CSR: New Rules and Rising Spending
March 11, 2021
The government recently announced certain changes to the corporate social responsibility (CSR) framework that could have a significant impact.
- Rule 2 of the Companies (Corporate Social Responsibility Policy) Amendment Rules includes a more precise definition of 'administrative overheads': The expenses incurred for general management and administration of CSR functions in the company. The definition explicitly excludes any expenses incurred for the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project.
- CSR Policy is now defined as a statement containing the approach and direction given by the board of a company. The statement takes into account the recommendations of the Board’s CSR Committee, and includes guiding principles for selection, implementation, and monitoring of activities as well as the formulation of the annual action plan.
- Rule 2(1) (g) introduces international organizations in India's CSR framework. It allows companies to engage any outside organization for designing, monitoring, and evaluating their CSR projects and in assisting them with capacity building of their personnel under Rule 4(3) of New Rules. Ongoing Projects include multi-year projects undertaken to fulfill CSR obligation stretching to a maximum duration of four years (three years excluding the year of commencement). As per the amendment in section 135, the unspent amount, if any, for ongoing projects, may be transferred to a separate bank account for three years and is not required to be transferred to the fund specified in schedule VII as required in Section 135(5) of the Companies Act, 2013. However, the uncertainty still remains for the projects whose implementation extends beyond a four years span.
- For all projects effective from April 1st, 2021, companies can undertake CSR activity only through implementing agencies that are registered with the central government. This will create a way for companies to have access to various entities for carrying out their CSR obligations.
- It is now the responsibility of the Board to ensure that administrative overheads in relation to CSR do not exceed five percent of the total CSR expenditure of the company. The amended rules require that any corporation with a CSR obligation of Rs 10 Cr. or more for the three preceding financial years would be required to hire an independent agency to conduct an impact assessment of all of their projects with outlays of Rs 1 Cr. or more. Companies will be allowed to count five percent of the CSR expenditure for the year up to Rs 50 lakh on impact assessment towards CSR expenditure.
- Mandatory disclosure of CSR projects approved by the Board is to be placed on the website of the company. This will ensure greater accountability of companies and help ensure compliance.
- Since the provisions are applicable from January 22, 2021, any amount that remains unspent on ongoing project in FY 2020-21 will have to be transferred to any separate account already mentioned under Schedule VII till "the fund" referred to in Section 135(5) and 135(6) of the Companies Act, 2013 is created or specified.
- Multi-year CSR allowed for 'ongoing projects' for up to 3 years;
- Firms allowed to set-off surplus spending in a year for up to 3 years;
- Impact assessment mandatory by agencies for firms with CSR spends over Rs 10 Crore ($1.3 million);
- Unspent funds to be transferred to CSR account or special fund;
- Non-compliance to incur penalties up to Rs 1 Crore ($136,000) and/or up to Rs 2 Lakh ($2800) per officer;
- Changes allow more flexibility for companies to execute projects, and multi-year CSR allows them pick up better projects.
Expenditure trends (FY 2015 to 2020):
- India was the first country to make CSR mandatory in 2014;
- Total expenditure for the above period was at Rs 79293 Crore ($12 billion);
- 51% rise in firms covered under CSR rules;
- CSR spends per firm grew at 23%;
- Companies felt strongly about education, health, and rural development for CSR spends.
HRPI View: Many of these changes were part of the demand of the industry. We advise companies to revisit and revise their CSR policies to comply with the new rules.