Practice Areas

Follow us

Concept and Applicability of CSR

Corporate social responsibility (“CSR”) is a self-regulating business model that helps a company be socially accountable-to itself, its stakeholders, and the public. The concept of CSR has evolved over the years and now used as strategy and a business opportunity to earn stakeholder goodwill.

Under the Indian Law, CSR is regulated under Section 135 of the Companies Act, 2013 as a statutory obligation for companies. As per Section 135 of the Companies Act, 2013, CSR is applicable to every company registered under the Act (and any other previous Companies law), with a net worth of Rs 500 crore or more, or a turnover of over Rs 1,000 crore or a net profit exceeding Rs 5 crore in any financial year.

After the introduction of CSR, the Companies (Corporate Social Responsibility Policy) Rules were notified on 27th February 2014 (“CSR Policy Rules, 2014”) to lay down the specifications and procedure to be followed by the companies while discharging their CSR obligations. Thereafter certain major changes were made in the CSR provision under Section 135 of the Companies Act, 2013 in the Companies (Amendment) Act 2019[1] and 2020[2] (“Amendment Act”).

Further, the Ministry of Corporate Affairs (“MCA”) through a notification dates January 22, 2021[3] has amended the Companies (Corporate Social Responsibility Policy) Amendment Rules (“New Rules”), to give effect to the changes introduced in CSR by the Amendment Act

Key Changes to CSR Rules

The New Rules have changed the existing definitions of CSR and the CSR Policy as indicated below:

  • Amended Definition: The New Rules have made considerable and significant changes in the definitions of CSR and CSR policy and incorporated new terms like Administrative Overheads[4], International Organization[5], Ongoing Project[6] and Public Authority[7] under the definition clause of CSR Policy Rules, 2014. Under New Rules, CSR is now defined under Rule 2(1)(d). The New Rules explicitly exclude 6 activities from the definition of CSR, which are: Activities undertaken in pursuance of normal course of business of the company[8]; Activity undertaken by the company outside India[9]; Contribution of any amount directly or indirectly to any political party by the Company under Section 182 of the Companies Act, 2013[10]; Activities benefitting employees of the company as defined in section 2(k) of the Code on Wages, 2019[11]; Activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services[12]; and Activities carried out for fulfillment of any other statutory obligations under any law in force in India[13].

CSR Policy is now defined under Rule 2(1)(f) as a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for selection, implementation, and monitoring of activities as well as the formulation of the annual action plan.

  • CSR Implementation Scheme: There has been substantial change in Rule 4 of the existing rules. The amended Rule 4 states that a Company can undertake CSR activities by itself or through any (i) company incorporated under Section 8 of the Act; (ii) registered pubic trust; (iii) registered society under Sections 12A and 80G of the Income Tax Act, 1961; (iv) any entity established under an Act of Parliament or a State legislature; or (v) any company incorporated under Section 8 of the Act, registered pubic trust, registered society under Sections 12A and 80G of the Income Tax Act, 1961[14]. From April 1, 2021, companies can undertake CSR activity only through implementing agencies that are registered with the Central Government and these companies would be required to fill the CSR-1 Form electronically with the Registrar of Companies[15]. Rule 6 has been omitted and the relevant provisions have now been incorporated in Rule 4 itself.
  • Role of CSR Committee: It is now mandatory for the companies to constitute a CSR committee and required to formulate and recommend to the Board a detailed action plan covering entire CSR policies and projects to be undertaken by the company. The aforesaid annual action plan may be alerted at any time during the financial year and is required to include the following: approved list of CSR projects, manner of execution of the listed projects, implementation schedule/timeline and method of fund utilization, mechanism of monitoring and reporting on goings of the project and details of need for project and impact assessment, if any[16]. This removes the vagueness of Rule 5 in earlier CSR Policy Rules, 2014 which only mentioned regarding the institution of a transparent monitoring mechanism for implementation of the CSR projects by the company.
  • CSR Expenditure: In terms of the New Rules, the Board shall be responsible to ensure that administrative overheads with respect to CSR do not exceed 5% of the total CSR expenditure of the company and surplus from any project cannot be titled as business profit and therefore has to be utilized for any CSR project.

Every company which has not completed the period of 3 financial years since its incorporation will have to spend 2% of the average net profit of the company made during such preceding Financial Years towards CSR. The CSR spending was earlier voluntary has now been made mandatory. The spending mandate of CSR was earlier based on “Spend or Explain” principle, which had no penalty, and as per the New Rules the principle of “Spend or Pay Penalty” has to be complied with[17].

