CSR Rules tweaked to rationalize committee constitution, implementing agencies etc

– Nitu Poddar, Partner | Lovish Jain, Executive | corplaw@vinodkothari.com

MCA vide its notification dated September 20, 2022 has made amendments in the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“Rules”). The said amendment seeks to do away with the redundant requirements in Rule 3(2) of making CSR expenditure and other compliances even after the companies cease to be covered within the thresholds under section 135(1), provide for continuation of CSR committee in case of amount lying in the unspent CSR account, amend the scope of implementing agencies and in the ceiling of expenditure towards impact assessment as well as some changes in the annual report on CSR.

The salient highlights of the amendment are as follows: :

1. Alignment of Rule 3 with section 135(1):

Omission of Rule 3(2): This is a corrective amendment to align the Rules with section 135(1). Prior to this amendment, apart from the companies covered under section 135(1) of the Companies Act, 2013 (“Act”), such companies which would cease to be covered under the the said section were also required to continue with compliance of section 135 i.e incurring CSR expenditure, constituting committee etc., for up to three financial years. This requirement provided in Rule 3(2) has been omitted. It is to be noted that this provision was anyway redundant after the changes brought in section 135(1) through Companies (Amendment) Act, 2017 whereby the period for which the thresholds to be checked was changed from “any” of the past financial year to “immediately preceding financial year”. This amendment was long pending since it was proposed in the Report of High Level Committee on Corporate Social Responsibility [Para 3.21]

2. Requirement of the constitution of the CSR Committee:

Insertion of second proviso to Rule 3(1): Considering that the monitoring of CSR activities will continue to be required for amount spent from the unspent CSR account, so long that there is any amount lying in the the unspent CSR account of the company, the CSR Committee will have to be continued and cannot be dissolved.

3. Widening of the category of entities that can be appointed as implementation agency:

As provided under Rule 4(1), a company may undertake CSR activities either through itself or appoint another entity to work on its behalf, called implementing agency. MCA vide this amendment has introduced a new class of entity which may act as an implementing agency.

Now, a company may also undertake its CSR activities through:

1. a  section 8 company or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 and approved under section 80G of the Income Tax Act, 1961, established by the company, either singly or along with any other company; or
2. a section 8 company, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 and approved under 80 G of the Income Tax Act, 1961, and has an established track record of at least three years in undertaking similar activities.

Entities that are covered within the aforesaid sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 of IT Act are as follows:

Clause under section 10(23C) of IT Act, 1961	Broad category of entity(ies) covered
(iv)	any other fund or institution established for charitable purposes which may be approved by the Principal Commissioner or Commissioner, having regard to the objects of the fund or institution and its importance throughout India or throughout any State or States
(v)	any trust (including any other legal obligation) or institution wholly for public religious purposes or wholly for public religious and charitable purposes, which may be approved by the Principal Commissioner or Commissioner, having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof
(vi)	any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad) and which may be approved by the Principal Commissioner or Commissioner
(via)	any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiac) or sub-clause (iiiae) and which may be approved by the Principal Commissioner or Commissioner

In our view, the entities covered under the said sub-clauses of section 10(23C) of IT Act should be engaged in undertaking Schedule VII activities to be able to act as an implementing agency. For example, in case an entity covered under clause (v) of section 10(23C) of IT Act is engaged exclusively in religious activity which is not covered under schedule VII, such entity cannot be appointed as an implementing agency. 

4. Revision in the limits to book expenditure towards impact assessment:        

Earlier the limits to book expenditure towards impact assessment was lower of 5% of the total CSR expenditure for that financial year or fifty lakh rupees, which has now been amended to higher of 2% of the total CSR expenditure for that financial year or fifty lakh rupees.

While this may seem to be increasing the limits of booking expenditure by putting 50 lakh as a minimum amount that can be booked, however, on doing simple math, it is understood that the higher limit (2% of the total expenditure) could be used only by companies with minimum average net profit of Rs 1250 crores in three financial years. The number of companies of this size may only be a handful! The earlier limits were taking into picture such companies with minimum average net profit of Rs 500 crores in three financial years.

5. Rationalization of the format of annual report on CSR:

The template of annual report on CSR was made quite elaborative vide the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.  The same has now been rationalized by omitting the requirement of mentioning the details of each project (on-going and others). There are a few more rejigs done in sequencing of the information.

It is to be noted that while this rationalization has been done in the information to be provided in the annual report of CSR, the information to be provided in Form CSR-2 (which has almost all details as was in the erstwhile CSR annual report) remains unaltered.

Knowledge Centre for Corporate Social Responsibility (CSR)