This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.
Date: 30 January 2021
India's Amended Corporate Social Responsibility Norms: Non-compliance to invite penal consequences
The Ministry of Corporate Affairs have recently amended Section 135 and rules issued thereunder by issuing multiple notifications to bring about sweeping changes in the Corporate Social Responsibility / CSR norms and the way they are implemented.
Every company, having (a) net worth of Rs 500 Crore or more; (b) turnover of Rs 1000 Crore or more; or (c) net profit of Rs 5 Crore or more, is required to spend at least 2% of their average net profit for the immediately preceding 3 financial years on CSR activities. In order to ensure strict implementation of the CSR obligation, the Government of India has changed the law to mandatorily require the companies to transfer unspent amount to a fund specified in Schedule VII, failing which penal consequences will follow. However, certain relaxations have also been given in terms of doing away with mandatory constitution of CSR Committee if the amount to be spent on CSR doesn’t exceed Rs. 50 Lakhs and allowing the companies to set off excess amount spent on CSR activities against future requirement to spend on CSR for up to 3 years amongst others.
1. Constitution of CSR Committee:
Where the amount required to be spent on CSR doesn’t exceed Rs. 50 Lakhs, the requirement for constitution of CSR Committee shall not apply. In such cases, the functions of CSR Committee shall be discharged by the Board of Directors of the Company.
2. Unspent CSR amount to be transferred to a fund specified in Schedule VII:
Earlier, if a company failed to spend money on CSR activities, then it was only required to disclose this in its annual report. Now, corporates will be required to deposit the unspent amount, unless it relates to an ongoing project, to a fund specified in Schedule VII within 6 months of the expiry of the financial year. In case of an ongoing project, any remaining unspent amount is required to be transferred to a special account to be opened by the company which will be called Unspent Social Responsibility Account within 30 days from the end of financial year. Such amount is required to be spent by the company within 3 years from the date of transfer, failing which it will have to be transferred to a fund specified in Schedule VII. The new rules provide that until a fund is specified in Schedule VII for the said purposes, the unspent CSR amount, if any, shall be transferred by the company to any fund included in schedule VII of the Act.
3. Penal consequences for non-compliance:
If a company defaults transferring the unspent amount in the prescribed manner, it will be liable to a penalty twice the amount required to be transferred to a fund specified in Schedule VII or Unspent Social Responsibility Account or Rs. 1 Crore, whichever is less. Further, every officer of the company who is in default shall be liable to one-tenth of the amount required to be transferred to a fund specified in Schedule VII or Unspent Social Responsibility Account or Rs. 2 Lakhs, whichever is less.
4. Set off allowed for excess CSR Expenditure:
Every company has been allowed to set off any excess amount spent on CSR activities over 2% of their average profits made during 3 immediately preceding financial years against future requirement to spend on CSR activities for up to 3 years.
5. CSR Expenditure:
The Board is required to ensure that administrative overheads shall not exceed 5% of the total CSR expenditure of the company for the financial year. Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of six months from the expiry of the financial year.
6. Certification by CFO or person responsible for financial management:
The Board is required to satisfy itself that funds so disbursed have been utilized for the purposes and in the manner as approved by it and the Chief Financial Officer or the person responsible for financial management shall certify to that effect.
With effect from April 1, 2021, every entity which intends to undertake CSR activity is required to register itself with the Central Government by electronically filing Form CSR-1. The form is required to be mandatorily verified by practicing Chartered Accountant/Company Secretary/Cost Accountant in practice. On submission thereof, a unique CSR Registration Number will be automatically generated by the system. This will not apply to projects approved prior to the given date.
8. Annual Action Plan:
The CSR Committee is now required to formulate and recommend to the Board of Directors, an annual action plan in pursuance of CSR Policy, including the (i) list of CSR project/programmes; (ii) manner of execution of those projects/programmes; (iii) modalities of utilization of funds and implementation schedules for those projects/programmes; (iv) monitoring and reporting mechanism for those projects/programmes; and (v) details of need and impact assessment, if any, of the projects undertaken by the company.
9. Impact Assessment Reports:
Every company having average CSR obligation of Rs. 10 Crore or more in the 3 immediately preceding financial years is now required to undertake impact assessment, through an independent agency, of their CSR projects with outlay of Rs. 1 Crore or more, and which have been completed not less than one year before undertaking the impact study. The impact assessment report is required to be placed before the Board and annexed with annual report on CSR.
10. CSR Reporting:
The Board Report of the Company is required to include an annual report on CSR containing particulars specified in Annexure I or Annexure – II, as applicable.
11. Mandatory disclosure on website:
The Board shall mandatorily disclose composition of CSR Committee, CSR Policy and Projects approved by it on the Company’s website, if any, for public access.
The revised CSR norms makes it mandatory for companies crossing the prescribed threshold to spend the required amount on CSR. Now, the "comply or explain" approach has been done away with and penal consequences for the companies as well as officers in default have been introduced for any failure to comply with CSR obligation to ensure strict implementation. The registration of CSR implementing agencies will bring about transparency as to how the companies are implementing the CSR projects and activities while mandatory impact assessment of the CSR projects having outlay above the threshold is aimed at effective implementation of CSR projects/activities to achieve the desired objective of fulfilling the social responsibility.
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