Contributed by: LexOrbis
The concept of Corporate Social Responsibility was introduced under section 135 of the Companies Act 2013 (“Act”). Accordingly, as per section 135 of the Act “every company having a net worth of Rs.500 crore or more, or turnover of Rs.100 crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director”.
The Corporate Social Responsibility Committee is required to formulate and recommend to the Board, a Corporate Social Responsibility Policy, which shall indicate the activities to be undertaken by the company as specified in Schedule VII of the Act. Some of the activities listed in Schedule VII amongst others includes activities such as eradicating extreme hunger and poverty; promotion of education; reducing child mortality, employment enhancing vocational skills; and improving maternal health.
In order to set out a framework to regulate Corporate Social Responsibility (“CSR”), the Ministry of Corporate Affairs, introduced the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“Rules”). The Ministry of Corporate Affairs, in January 2021 further introduced amendments to the Rules by introducing the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021(“Amendment Rules”).
I. One of the significant amendments introduced by the Amendment Rules is the changes to the definition of ‘Corporate Social Responsibility”. The Amendment Rules define Corporate Social Report (CSR), to include the activities that a company undertakes in accordance with the statutory obligation laid down in section 135 of the Act and its Rules.
However, the following activities are not included in the definition of CSR:
(i) Activities undertaken in the normal course of company business, engaged in the development and research activity of new drugs, vaccines, and medical devices in its normal course of business can undertake the development and research activity of a new drug, vaccine and medical devices relating to COVID-19 for the financial years 2020-21, 2021-22, 2022-23 subject to the conditions that:
such research and development work was performed in alliance with any institute or organization given in item (ix) of Schedule VII i.e., contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
all the details of the activity shall be elaborated in the Annual report on CSR included Board Report.
(ii) any activity done by the company outside India, except providing training to personnel of Indian sports who is representing any State or Union territory at the national level or representing India at an international level.
(iii) contribution of any amount directly or indirectly to any political party under section 182 (Prohibition and Restrictions Regarding Political Contribution) of the Act.
(iv) activities that are providing advantage/ benefit to employees of the company as described in section 2(k) under the Code on Wages, 2019.
(v) activities that are supported by the company on a sponsorship basis for the purpose of taking the marketing benefits of its products or services.
(vi) activities that are performed for the fulfillment of any other statutory obligations as per any law in force in India.
II. The other key amendments introduced are:
(i) CSR Implementation: Rule 4 of the Amendment Rules mandates that the Board of a company ensures that CSR activities are undertaken by the company. From 1 April 2021, entities carrying out CSR activities are required to file with the Central government, an e-form namely CSR-1, provided in Annexure-II of the Amendment Rules to generate a unique registration number. To ensure transparency, the Board of Directors of a company shall mandatorily disclose the composition of the CSR Committee, and CSR Policy and projects approved by the Board on their website for public access.
(ii) CSR Expenditure: Rule 7 provides that the Board of a company shall ensure that the administrative overheads shall not exceed 5% of the total CSR expenditure of the company for the financial year.
(iii) CSR Reporting: Rule 8 provides that every company having an average CSR obligation of Rs.10 Crore or more in the three immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of one crore rupees.
(iv) Website Disclosure: Rule 9 provides that the Board of Directors of a company shall mandatorily display on the company’s website the composition of the CSR committee, CSR Policy and projects approved by the Board.
(v) Transfer of unspent CSR amount: Rule 10 provides unspent CSR amount will be transferred by the company to any fund included in Schedule VII of the Companies Act.
Conclusion: The Amendment Rules have introduced significant changes to section 135 of the Act and the Rules thereunder. Prior to the Amendment Rules, provision for contribution to the CSR implementation was voluntary. The Amendment Rules makes it mandatory for every corporate entity falling within the definition of “Corporate Social Responsibility” to have a Corporate Social Responsibility Committee to formulate and recommend to the Board a CSR Policy and ensure implementation of the CSR and other compliances prescribed thereunder. Few large corporate houses have been engaged in doing CSR voluntarily and will have to step up now in order to comply with the new rules. The Amendment Rules mandating companies to formulate a CSR policy is a positive step that will help in social upliftment activities.
Contributed by LexOrbis
The above article is authored by Ms Mini Raman (Partner) and Angelina Talukdar (Senior Associate).