Enhancing Corporate Social Responsibility: Analysing the CSR Amendment Rules 2021

Introduction

Corporate Social Responsibility (CSR) is an important part of corporate operations that reflects a company’s commitment to social and environmental welfare. The Ministry of Corporate Affairs (MCA) of India proposed significant modifications to the regulatory framework governing CSR with the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.[1] These rules, which came into effect on January 22, 2021, update the criteria for monitoring and evaluating CSR projects, as well as the usage of CSR funding.

Section 135 of the Companies Act of 2013 requires every qualifying company to devote at least 2% of its average net earnings over the preceding three fiscal years to CSR initiatives in the current fiscal year. The CSR Rules, 2021 supplement and amend the Companies (Corporate Social Responsibility Policy) Rules, 2014.[2]

It is critical to understand the scope and boundaries of CSR activities as stated by the Act and CSR Amendment Rules. Certain activities done in the usual course of business, contributions to political parties, sponsored activities for marketing purposes, and activities conducted outside India (except sports training for Indian representatives) are exempt from the Act. Furthermore, specific exemptions have been granted to firms involved in the development and research of novel COVID-19-related pharmaceuticals, vaccines, and medical devices for the fiscal years 2020-21, 2021-22, and 2022-23.

This article aims to analyse the CSR Amendment Rules 2021 in the following manner:

• Overview of the Rules and Key Changes Introduced
• The rationale behind the Amendment
• Stakeholders Impacted
• Implications and Challenges

Overview of the Rules and Key Changes Introduced

Relevant Definitions (Rule 2)

• CSR Policy (Rule 2): The definition of CSR Policy now emphasises the board’s role in formulating the policy in consideration of the CSR Committee’s recommendations. The policy should reflect the approach, direction, guiding principles, and annual action plan for CSR activities adopted by the board.
• Ongoing Projects (Rule 2): The term “ongoing projects” has been introduced to refer to multiyear projects. A continuing project can span no more than four fiscal years, including the initial year. Projects must incur ongoing expenses over time. With sufficient justification and board approval, projects that were not initially approved as multi-year can be converted to ongoing projects.

Modes of Implementing CSR Activities (Rule 4)

Companies are now required to only engage in CSR activities through registered implementing agencies, with the exception of programmes approved prior to April 1, 2021. Implementing agencies can register with the MCA by submitting e-form CSR-1. Entities eligible for registration include Section 8 companies, public trusts that have been registered, and societies that meet specified criteria.

• Role of International Organisations (Rule 4(4)): Companies may engage international organisations for designing, monitoring, and evaluating CSR projects or programmes, as well as for developing the capacity of their own staff. These engagements are subject to prescribed thresholds for administrative ancillary costs.
• Board Obligation and CFO Certification Requirements (Rule 4(5)):For CSR fund disbursements, the Chief Financial Officer (CFO) or the responsible party must now provide a certificate of expenditure. Additionally, the CFO is accountable for certifying the annual CSR report. This increases the function of the CFO in CSR provisions.

CSR Committee and its Responsibilities (Rule 5)

• Responsibility to recommend Annual Action Plan (Rule 5(2)): The CSR Committee is responsible for developing and recommending to the board a comprehensive annual action plan. This plan contains project listings, execution methods, fund utilisation modalities, monitoring mechanisms, and requirements for impact assessment. During the fiscal year, the board may alter the plan based on reasonable justifications.

CSR Expenditure (Rule 7)

The CSR Rules stipulate that administrative expenses cannot exceed 5% of total CSR expenditures. Administrative overheads are costs associated with the general management and administration of CSR functions, excluding project-specific costs.

• Surplus Out of CSR Programme (Rule 7(2)): Surplus funds generated from CSR activities cannot be regarded as business profits, reinvested in the same project, transferred to the company’s unused CSR account, or retained. They must be transmitted within six months of the end of the fiscal year to a fund specified in Schedule VII.
• Excess Amount Spent (Rule 7(3)): Companies exceeding the 2% average net profit threshold for CSR expenditure may offset the excess amount against CSR obligations in the three fiscal years that immediately follow, subject to a board-approved resolution. However, this surplus does not account for surpluses resulting from CSR activities.
• Holder of Title to CSR Assets (Rule 7(4)): Capital assets acquired or created for CSR objectives must be held in the name of a Section 8 company, a registered public trust, a registered society with a CSR registration number, CSR project beneficiaries, or a public authority. Existing fixed assets must comply with this rule within 180 days unless the board of directors approves and provides reasonable justification.

