Co-author: Amrut Joshi
This article was originally featured on GameChanger Law Advisors.
4 min read
On January 22, 2021, the Government of India amended the regulatory framework for corporate social responsibility in India (“New Rules”).[1] The New Rules now cast the spotlight on the “responsibility” portion of CSR initiatives, increasing governance and transparency of CSR spends. At the same time, the New Rules signal a significant shift from the “name and shame” philosophy adopted previously, with the introduction of monetary penalties for non-compliance. In this post, we briefly highlight key changes of the New Rules and their impact on CSR spending and accounting.
- Strategic and deeper involvement by corporates: Firstly, the New Rules now require CSR Committees of corporates to frame more robust CSR policies, articulating in greater detail their CSR philosophies, potential spends and monitoring mechanisms. Secondly, CSR Committees are expected to formalize an “action plan”, charting CSR projects, implementation and monitoring schedules. Corporates are expected to adhere to such action plan, and if required, the CSR Committee will recommend changes during the course of a year. Thirdly, the New Rules have introduced a Chief Financial Officer (CFO) certification requirement in relation to CSR spends, thus re-emphasizing the deep involvement from the highest management.
- Transparent Implementation: The New Rules focus on both sides of the implementation coin, i.e., on not-for-profit implementing agencies as well as corporate grantors.
- Implementing agencies are (effective April 1, 2021) required to mandatorily register with the Ministry of Corporate Affairs and obtain a unique CSR Registration Number, which is to be quoted on all CSR disclosures of the corporate grantors. Additionally, such agencies should have valid and subsisting income tax registrations (under Section 12A and 80G of the Income-Tax Act, 1961) relating to their eligibility for exemptions under the Income-Tax Act. Coupled with existing requirements of having a track record of at least 3 years in the relevant field of operation, these New Rules now aim to ensure that only bona fide NGOs are recipients of CSR funds, and hence, will also be honest implementers of such projects.
- On the flip side, larger corporates (spending an average of INR 100 million in the past three financial years) are now required to undertake mandatory impact assessment by an independent agency of large projects (completed projects in the past year budgeted for INR 10 million or more) and disclose such assessment reports in their annual disclosures. Thus, with this mandatory impact assessment requirement, corporate involvement continues even post closure of the project. Therefore, both corporates will need to give more careful thought to the kind of impact they desire from a large project, the capabilities of the implementing agencies and the metrics that they will utilize to measure impact. This also opens up corporates to greater scrutiny from civil society organizations and a vigilant public.
- Separation of Unspent CSR funds: The New Rules now require a corporate to transfer unspent amounts within the stated timelines, to (a) a separate bank account (Unspent CSR Account), if it relates to an ongoing project, which has to be spent on such project within the next three financial years, or (b) any fund specified in Schedule VII of the Companies Act (such as the PM CARES fund, disaster management fund, etc.). Hence, unspent CSR funds are clearly traceable and separated from all other monies of a corporate, thereby increasing accountability in CSR spending. Previously, such amounts were just disclosed in the annual corporate filings along with reasons for not spending the full CSR amounts.
- Penalties for non-compliance: The New Rules have introduced monetary penalties for a company and every officer in default for non-compliance with the provisions relating to undertaking of CSR expenditure and transfer to Unspent CSR Account/Schedule VII fund (as applicable). A defaulting company is now liable for the lesser of INR 10 million or twice the amount that should have been transferred to the Unspent CSR Account/ Schedule VII specified fund (as applicable). Additionally, a defaulting officer is now liable for the lesser of INR 0.2 million or one-tenths the amount that should have been transferred to the Unspent CSR Account/ Schedule VII specified fund (as applicable).
The New Rules have increased CSR disclosures and also clarified accounting measures to be adopted in relation to various aspects of CSR spends, such as administrative overheads, surplus arising out of CSR funds, carrying forwards excess spends in a year, creation/acquisition of a capital asset out of CSR funds.
To summarise, the key takeaways from the New Rules would be:
- Corporates will now need to review their internal management information systems to ensure it accurately captures all CSR related information to enable such executive sign offs and comply with the New Rules, in letter and spirit, and to avoid the penal consequences; and
- Implementing agencies to also ensure that they are compliant with extant laws, and ensure that they obtain their CSR registration in a timely manner. Further, the New Rules also expect responsible implementation, given the requirement for mandatory post-implementation impact assessments.
[1] The Government issued 3 notifications that amend the provisions of the Companies Act, 2013 and the Companies (Corporate Social Responsibility) Rules, 2014.
