CSR funds may be used for COVID-19 relief, clarifies MCA

Team Vinod Kothari & Company | corplaw@vinodkothari.com

Updated on 24th March, 2020

Like all other public agencies, MCA has been taking a series of steps in the wake of the rapidly spreading COVID-19 and issued clarification[1] on spending of CSR funds for COVID 19 stating that the amount spent on COVID-19 by companies will count towards CSR spending. The activities falling under item nos. (i) & (xii) of Schedule VII of Companies Act,  2013 undertaken due to COVID 19 shall qualify as CSR activity which covers the following:

  • Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
  • Disaster management, including relief, rehabilitation and reconstruction activities.

Notably, substantial CSR money remains unspent, very often for want of appropriate CSR projects. Many companies have to explain the same by finding some reason or the other. Currently the country is passing through an epidemic that has affected the whole world. Hence, companies may come forward and spend their unspent CSR budgets. Indeed companies are also welcome to over-spend this year’s budget pursuant to a proposal in the Companies Amendment Bill which permits carry forward of excess spending as well.

Hence, this is the right occasion, and unarguably, one of the noblest causes, to use CSR funds in whatever way, one may think of.

Questions are often being asked – can the company include the expenditure incurred for COVID-19 preparedness for its own employees and workmen – say, giving of masks, sanitizers, or similar expense, as a part of its CSR spending?

Our answer to this question is the same as what we have continuously answered as a part of our FAQs[2] on CSR that CSR is spending on a social cause. An employer spending for the well being, safety or welfare of employees is performing the employer’s legal or moral obligation. That cannot be regarded as CSR. However, if the company spends on COVID-19 preparedness, either by itself or through implementing agencies, for a wider section of public, and its employees or their families are also the beneficiaries of such an exercise, there is no denial as to eligibility of the same as CSR spending.

 

Our related write ups on CSR may be viewed here:

Proposed changes in CSR Rules

Draft CSR Rules Make CSR More Prescriptive

CAB, 2020: Bunch of Proposals for revamping CSR Framework

[1] http://www.mca.gov.in/Ministry/pdf/Covid_23032020.pdf

[2] http://vinodkothari.com/2019/11/faqs-on-corporate-social-responsibility/

Proposed changes in CSR Rules

Nitu Poddar and Tanvi Rastogi

corplaw@vinodkothari.com

Section 135 of Companies Act, 2013 dealing with the Corporate Social Responsibility (“CSR”) was amended vide the Companies (Amendment) Act, 2019 inter-alia requiring the provisions to change from “comply or explain” to “comply or suffer” by introducing penal provision for non-compliance. The amendment also provided for parking the unspent amount of ongoing projects in a separate account and any other unspent amount to Clean Ganga Fund or PMNRF or like. Amidst the decriminalisation (of offences under Companies Act) spree by the government, the introduction of penalty in the CSR provisions have surely not been welcomed by the corporates.

In any case, the provisions have not been made effective for want of respective change in the CSR Rules, 2014. Accordingly, MCA has proposed changes[1] in the CSR Rules vide proposal dated March 13, 2020. Substantial changes have been proposed viz. definition of ongoing projects, that the implementing agencies could be only section 8 companies or a government entity, registering of such implementing agencies by filing e-form CSR-1 with the MCA, CFO certificate, additional website disclosures, detailed CSR report, mandatory impact assessment to name a few.

In this write up, we discuss the impact of the significant proposal in the CSR Rules by the MCA.

Rule No Heading Proposal Remarks / Comments

Rule 2(1)(c)

Negative attributes of what will not be considered as “CSR” Corporate Social Responsibility (CSR)” means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Act in accordance with the provisions contained in these Rules, but shall not include the following, namely-

  1. Activities undertaken in pursuance of normal course of business of the company.
  2. Any activity undertaken by the company outside India.
  3. Contribution of any amount directly or indirectly to any political party under section 182 of the Act.
  4. activities that significantly benefit the employees of the company and their families.

Provided that in case of any activity having less than twenty five percent employees as its beneficiary, then such activity shall be deemed to be CSR activity under these rules

The 4 items mentioned in the negative attributes of what would not include to be a CSR expenditure is not a new provision. This is already mentioned in the current Rule 4 from where it has been replaced in the definition clause.

 

Only addition is the clarification in clause (iv) w.r.t the extent to which the employees of the Company could be beneficiary of CSR program. The threshold is less than 25% of the total beneficiary of the CSR program.

 

What is not clarified is whether the threshold of 25% is with respect to value or number. To our mind, it should be the number of employees.

 

However, this would make the CSR provisions heavy with mechanical rules which people may contrive easily by scheming CSR spend wherein the number of employees benefitted is within the 25% threshold but the value attributed to them is much higher.

