– Muskan Agarwal | Corporate Law Division

(temp@vinodkothari.com)

Corporate Social Responsibility (CSR) is the responsibility of a company towards the society. The Companies Act, 2013 brought CSR provisions into force. The Companies (Amendment) Act, 2019[1] has identified some amendments to be brought in CSR provisions. However the amendments have not come into force yet. A High Level Committee was set up in 2015 under the chairmanship of former Secretary to Government of India, Shri Anil Baijal, to suggest measures for improving provisions of CSR policies. Few of the recommendations of High Level Committee- 2015 has already been implemented. With HCL- 2015 paving the way, the High Level Committee on Corporate Social Responsibility, 2018[2] (Committee) was formed under the Chairmanship of Shri Injeti Srinivas, Secretary, Ministry of Corporate Affairs (MCA). The Committee was set up to review the existing framework and formulate a roadmap for future implementation. The Committee has, after discussions held in 3 sessions, placed its recommendations to be incorporated in the CSR provisions, when brought into force.

Recommendations of the High Level Committee on CSR

  1. Scope of applicability of the CSR Provisions

The Committee recommended to extend the scope of CSR applicability to Limited Liability Partnerships (LLPs), Banks registered under the Banking Regulations Act, 1949, and other entities not covered under Companies Act.

  1. Applicability of CSR Provisions to Companies which have not completed 3 years from incorporation

The Committee recommended to give relaxation from CSR Provisions to the companies which have not completed 3 years from its incorporation.

  1. Exemption from constitution of CSR Committee

The Committee recommended that the Companies having CSR amount below Rs. 50 lakhs not be obliged to form CSR Committee. Rather, the Board can fulfil the obligations of CSR Committee.

  1. Treatment of Unspent CSR Amount

As per the Companies (Amendment) Act, 2019, unspent CSR amount shall be transferred to a separate account which shall be used within 3 financial years. The Committee recommends that unspent amount along with interest earned on it, shall be spent within 3-5 financial years, depending on the nature of project. Further the unspent amount which shall remain after expiry of this period shall be transferred to a fund to be specified by the Central Government, and not to Prime Minister National Relief Fund, which shall be used by the Government for projects recognized under Schedule VII of the Companies Act, 2013.

The Committee further recommended to remove criminal liabilities (imprisonment), and impose only civil liability, i.e penalty on default can extend to 2-3 times the amount involved in default, maximum penalty being Rs. 1 Crore upon the default being made good.

  1. Capital Assets creation through CSR projects

The provisions of CSR in the Companies Act, 2013 provides that the company is not entitled to any gain or cash inflow from the CSR projects. The Committee recommended that the company should be obliged to provide detailed reporting on the CSR spending where capital assets are being created. Further such projects that lead to asset creation should be carried out in partnership with the State and Community. The ownership of asset thus created will rest with public, and the company shall only look into its operation.

  1. Scope of local areas as per CSR provisions

The Committee recommended to clarify that the reference of local area in the provisions is only directory and not mandatory in nature. Where it is difficult to define local area, the company shall give priority to national crisis.

  1. Inclusion of activities under Schedule VII

The Committee recommended inclusion of Sustainable Development Goals (SDGs) and items like welfare of senior citizens, rehabilitation of differently abled persons, promotion of sports, contribution to incubators partly funded by Central/State Government or a Public Sector Undertaking provided that they are a Section 8 company and do not undertake commercial activities, protection and maintenance of heritage monuments/sites, relief rescue, rehabilitation and reconstruction activities related to disasters and drought.

  1. CSR reporting, disclosure and audit

The Committee suggests that reporting and disclosures of CSR should be strengthened with respect to selection of projects, locations, implementing agencies etc. Further, companies having average CSR amount of Rs. 5 crore or more in the 3 immediately preceding financial years is recommended by Committee to disclose an assessment study in their Board Report for that financial year that is to be done once in a period of 3 years.

The committee also recommended that the details of CSR spending should be made a part of Financial Statements and hence to become subject to Statutory Audit.

  1. Implementing Agencies

The Committee recommends that the Board shall execute a project through an Implementing Agency (IA) once it has ascertained its credibility. The said IA should be registered with MCA to carry out CSR activities.

Further, the Committee suggests to clarify that transfer of funds to Implementing Agencies shall not mean that the CSR amount is spent. The Board needs to ensure and report on the spending on CSR activities.

  1. Tax Deduction

The Committee recommends that all activities under Schedule VII to be made tax deductible. Further the mode of implementation (when implementing through IA or on an individual capacity of the company) shall also not affect the said deductibility.

  1. CSR Exchange Portal

CSR Exchange Portal is a platform where all information related to CSR is reported by the companies which is accessible to the public. The Committee further suggests to develop the portal so that all the stakeholders, i.e. IAs, contributors and beneficiaries can interact and access the information freely, thus increasing its efficiency.

  1. Business Responsibility Report

The Committee recommends that the applicability of Business Responsibility Report (BRR) to be extended to top 1000 companies.

  1. Social Impact Companies

The Committee recommends that ‘Social Impact Companies (SIL)’ to be created which shall be permitted to distribute conditional profits. SIL will have the strengths of both of private sector and civil society, and hence will be able to work more efficiently.

  1. Network for CSR

National Foundation for Corporate Social Responsibility (NFCSR) was established by MCA & Indian Institute of Corporate Affairs (IICA) as a platform for corporates to undertake CSR projects jointly with Government, Non-Government and Civil Society Organizations and local communities.

  1. CSR guidelines for Public Sector Undertakings (PSUs)

The Committee recommends that the Department of Public Enterprises and MCA should jointly issue guidelines for CSR implementation by PSUs.

  1. Annual Report by Ministry

The Committee suggests that the Ministry should prepare an Annual CSR Survey on CSR spending by companies, trends and gap areas.

  1. Extension of Administrative Overheads

Administrative overhead is the cost incurred (salary paid) by the company on staff and employees who render their service for CSR. The Committee recommends that 5% limit on administrative overheads should be given an extension of additional 5%.

  1. Contradiction of Rule 3(2) with Section 135(1)

Section 135(1) specifies that the eligibility criteria for CSR requirement is based on ‘immediately preceding financial year’. Whereas Rule 3(2) provides that the company has to cease fulfilling the mentioned criteria in Section 135(1) for 3 years does not have to comply to the provisions. Thence the Committee suggests to delete Rule 3(2).

  1. International organization

The Committee suggests that International organizations should also be eligible to carry out CSR activities in India.

  1. Exclusion of Individual Activity

The Committee suggests that Individual Social Responsibility, like a pro-bono services of their employees, shall not be considered as CSR activity.

  1. CSR expert inclusion

The Committee suggests that the Government may prescribe the thresh-hold, meeting which the company shall have to include a CSR professional/expert. The Board can voluntarily adapt to this even if it does not meet the criteria.

  1. Third Party Assessment

The Committee suggests that 5% of companies mandated to carry out CSR activities will be subject to 3rd party assessment of its CSR project on a random basis.

Conclusion

The Committee provides a number of recommendations for incorporating in CSR provisions that can be incorporated in the provisions of the Companies (Amendment) Act, 2019, when brought into force. The recommendations can bring further clarity and preciseness in the CSR provisions.  It has recommended to make some provisions stricter, whereas liberalize some of the provisions, keeping in balance the need out of the provisions.

[1] http://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf

[2] http://www.mca.gov.in/Ministry/pdf/CSRHLC_13092019.pdf