4 (1+3) years. [2^nd proviso of S.135(5)]. Thus in one way or other, funds required to be spent as per S.135(2) must be either spent or trfd to Sch VII fund or deposited in a separate bank account to be spent over next 3 years.

Penalties: In case of defaults, the company shall be liable to a penalty of twice the amount required to be trfd to a Sch VII Fund or ‘Unspent CSR Account’ or Rs 1 crore whichever is less. There is a penalty even on every concerned officer who is in default of this compliance of Rs 1/10^th of the amount required to be transferred or Rs 2 lakh whichever is less. [S.135(7)]

Excess spending can be carried forward

In case of any spending in excess of CSR requirements, the company can carry forward the same and set-off against future CSR requirements. [3^rd Proviso of S.135(5)]

CSR Policy & Annual Action Plan

Earlier CSR Policy was defined as a list of activities/projects, however now it is defined as a statement containing the approach and direction and includes guiding principles for selection, implementation and monitoring of activities. This is much better. Further it includes preparation of an Annual Action Plan, consisting of a list of approved projects, amounts allocated, implementation method (direct, by an implementing agency, its name, etc.) and fund utilisation modalities. However realising these details may not be fully ready at the beginning of the year, rules allow alteration in the Plan during the year. Though rules require that all alterations must be approved by the Board. [R 2(1)(f) & 5(2)]

Expenditure on Covid-19 allowed as CSR

Several amendments have been made over last year or so to allow expenditure on Covid-19 related activities as CSR.

• A company involved in R&D activities in normal course, may undertake R&D for new vaccines, drugs, medical devices for Covid-19. However such expenditures should be incurred during the period 2020-21 to 2022-23. However the activity must be in collaboration with any of the institutes included under item (ix) of Sch VII. [R2(1)(d)(i)]
• Any expenditure incurred under any of the clauses of Sch VII for the purposes of Covid-19 is allowed. In particular it has specified activities relating to promotion of health care including preventive health care and sanitation and disaster management.  (MCA General Circular 10/2020 dt 23^rd March 2020)
• Ex-gratia (i.e. payment not covered by contract) payment to casual/ temporary / daily wage workers over and disbursement of wages for fighting Covid 19 can be considered as CSR, provided Board passes a specific resolution in this regard. This has to be certified by the statutory auditor. (MCA Circular 15/2020 dt 10^th April 2020)
• Payment to PM CARES Fund (Office Memorandum CSR-05/1/2020 dt 28-3-2020)
• Chief Minister’s Relief Fund or State relief Fund for Covid-19 not covered by Sch VII, not to be covered under CSR. (MCA Circular 15/2020 dt 10^th April 2020)
• Contribution to State Disaster Management Authority (MCA General Circular 10/2020 dt 23^rd March 2020)

Expenditure on Employees disallowed under CSR

Earlier rule only forbid CSR activities which were ‘only’ meant for employees. This rule could be easily circumvented to beat the spirit of law. Since an activity which benefited predominantly employees could ‘technically’ be allowed as CSR, since it included some community members and did not preclude community.

However the new rules have now gone to other extreme and do not allow any activity under CSR, under which employees [as defined under S.2(k) of Code on Wages 2019] benefit. [R2(1)(d)(iv)] This would mean, if a dispensary is being run, which covers both employees as well as community, the company probably cannot claim it as CSR expenditure or at least has to take out expenditure relating to employees. Mar’20 draft rule was more practical, it put a cap of 25% on employees. It would have reduced unnecessary complications. 

Sponsorship of events:

Any activity supported by a company on sponsorship basis, which provides marketing benefits for a company’s products/ services is not allowed as CSR.

This could mean if an event is sponsored for an activity falling under Sch VII, and if only a company’s name is used, without advertising company’s products / services, then it may be allowed as CSR.

Assets created out of CSR Exp.

CSR Expenditure may result in creation of an asset, but it must not be capitalised in the books of the company. For example, if a CSR expenditure results in say an asset like water tank, then it can be handed over to a Public Authority [as defined under RTI] or to the community, say a community based organisation like SHG or CBO or even an FPO, etc. If the asset is say a mobile medical van, which needs to be operated on a regular basis, then it can be handed over to a registered NPO.

Under no circumstances, it can be retained by the company.

In fact in case any such assets exist in the books of the company at the time of effectiveness of CSR Amendment Rules 2021 (22-01-2021), the company needs to transfer the assets within 180 days of such effectiveness or another 90 days with the Board approval.

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