Rule 2(1)(e) Definition of CSR Policy “CSR Policy” means a statement containing the approach and direction given by the board of a company, as per recommendations of its CSR Committee, for selection, implementation and monitoring of activities to be undertaken in areas or subjects specified in Schedule VII of the Act. It is clear that unlike the current prevalent practice, where the board lists down the activities from schedule VII for its CSR, the board will have to do a strategic planning with respect to CSR activity to be undertaken by the company.
Rule 2(1)(h) Defining “ongoing projects” and rule thereto “Ongoing Projects” means a multi-year project undertaken by a Company in fulfillment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall also include such projects that were initially not approved as a multi-year project but whose duration has been extended beyond a year by the Board based on reasonable justification.

In case of ongoing projects, the Board of a company shall monitor the implementation of the project with reference to the approved timelines and year wise allocation and shall be competent to make modifications, if any, for smooth implementation of the project within the overall permissible time period.

 

1.     The ongoing project can be a program of maximum 4 years (including the first year of commencement); – mere one-time spending surely cannot be a “project”. It requires continued expenditure over time.

2.     “Year” would surely mean financial year. Therefore if say a project has been commenced in the month of February, 2020, the three FY therefrom, will be FY 2022-2023.

3.     Year wise allocation will have to be made

4.     Basis reasonable justification, a bullet program can also be converted to an ongoing project by the board of directors

While the timeline of 4 years at one go is proposed, the gaps seems to be two-fold:

1.     What about the projects which may take longer than 4 years; so as to keep a close check on India Inc., seems like the govt. intends the companies to make budgets for 4 years and either implement it or transfer amount to the National CSR account

2.     Can such projects be extended after completion of the 4 years? – the answer to this seems to be positive

Rule 4 Modes of implementing CSR activities (1) The Board shall ensure that the CSR activities are undertaken by the company itself or through:

(a) a company established under section 8 of the Act, or

(b) any entity established under an Act of Parliament or a State legislature.

Provided that a company may also engage an international organization[2][3] for implementation of a CSR project subject to prior approval of the central government.

 

So far, a section 8 company, trust, or a society, having track record of three years in carrying out similar activity was qualified to be an implementing agency, however only section 8 companies are proposed to be retained to be an implementing agency. The language of clause b indicates that only incorporated entities will be eligible to be an implementing agency. However, the language here is quite vague.

Companies currently undertaking CSR through group foundations incorporated / established in any other form will have to look for other agencies as the CSR through in-house foundations seems to be over

Also international organisations identified under section 3 of United Nations (Privileges and Immunities) Act, 1947 can be appointed as implementing agency after approval of central government. This would mean that the Indian branch of such organisation will have to work in a schedule VII activity within India.

The method of seeking such prior approval is not proposed. This may require the involvement of Ministry of External Affairs.

Rule 4(1) Mandatory registration of implementing agency with the MCA Provided that such company/entity, covered under clause (a) or (b), shall register itself with the central government for undertaking any CSR activity by filing the e-form CSR-1 with the Registrar along with prescribed fee.

Provided further that the provisions of this sub-rule shall not affect the CSR projects or programmes that were approved prior to the commencement of the Companies (CSR Policy) Amendment Rules, 2020.

This is a fresh introduction. The template of the e-Form is present in the draft rules. Also, this would mean that, post these Draft Rules comes into force, these entities will not be hired as implementing agencies until they register themselves. This would lead to regulating of such implementing agencies.
Rule 4(3) Other role of international organisation A company may engage international organizations for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy as well as for capacity building of their own personnel for CSR. The provision, using the word “may”, is directory and not mandatory. Accordingly, companies can take a call to appoint any other entity to undertake the prescribed overhead jobs in respect of CSR. In any case, the threshold allowed as administrative overhead will be applicable,
Rule 4(4) Board responsibility and CFO certification Board of a company shall satisfy itself that the funds so disbursed have been utilized for the purpose and in the manner as approved by it and Chief financial Officer or the person responsible for financial management shall certify to the effect. This is an extremely important proposal. In addition to the monitoring by the board, it requires the CFO or alike to give utilisation certificate of the disbursements made. This makes the role of monitoring all the more crucial.   This apart the, CFO will also be required to sign the annual CSR report.

This clause makes the CFO apparently responsible for the entire CSR provision without him being part of the CSR committee or the board of directors.

Probably, such certificate shall have to be placed before the CSR committee and / or the board – the draft rules are silent on this.

Rule 5 CSR Committee – responsibility to recommend annual action plan The CSR Committee shall formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the following:

a)     the list of CSR projects or programmes that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act;

b)     the manner of execution of such projects or programmes as specified in sub-rule (1) of Rule 4;

c)     the modalities of utilization of funds and implementation schedules for the projects or programmes; and

d)     monitoring            and            reporting mechanism            for            the            projects or programmes.