  • CSR Reporting[18]: The company’s Board Report that pertains to any financial year shall include an annual report on CSR that contains all the particulars as per the applicable specifications. A balance sheet filed in case of a Foreign Company, it shall contain an annual report on CSR containing particulars specified[19]. Also, any company with a CSR obligation of Rs 10 Cr. or more for the 3 preceding financial years would be required to hire an independent agency for conducting impact assessment of all of their projects with outlays of Rs 1 Cr. or more.
  • Display of CSR activities on website[20]: It is now mandatory for the Board of Directors of the Company to disclose the composition of the CSR Committee, and CSR Policy and all the Projects that are approved by the Board, on the official website of the Company, if any, to make it available for public access.
  • Transfer of unspent amount[21]: Rule 10 talks about two aspects of using and transferring the unspent amount: (i) In case the amount unspent does not relate to an ongoing project, the Board shall transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year after specifying the reasons in its report for not spending the amount. (ii) In case the amount unspent relates to an ongoing project, then the unspent amount shall be transferred at the end of the financial year to a special account that is opened by the Company in that behalf to be called the Unspent Corporate Social Responsibility Account, within a period of thirty days.

Conclusion

The New Rules have effectively reduced the excessive discretion on part of the company by laying down uniform mandatory procedures to be followed in certain aspects. These will now guide India’s CSR regime, giving effect to changes introduced in Section 135 of Companies Act, as a result of Companies Amendment Act of 2019 and 2020 in various aspects. The New Rules ensures strict compliance and to keep a check on the activities of the company as there are now rigid penal consequences of non-compliance.. While the Government is striving for improvement in India’s ease of doing business ranking, this may seem to run contrary to such efforts.

Further, in terms of the MCA circular[22] dated 28.03.2020, the Government of India has set up a new PM-CARES Fund, to provide relief to those affected by any kind of emergency or distress situation in the Covid-19 pandemic. Further, the circular states that any contribution made by the company to the PM CARES Fund shall also qualify as CSR expenditure under the Companies Act 2013. Also, the MCA vide its general circular no. 09 of 2021 dated 05.05.2021[23], has clarified that spending of CSR funds for creating healthcare infrastructure for covid care, establishment of medical oxygen, generation and storage plants, manufacturing and supply of oxygen cylinders, ventilators, concentrators and other medical equipment for countering covid 19 or similar activities relating to promotion of healthcare shall be eligible CSR activities.

[1]Available at < https://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf>

[2]Available at < https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf>

[3]Available at < http://www.mca.gov.in/Ministry/pdf/CSRAmendmentRules_22012021.pdf>

[4] Rule 2(1)(b) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[5] Rule 2(1)(g) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[6] Rule 2(1)(i) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[7] Rule 2(1)(j) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[8] Rule 2(1)(d)(i) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[9] Rule 2(1)(d)(ii) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[10] Rule 2(1)(d)(iii) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[11] Rule 2(1)(d)(iv) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[12] Rule 2(1)(d)(v) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[13] Rule 2(1)(d)(vi) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[14] Rule 4(1) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[15] Rule 4(2) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[16] Rule 5(2) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[17] Section 135 of the Companies Act, 2013

[18] Rule 8 of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[19] Rule 8(2) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[20] Rule 9 of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[21] Rule 10 of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021

[22] Ministry of Corporate Affairs, eF. No. CSR-05/1/2020-CSR-MCA, circular dated 28.03.2020

Available at <http://www.mca.gov.in/Ministry/pdf/Circular_29032020.pdf>

[23] Ministry of Corporate Affairs, E-file no. CSR-01/5/2021-CSR-MCA, circular dated 05.05.2021 Available at < https://www.mca.gov.in/Ministry/pdf/GeneralCircularNo9_05052021.pdf>

Asia Law Offices advised a major transnational strategic collaboration between its client, UAE-Based Pharmax Pharmaceuticals, and Swiss pharma major Acino Pharmaceuticals.

ALO represented Pharmax in the structuring and closure of entire transaction documents of the significant collaboration.

The collaboration framework extends to licensing, manufacturing, and supply of Acino formulations within the gastroenterology and the cardiovascular space throughout the Middle East and Africa.