CSR Reporting (Rule 8)

• Annual CSR Report (Rule 8(1)): Beginning with the 2020-21 fiscal year, the Board must include a new detailed Annual Report on CSR Activities, as outlined in Annexure II. The old Annual Report on CSR Activities remains pertinent for prior fiscal years.
• Mandatory CSR Impact Assessment (Rule 8(3)): Companies with an average CSR obligation of at least 10 crores over the past three years must conduct a mandatory impact assessment through an independent agency. This applies to CSR programmes with expenditures exceeding 1 crore rupees that were completed at least a year prior to the impact study. The impact assessment reports must be presented to the board of directors and attached to the CSR Annual Report. Impact assessment expenditures are limited to 5% of total CSR expenditures or Rs. 50 lakhs, whichever is less.

Display of CSR Activities on the Company’s Website (Rule 9)

Companies are required to provide public access to CSR initiatives approved by the board, the CSR policy, and the CSR Committee’s composition on their websites.

Transfer of Unspent Amounts (Rule 10)

• Unspent Amounts from Ongoing Projects: Unspent amounts from ongoing projects must be deposited into a distinct bank account for a period of three fiscal years. If the transfer is not made within 30 days of the end of the third fiscal year, the amount must be transferred to one of the funds listed in Schedule VII.
• Unspent Amount (Other than Ongoing Projects): Unspent amounts that do not pertain to ongoing projects must be transferred to a fund specified in Schedule VII within six months of the end of the fiscal year.

Rationale Behind the Amendment

The CSR Amendment Rules 2021 were enacted to bolster and consolidate India’s CSR framework. The revised applicability threshold seeks to bring more companies under CSR obligations, ensuring that a broader spectrum of businesses contribute to social and environmental welfare. By aligning CSR activities with national priority areas, the amendment aims to effectively support government initiatives and address critical development challenges.

The emphasis on project monitoring and impact evaluation originates from the need for CSR initiatives driven by results. The amendment acknowledges the significance of evaluating the efficacy of CSR initiatives to ensure that they generate measurable and enduring social impact. By enhancing reporting requirements, the amendment promotes transparency and accountability, thereby nurturing trust among companies, their stakeholders, and the general public.

Stakeholders Impacted

The CSR Rules 2021 impact multiple stakeholders involved in CSR activities.

• The revised threshold for applicability has a direct impact on eligible companies. The expanded criteria ensure that a greater number of businesses are accountable for their CSR obligations.
• Non-profit organisations and social initiatives play an important role as stakeholders. The amendment requires companies and these organisations to work more closely together to align CSR initiatives with national priorities.
• The amendment impacts the society as a whole. It intends to have a considerable and positive effect on communities and the environment by directing CSR funds towards national priority areas.

Implications and Challenges

The CSR Amendment Rules, 2021 have implications for CSR practices’ governance, transparency, collaboration, and innovation. They improve corporate governance and stakeholder engagement but pose compliance and reporting difficulties. The revised rules create opportunities for partnerships between businesses, non-profit organisations, and government agencies, but aligning objectives and maintaining accountability may present difficulties. Innovation is emphasised for scalable CSR projects but identifying viable solutions and determining long-term sustainability present obstacles. To effectively fulfil their CSR obligations and maximise their social impact, businesses must navigate these implications and challenges.

Conclusion

In conclusion, the CSR Amendment has significantly altered the landscape of corporate social responsibility. The revised applicability threshold increases the number of eligible companies. The emphasis on collaboration between enterprises, nonprofit organisations, and social initiatives strengthens partnerships. It seeks to address significant social and environmental challenges by allocating CSR funds to national priority areas for the greater good of society. These modifications represent an essential step towards improved CSR governance, transparency, collaboration, and innovation.

Frequently Asked Questions (FAQs)

[1]https://www.mca.gov.in/Ministry/pdf/CSRAmendmentRules_23012021.pdf.

[2]https://www.mca.gov.in/Ministry/pdf/CompaniesActNotification2_2014.pdf.

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