This seems to be an immediate actionable once the draft rules are effective.

While annual budget and areas of activities was being recommended by the CSR Committee, however, the manner of execution was something that was currently being decided by the board. Also, practically speaking, there used to be one of meeting of CSR in several cases in which the allocating of budget for next FY and approving and signing of the report of last FY used to be done.

However, it is proposed that the committee draws a detailed annual action plan to undertake CSR program. Reading the draft rules, it seems like the government is in full mood to get the management on their heels for effective implementation of the CSR provisions along with ensuring that such spent is making impact in the society.

Rule 8(3) Mandatory CSR impact assessment A company having the obligation of spending average CSR amount of Rs 5 Crore or more in the three immediately preceding financial  years in pursuance of sub section 5 of Section 135 of the Act, shall undertake impact assessment for their CSR projects or programmes, and shall disclose details of the same in its Annual Report on CSR.

 The impact assessment report is to be attached to the annual report [as per the annexure]

 

The High Level Committee on CSR[4] highlighted importance of the need and impact assessment for projects with higher outlays. This will help in bringing forth the areas requiring more attention, for there development.

Companies having minimum 5 cr of average CSR obligation in last 3 years shall have to undertake mandatory impact assessment. Interestingly, the report of such assessment is proposed to form part of the annual report.

There are several question around this:

1.     who does this assessment ? surely, the govt acknowledges that an outside entity can also be engaged for such assessment and therefore there is increased limits of allowed overhead expenditure for such companies who are mandatorily required to undertake such assessment

2.     also, it is to be noted that the CSR report as mentioned in the annexure, includes surplus from CSR in the total CSR obligation; – will this mean that where there is extraordinary surplus, compliance of this provision becomes applicable because of surplus ? it may in such cases prove to be waste of resources

Rule 7(1) Limit of overhead expenses The board shall ensure that the administrative overheads incurred in pursuance of sub-section (4) (b) of section 135 of the Act shall not exceed five percent of total CSR expenditure of the company for the financial year.

Provided that a company undertaking impact assessment, in pursuance of sub-rule (3) of Rule 8, may incur administrative overheads not exceeding ten percent of total CSR expenditure for that financial year

Discussed above
Rule 7(2) Surplus out of CSR program Any surplus arising out of the CSR projects or programmes or 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 action plan of the company.

 

Though it may seem to be amendment in this provision, however, there is no effective change. The surplus out of CSR activity was anyway prohibited to form part of business profits of the Company. This is just an explicit clarification to say that it has to be used back for CSR purpose only – either the same program from which such surplus has been generated or any other project as per CSR policy of the company.

What is missing is the time limit within which such surplus has to be transferred to the unspent account.

Rule 7(3) Title holder of CSR assets The CSR amount may be spent by a company for creation or acquisition of assets which shall only be held by a company established under section 8 of the Act having charitable objects or a public authority[5].

Provided that any asset created by a company prior to the commencement of Companies (CSR Policy) Amendment Rules, 2020, shall within a period of One hundred and eighty days from such commencement comply with the requirement of this rule, which may be extended by a further period of not more than ninety days with the approval of the board based on reasonable justification

 

This is another important proposal which says that any asset acquired / created for the purpose of CSR has to be in the name of a section 8 company or a public authority and cannot be held in the name of the company itself. Considering the quantum of CSR spent being carried through in-house foundations, its seems that this may be heavily opposed by the corporate houses.

Here asset is not defined. However, the intent seems to mean fixed assets only.

If otherwise, that would effectively mean that a section 8 company will have to be engaged for any CSR activity because one cannot think of any CSR activity without creation / acquiring of any asset.

180+90 days (extension with reasonable justification) time has been proposed for the compliance of this provision.

Rule 7(4) Unspent amount of ongoing projects to be transferred to Unspent CSR Account Unspent balance, if any, towards fulfilment of CSR obligation at the time of commencement of these Rules shall be transferred within a period of thirty days from the end of Financial Year 2020-21 to special account viz., ‘Unspent Corporate Social Responsibility Account’ opened by the company and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year. From this provision it seems that the first year of transfer to unspent CSR amount is proposed to be for the FY 2020-21 i.e by 30th April, 2021.

However, the requirement mentioned in the annual CSR report (annexure to the draft rules) seems to suggest that the provision for transfer may be applicable for current FY i.e the unspent amount may be required to be transferred within 30th April, 2020.

