Corporate Social Responsibility (Csr) Regime In India And Amendments Introduced

Corporate Social Responsibility (“CSR”) is a broad concept that is aimed at instilling sense of social responsibility amongst corporations. It is structured around the credence that the society essentially funds businesses of corporations and contributes towards continuance and growth of most businesses and for this reason, corporations that benefit in some way from the society should recognize and realize the contribution of society to their businesses. As a policy, CSR is meant to works towards nurturing a sense of responsibility towards the society, amongst corporations.

While India may be one of the first few nations in the world to legally mandate CSR in the year 2014, the concept as such was prevalent in India and it was common practice amongst companies (mostly large and prominent corporations) to be involved in CSR activities on voluntary basis, typically involving traditional social focus areas.

It is a well-established notion that companies which sincerely discharge their social responsibility, generally enjoy a good repute and are regarded as virtuous corporate citizens. It is also believed that when a business engages in CSR activities, it leads to making positive contributions towards social, cultural, economic, environmental and other issues that are prevalent in the society. Indulging in CSR also helps forge a stronger bond between employees and corporations, boost morale of the corporations and its members, and generally leads to employers and employees both feel more connected with the society.

While CSR was mandated under law by causing amendment to the Companies Act, 2013 (“Act”) and introduction of CSR Rules, 2014, the provisions regulating CSR activities of companies have since evolved with time. The amendments caused to CSR (prior to much recent ones) were particularly aimed at motivating companies to develop genuine desire to take up a social cause and not consider CSR as a routine compliance but realize its potential and paybacks.

Meanwhile, in the wake of urgent emerging requirement for additional healthcare facilities, the Ministry of Corporate Affairs (“MCA”) has been issuing multiple clarifications on what companies could consider as part of their CSR expenditure. The most recent announcement was made on May 5, 2021, where it was clarified that companies could use their CSR funds for “creating health infrastructure for Covid-19 care, establishment of medical oxygen and storage plants, manufacturing and supply of oxygen concentrators, ventilators, cylinders and other medical equipment for countering Covid-19”.

The above clarification was issued on the heels of one prior clarification which was issued on April 22, 2021, when it was clarified that CSR funds of a company could be used to set up “makeshift hospitals and temporary Covid-19 care facilities”.

However, a significant change came about much prior, on January 22, 2021, when the Central Government notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (“New Rules”) giving effect to the changes introduced in CSR by the Companies Amendment Acts of 2019 and 2020, amending Companies (Corporate Social Responsibility Policy) Rules, 2014.

The introduction of New Rules was considered by many to have marked significant overhauling of the CSR regime in India as it resulted in major changes in the CSR provision under Section 135 of the Act, and it is apparent that it has been done with the intent to allow companies to redirect their CSR funds towards Covid-19 relief, and to draw maximum utilization during these strenuous times.

The noteworthy changes have introduced additional categories of activities that companies could contribute towards and consider such expenditure as part of their CSR spend. The highlights of changes brought to the CSR regime vide the New Rules and subsequent notifications of the MCA, including the Companies Amendment Acts of 2019 and 2020, are as below:

A. R&D of new vaccines, medicines, and medical devices relevant to Covid-19: Any company engaged in research and development of new vaccines, pharmaceuticals, and medical devices in the ordinary course of business may undertake research and development of new vaccines, medicines, and medical devices relevant to Covid-19 as CSR during the FYs 2020-21, 2021-22, and 2022-23, subject to certain exceptions.
B. Addition to eligible CSR Expenditure: With the New Rules coming into effect, contributions now made by companies towards the following activities will be considered as expenditure eligible for CSR:
i. Contributions to the PM CARES Fund;
ii. Contributions to incubators or R&D projects in the field of science, technology, engineering and medicine, funded by the central or state government, a public sector undertaking or any agency of the central or state government; and
iii. Contributions to public-funded universities engaged in conducting research in science, technology, engineering and medicine to promote sustainable development goals, in collaboration (additional) with Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy and the Department of Pharmaceuticals.
iv. Companies can now allocate and utilize their CSR funds for creating health infrastructure for providing care, establishment of medical oxygen and storage plants, manufacturing and supply of oxygen concentrators, ventilators, cylinders and other medical equipment, for combating Covid-19 and restraining spread thereof.
C. Amendment to Rule 7: As companies are now allowed to set-off CSR expenditure above the required 2% expenditure, in a financial year, against the required expenditure, for up to three (3) financial years, if a company spends an amount in excess to their CSR requirements. In other words, companies now have the leverage to offset any excess CSR spending, in the current financial year, against its future CSR spending requirements, as may be mandated and set out under applicable regulations, in the following (immediate) three (3) financial years.
D. Unspent CSR Funds: According to the New Rules, any unspent amount by a company is now statutorily required to be transferred within a period of 30 days of the end of the financial year, to the specifically designated ‘Unspent Corporate Social Responsibility Account’ to be opened by the company. In case, the company is unable to spend such amount in the next three (3) financial years, the same shall be transferred to any fund such as the PM National Relief Fund, PM CARES Fund, Disaster Management Fund, Clean Ganga Fund etc.
The companies are statutorily required to deal with surplus funds by either spending it on the same project or by transferring it to unspent CSR account or any other fund as specified in Schedule VII of the Act.
E. Monitoring Effectiveness: In order to monitor the effectiveness of CSR on the beneficiaries, appointment of an independent agency has been made compulsory for companies having an average CSR spending of INR 100 million or more or all CSR projects having budgets of INR 10 million and more.
F. Formation and role of CSR Committee/Disclosure Requirements: A company is mandatorily required to disclose the composition of the CSR Committee, its CSR Policy, and the projects approved by the Board of Directors. Such CSR Committee is required to formulate an annual action plan for CSR spends, which should list the CSR projects, implementation and monitoring schedules, and details of impact assessment. This is not required if a company’s CSR spend is less than INR 5 million. In such a case, the Board of Directors will perform the functions otherwise assigned to the CSR Committee.
G. Certification of disbursement and utilization of CSR Funds: In order to make the process more unambiguous, the rules now require the company’s Chief Financial Officer to certify that the CSR funds have been disbursed and utilised in the manner approved by the Board of Directors.
H. Decriminalization: Monetary penalties for the company and every officer in default for non-compliance have been introduced with this amendment. A defaulting company is liable to pay penalty for the lesser of INR 10 million or twice the amount that should have been transferred to the Unspent CSR Account or the Schedule VII specified fund. Additionally, a defaulting officer is now liable for the lesser of INR 2,00,000, or one-tenth the amount that should have been transferred to the ‘Unspent CSR Account’ or the Schedule VII specified fund.
I. Mandatory Impact Assessment: The New Rules require mandatory impact assessment of CSR projects. This requirement is applicable on companies that have an average CSR spending of INR 100 million or more in the past three (3) financial years. It must be conducted for all CSR projects that have budgets of INR 10 million and more; and have been completed one year prior to undertaking the impact assessment.
An ‘independent’ agency must be appointed to undertake the impact assessment. The costs of such an agency cannot exceed INR 5 million or five percent of the total CSR spend for that financial year (whichever is lower).
J. Spends not eligible for CSR: According to the New Rules, following activities will NOT be counted as CSR:
i. direct or indirect contributions to any political party;
ii. activities undertaken in the normal course of business;
iii. those undertaken to meet any other statutory requirements, under any law in force in India;
iv. those which benefit employees;
v. sponsorship that derives marketing benefits for a company’s products; and
vi. activities outside India (barring training of Indian sports personnel)
K. Administrative Overheads: Administrative Overheads are now defined as expenses incurred by a company for general management and administration of CSR functions. These expenses exclude expenses directly incurred for designing, implementation, monitoring, and evaluation of a particular CSR project. Administrative Overheads can’t exceed 5% of the company’s CSR spend in one financial year.

ANHAD LAW’S PERSPECTIVE

Like earlier, the recent amendments to CSR regime appear to be aimed at evolving CSR beyond mere compliance for corporations. CSR regime as a result of New Rules coming to effect, is likely to command a more strategic, structured and impact focused approach from corporations involved in CSR. These changes are also likely to reduce the excessive discretion that may have been enjoyed by companies earlier, as the New Rules aim to enhance clarity by introducing uniformity in CSR implementation.

The New Rules introduce significant changes towards monitoring and evaluation of CSR activities, utilization of CSR funds, and provide for accountability of companies with additional compliance obligations and strict penal provisions.

Companies will have to ramp up internal controls when selecting, getting information on and functioning of implementing partners to safeguard against misappropriation, misrepresentation and other vulnerabilities. The introduction of monetary penalties can be a deterrent, making it crucial to have strong systems, governance, transparency and maintain regulatory compliance.

The impact assessment by an independent body, publication on websites and annual disclosures are indeed positive steps towards achieving transparency of the overall CSR scheme. This might cut down the malpractices being carried out by companies and help the government to better monitor CSR expenditure.

However, despite such efforts a question still remains whether these rules completely prevent the misuse of provisions, ensure honest CSR spends and are beneficial for all the aspects of a society.

From our perspective, inter-alia, two issues are relevant regarding utilization of funds and CSR touching other equally relevant elements of a society:

(a) Under the present CSR regime, there is a need for the mechanism to meticulously monitor ultimate utilization of CSR funds in cases where CSR contributions are flowing from a company to the beneficiaries thereof, for the purpose of CSR compliance, through a designated government body. It would be important to check that CSR framework is not conveniently used to reflect compliance of CSR requirements on the part of a company, but at the same time the compliance framework being misused for illegal or non-permitted activities, resulting into directly / indirectly benefiting certain stakeholders or members of management of the company making CSR contributions.
(b) There are certain non-corporate and corporate aspects of the society such as sports, armed forces, para-military forces, technology incubators, etc., which have been ignored to a certain extent under the CSR realm, which perhaps calls for added attention, support and participation from eligible businesses. In such a scenario, a mechanism should be established wherein a certain percentage of CSR funds, including part of unspent funds of a company, are diverted for utilization in these neglected sectors. This would be another way of giving back to the society and ensuring a steady stream of funds for such beneficiaries. It is important to ensure that all the quarters of a society benefit from CSR initiatives and activities undertaken by the companies, so that there is no disparity in contributions and expenditure amongst various causes that are worthy of receiving such contributions.

Manishi Pathak, Founding Partner and Dhruv Gandhi, Partner

Disclaimer: The contents of the above publication are based on understanding of applicable laws and updates in law, within the knowledge of authors. These are personal views of authors and do not constitute a legal opinion, analysis or interpretation. This is an initiative to share developments in the world of law or as may be relevant for a reader. No reader should act on the basis of any statement made above without seeking professional and up-to-date legal advice.

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