By Dr. Devesh Prakash
Ministry of Corporate Affairs (MCA) has amended Corporate Social Responsibility Rules, 2021 with an objective to reinforce compliance, promote anti-abuse, strengthen governance and improve transparency and flexibility. In 2014, India became the second country in the world (after Mauritius) to introduce CSR by including specific provisions through Section 135 in the Companies Act, 2013. The act required companies to spend corporate social responsibility satisfying certain qualifying conditions every year. Under the previous rules, the Board of Directors were merely required to explain reasons for underspend, if any, in the company’s Annual Report.
The amended rules now mandate companies to necessarily spend at-least two percent of their average net profits earned over the preceding three financial years. The amended rules reinforce that any unspent CSR amount shall be transferred to the specified CSR funds. If a company provides funds to an NGO for a specified project, then it needs to monitor the spend to ensure that the fund was spent by the NGO for a specified project within the financial year. In case, the NGO does not spend the money, it would be considered as unspent fund in the hands of such a donor company. The unspent amount relating to an ongoing project shall be transferred to a separate bank account created with scheduled banks and shall be utilized for the next three financial years for ongoing projects. Ongoing projects are three-year projects approved by the Board. Recognition of CSR expenses in the financial statement and period in which to be recorded has become a tenuous subject of discussion in the industry and among accountancy professionals.
CSR’s definition has been provided which includes negative list i.e. list of items prohibited to be considered for spending towards CSR. Such list includes activities in the normal course of business or activities benefiting employees only or meeting statutory obligations. Also, spending towards Sponsorship for deriving marketing benefits or sponsoring sports personnel outside India except training sports personnel representing any State or Union territory at the national level or India at international level or political donations have been included in this negative list. Recent changes allow spending of CSR funds on setting up makeshift hospitals and temporary COVID-care facilities. The aim of CSR spending should be to provide benefits to the society. Incidental benefit is not prohibited for CSR. For example, purchase of goods and services from social enterprises that directly benefit the employees of the company (such as gifts purchased from local NGO for employees, set up of a school for the benefit employees’ children etc) or the company is not to be treated as CSR spend.
Provisions which could significantly alter the way CSR was carried out is a mandatory requirement for every CSR vehicle. For example, a section 8 company that intends to undertake CSR activity has to register with the Central Government. The Board of a company has to ensure that CSR vehicles through which CSR activities are carried out are registered throughout the period with appropriate authorities.
The new rules place emphasis on the enhanced role of a CSR committee in the CSR activities of a company. Rules require a CSR committee to formulate the list of CSR projects or programs, areas or subjects, the manner of execution, the modalities of utilization of funds, details of need and impact assessment and monitor the CSR policy of the company from time to time. The new rules emphasize on the obligation on the Board and Chief Financial Officer for monitoring, evaluation and reporting of CSR activities by providing specific roles and responsibilities. These roles and responsibilities may include the Board to ensure that CSR activities are undertaken by CSR vehicles which are registered. In addition, they also involve the Board to ensure that that the funds so disbursed have been utilized for CSR activities. Similarly, CSR Rules, 2021 cast obligations on the Chief Financial officer or equivalent to certify that the funds disbursed under CSR have been utilized for the approved purposes.
Rules around CSR activities of a company have become stringent. There are now both general and specific penalties leviable for non-compliance with CSR provisions. Companies will have to consider these changes holistically from the systems, processes, compliance and reporting perspective and may have to re-visit their existing policy and procedures to ensure that their CSR policy, procedures and systems are in compliance with these changes at all times.
A steppingstone to adjust with changing paradigms of CSR norms include regular monitoring and ensuring that checks and balances are in place for certain more prescriptive provisions like last mile monitoring of funds spent by companies. Key steps towards preparedness by companies should include ensuring that implementing agencies are duly registered and they conduct a due diligence including reputational checks. Companies must also refresh the roles of Board, CSR Committee, CFO and set-up new SOPs including a defined process for fund utilisation, determine applicability of impact assessment, prepare a detailed checklist of processes with the owners and timelines and formulate an annual action plan. They must also evaluate and finalize additional disclosures in the annual report/website. In short, the companies need to reconfigure their policy and governance structure around CSR spent to comply with the new set of rules.
The author is partner, financial accounting advisory services, EY India. Views expressed are personal