Rule 9 Additional disclosures on the website of the company The Board of Directors of the company shall mandatorily disclose the composition of the CSR Committee, and CSR Policy and Projects approved by the Board on their website for public viewing, as per the particulars specified in the Annexure. This is again an important proposal for the companies which have / are required to have a functional website. This requires the companies to inter alia mandatorily disclose the CSR projects approved by the board. So far, this was only known from the annual report much after the end of the FY. This proposal indicates that the board will have to make a thought-through plan on the recommendation of the CSR Committee as the same will be displayed on its website and therefore cannot be changed as per the whims and fancies of the board.

This will also put check on the random on-off / philanthropic acts of the promoters which currently is, in many cases, being converted to CSR spent.

Rule 10 National Unspent Corporate Social Responsibility Fund The Central Government shall establish a fund called the “National Unspent Corporate Social Responsibility Fund” (herein after referred as “the Fund”) for the purposes of sub-section (5) and (6) of section 135 of the Act. The Fund shall be utilized for the purposes of undertaking CSR projects in the in areas or subjects specified in schedule VII of the Act. Provided that until such fund is created the unspent CSR amount in terms of provisions of sub-section (5) and (6) of section 135 of the Act shall be transferred by the company to any fund as specified in schedule VII of the Act.

The manner of administration, authority for administration of the Fund shall be in accordance with such guidelines as may be prescribed by the Central Government from time to time.

This is the proposed govt fund dedicated to undertake CSR activities.
Annexure Annual CSR Report Several additional details in line with the rest of the proposal:

1.     total CSR obligation to additionally include the surplus arising out of CSR profits

2.     CIN of implementing agencies

3.     Details of CSR amount spent / unspent for the financial year

4.     Details of CSR amount spent against ongoing projects for the financial year

5.     Details of CSR amount spent against other than ongoing projects for the financial year

6.     Amount spent in Administrative Overheads

7.     Details of CSR amount spent/ unspent for the preceding three financial years

8.     Details of CSR amount spent for ongoing projects of the preceding financial year(s)

9.     Amount transferred to ‘Unspent CSR Account’ pursuant to sub-rule (4) of Rule 7 of Companies (CSR Policy) Rules, 2014 for the financial year 2014-15 to 2019-20

10.  In case of creation or acquisition of asset, details relating to the asset so created or acquired through CSR spent in the financial year

11.  reason(s) if the company has failed to spend two per cent of the average net profit as per section 135(5)

 

Signing of the CSR Report: inter alia to be signed by Director or Chief Financial Officer

There are several additional details required in the report which is by and large in line with the additional requirement.

 

It may be noted that requirement of CIN of implementing agencies will be applicable for section 8 companies only.

 

While the proposed rules are quite technical, considering the intent of CSR, it should be broadly principle based then laden with heavy rules and the CSR committee could be laden with the onus of compliance of the provisions in such case.

In any case, looking at the Draft Rules, it seems to be loud and clear that gone are those days when the companies used to take the CSR provisions lightly by putting cliché explanations in the annual report for all the gaps for unspent amount. One cannot ignore that, as per CARO-2020, the auditor is also required to comment on the CSR provisions specifically with respect to the amount unspent and whether transferred to the unspent account.

While it would be taking the companies to task if the proposed amendments are brought into force before the end of the current FY, however, it will not be surprising looking at the trend of applicability of CARO-2020 and timing of this Draft Rules.

 

[1] http://feedapp.mca.gov.in/csr/pdf/draftrules.pdf

[2] International Organization” means an organization notified by the Central Government as an international organization under section 3 of the United Nations (Privileges and immunities) Act, 1947 (46 of 1947), to which the provisions of the Schedule to the said Act apply.”

[3] List of such recognised international organisation – refer footnote to section 3 and 4: http://www.mea.gov.in/Uploads/PublicationDocs/142_1947-The-United-Nations-Privileges-And-Immunities-Act-1947.pdf

[4] https://www.mca.gov.in/Ministry/pdf/CSRHLC_13092019.pdf

[5] Public Authority” means ‘Public Authority’ as defined in sub- clause (h) of section (2) of Right to Information Act, 2005.

 

Read our article on the topic of CSR here:

http://vinodkothari.com/2019/08/csr-a-corporate-social-responsibility-or-a-corporate-social-compulsion/

Read our article on changes proposed by the high level committee on CSR:

http://vinodkothari.com/2019/08/injeti-srinivass-committee-changes-recommended-in-provisions-of-corporate-social-responsibility/

For FAQs related to CSR click here:

http://vinodkothari.com/2014/02/corporate-s-ocial-r-esponsibility-faqs/

Draft CSR Rules Make CSR More Prescriptive

FAQs on Corporate Social Responsibility

Injeti Srinivas’s Committee: Changes recommended in provisions of Corporate Social Responsibility