Section 135 of the Companies Act, 2013 mandates companies with a net worth of INR 500 crore or more/turnover of INR 1000 crore or more/net profit of INR 5 crore or more during any financial year, to spend 2% of their average net profit on corporate social responsibility (CSR). Schedule VII of the Companies Act prescribes the activities that can be called as CSR activities. CSR Rules, 2014 defines several compliance requirements pertaining to CSR activities, CSR Committee, CSR Policy, CSR Expenditure, CSR Reporting, and display of CSR activities on the company website. The CSR Rules were amended in 2021 vide Notification No. E-F. No. CSR-05/3/2020-CSR-MCA dated 22.1.2021. The amendment mandated companies which undertake CSR activities to register with the Central Government by filing the form CSR-1 electronically. The 2021 Rules have been further amended by the Ministry of Corporate Affairs via Notification No. G.S.R-715(E) dated 20.09.2022.
ANALYSIS OF 2022 AMENDMENT TO CSR RULES AND IMPACT ON NON-PROFITS
Some highlights of the 2022 amendment and their impact are discussed below:
1. CONSTITUTION OF CSR COMMITTEE
As per the new amendment, according to Section 135(6) of the Companies Act, a company having any amount in its ‘Unspent Corporate Social Responsibility Account’ shall mandatorily constitute a CSR Committee. The CSR Committee will monitor the unused funds set aside in this designated account and these funds must be used within three financial years.
Impact: Earlier, relaxation was given to companies to not form a CSR committee if they no longer satisfy the required criteria. Reconstitution of CSR committees will be required in case of
such companies which have dissolved the CSR Committees pursuant to Section 135(9) but have any amount in Unspent CSR Account w.r.t. ongoing project(s).
2. REVISION IN LIMITS OF EXPENDITURE ON IMPACT ASSESSMENT
Expenditure on impact assessment reports is now allowed at 2 percent of total CSR expenditure or Rs. 50 Lakhs, whichever is higher. The earlier rule had allowed up to 5% of the total CSR spending or ₹50 lakh whichever is less.
The amendment permits greater impact assessment spending in the event of substantial CSR projects, which is beneficial for the non-profits.
3. OMMISSION OF RULE 3(2) AND ALIGNMENT WITH SECTION 135(1)
Earlier, CSR provisions were no longer applicable when a company ceased to meet the threshold requirements for CSR obligation for three consecutive years. In this new amendment, this rule (Rule 3(2)) has been omitted. So once CSR provisions become applicable, it will remain applicable.
4. WIDENING THE CATEGORY OF ENTITIES THAT CAN BE APPOINTED AS IMPLEMENTING AGENCIES
The new amendment states that, Companies under Section 8 of the Act, registered public trusts or registered societies that are exempted under sub-clauses (iv), (v), (vi) or (via) of Section 10 (23C) which are also approved under 80G of the Income Tax Act, 1961 and with which have an established track record of at least 3 years in undertaking similar activities are eligible to act as implementing agency. Earlier only entities registered under section 12A and approved under Section 80G of the Income Tax Act, 1961 were only recognised to act as implementing agencies.
Impact: The scope of CSR recipients is now widened to educational institutions who are exempted under prescribed clauses of Section 10(23C) of Income Tax Act, 1961 and holding the exemption under Section 80G, subject to registration with Ministry by filing form CSR-1.
5. FORMATION OF ANNUAL REPORT ON CSR AND DISCLOSURE IN BOARD’S REPORT
Detailed information with respect to on-going projects is now not a part of disclosure in Board report. The new change requires the companies to provide the executive summary along with the weblinks of impact assessment of CSR projects. Details excluded in the new reporting format include the following: name, location, amount allocated by the company for the project, duration of the CSR project, amount spent in the current financial year on the project, mode of implementation, name of the implementing agency and their CSR registration number, and amount transferred to the unspent CSR account.
If the company fails to spend 2% of the average net profits of the three immediately preceding financial years, reasons for the same should be provided in the annual report and the annual report should be annexed to the Board’s report.