THE NEW CSR AMENDMENT, 2020 – ITS IMPLICATIONS AND DRAWBACKS

This article is written by Vanshika Kasturi, a 3rd year law student at DSNLU, Vishakhapatnam

In the month of March of 2020, the Ministry of Corporate Affairs (MCA) put forth the latest amendment regarding the Corporate Social Responsibility Policy. The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 had been made accessible for public response and action until April 10th, 2020 and the MCA was seeking the public inputs on them.

The rules were drafted to put into motion the 2019 amendments made to the Companies Act. You may remember for sure the adjustments and recommendations that were made to Corporate Social Responsibility (CSR) by the Finance Minister’s during the 2019 budget speech; those were later passed in July 2019. The current guidelines have been drafted to put into effect those adjustments and are applicable to CSR-compliant companies as well as to nonprofits throughout India.

The current law is rather lenient regarding the CSR obligations and even after the companies failing to meet up with the CSR obligation the maximum extent of penalty was a notice being served to the company from MCA soliciting for the reasons behind the failure to meet up with the liability. The pre-amendment and post amendment rules have one major change and that is not meeting of the CSR obligation will carry penal consequences. Though it seems like an appropriate move to be made but none the less its too early to assess the impact of the amendment that is related to the CSR. It is a pain striking and meticulous process but hopefully it would bring in a change in the way companies treat the CSR obligation A substantial picture of compliance requirements will be clear only after the publication of the amendments to the Companies (Corporate Social Responsibility Policy) Rules, 2014 and other ancillary rules and regulations

The new CSR rules have quite drastically changed numerous core aspect of the regulation. The 2020 rules are changing the definition of CSR to now cover any activity assumed by a company under their obligations to the CSR provisions of the Companies Act 2013.

· That being said, CSR will not include:

1. the activities that the companies engage in as an integral part of their business

2. An action or activity that has been take on by the company outside the Indian territory

3. any form of contribution made to a political party irrespective of whether it was direct of indirect

4. Activities that benefit only company employees (if company employees are 25 percent or less of the people served by an activity, it can be counted as CSR).

Inferences that can be drawn from the draft CSR Rules Amendments 2020:

1. The Ministry has clearly indicated that they are bringing a central monitoring system for CSR spent, and each implementing agency will have to get themselves validated through filling up of CSR-1 form.

2. There is no clarification on the track record of the implementing agencies (Section 8 companies), it means that newly registered section 8 companies after submitting CSR Form 1 will become eligible for implementation of CSR projects.

3. The amendment will not affect the CSR projects or programs that were approved prior to the commencement of the Companies (CSR Policy) Amendment Rules, 2020.

The problems with the CSR amendment

Contrary to the popular and overall perception, the CSR Rules under rule 4(2) allow registered trusts, registered societies and Sec.8 companies that have been established by the enterprise or company itself, or via independent third party or through enterprises and companies installed through an Act of the Parliament or a state legislature, to behave as implementing groups or agencies and carry out the enterprises CSR activities. However, under the draft amendment, only section 8 companies and entities established by the Parliament or a state legislature may act as implementing agencies for CSR activities.

The pitch of the new rules conscripted by the MCA seeks to eliminates trusts and societies from the current list of qualified beings which could be used as implementing agencies (IAs) for CSR. What has led such an absurd proposal is not very clear. If one goes through the media and news reports then one would understand that the main bone of contention regarding the new CSR amendment is that the owners of some companies who may have used trusts and societies as a roundtrip of the CSR funds have been excluded and there is a huge hue and cry regarding the same many believe that such company owners should be included but a lot of the general public believe that they should not be Should such exemptions really be included or not is the question of the day.

For CSR-compliant agencies, the 2020 guidelines/rules make the following changes:

1. Companies can collaborate with each other for CSR tasks, as long as person reporting is undertaken.

2. Companies can corroborate with global organizations to display CSR initiatives and for their very own potential building, but will need previous permission from the government to execute CSR initiatives with such organizations.

3. The CSR Committee will need to proportion with their board an annual motion plan for CSR and other info, inclusive of impact evaluation and wishes assessment.

4. A 10 percent expenditure cap has been positioned for groups which are assignment impact evaluation. This is together with the five-percentage cap on administrative charges related to CSR spending.

5. Unspent CSR price range from a business enterprise will need to be transferred to an ‘Unspent CSR’ account and can be spent in line with the employer’s motion plan.

6. Any stability that need to had been spent on CSR, but has now not been spent but, have to be transferred to an ‘Unspent CSR’ account inside 30 days of these regulations getting into force, and used within 3 economic years. Failing which, this amount needs to be transferred to a fund distinct beneath Schedule VII of the Companies Act.

7. Companies with CSR spends over INR 5 crore will want to conduct impact evaluation in their CSR projects.

8. CSR activities will want to be posted at the business enterprise’s internet site and in their Annual Report in a format prescribed in these policies.

Overview of the CSR rules

Unlike preceding amendments on the implementation of CSR, the draft introduced in the year 2020 indicates three very special and significant modes for application and implementation,

1. one through Section 8 of Companies Act,

While answering the question regarding sec.8 the MCA stated that “Section 135 of the Act reads “ Every company…….”, i.e no specific exemption given to section 8 companies with regard to applicability of section 135, hence section 8 companies are required to follow CSR provisions”

2. Second through addition of global groups or international agencies through the appropriate approvals through the suitable channels

It in furtherance stated the appropriate annexures for foreign based companies to file CSR reports In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (1) of section 381 shall contain an Annexure regarding report on CSR

3. Third through any entity set up under an Act of Parliament or a State legislature.

It can be a setback for lots groups which have already established structures and tactics running with either a registered trust or society foundation for CSR application execution. It is right to have a current practice of including foundations, trusts and societies in conjunction with cautioned new exercise. Any amendment must be modern and an iota of regression makes it challenging for businesses to take a detour and accommodates abrupt change in the course.

In addition to current administrative overheads of five percent, it is heartening to earmark ten percentage in the direction of administrative overheads to undertake effect evaluation. It would be ideal to encompass other aspects of effect assessments which includes need and meantime assessment and social audits. It is welcoming entry point of engagement of global groups for designing, tracking and evaluation purpose of the CSR projects.

The draft reads that the unspent stability, if any, toward fulfilment of CSR responsibility be transferred inside a length of thirty days from the end of Financial Year to ‘Unspent Corporate Social Responsibility Account’ opened by the agency and such quantity will be spent with the aid of the enterprise in pursuance of its duty toward the CSR Policy inside a length of 3 economic years, failing which, the corporation shall transfer the same to a fund laid out in Schedule VII, within a period of thirty days from the date final deadline of 12 months. It is administratively bulky and provides pointless protocols to comply with.

The ministry of corporate affairs in its Q and A forum has answered many of the curtail questions that had plagued a lot of minds when in the matters concerning CSR

Conclusion

The MCA had issued a deadline of 20 April 2020 for the general public to send their commentaries and views on the draft of the rules. While it is estimated that quite a few essential changes would be recommended, the essentiality of the point is that rule 4 due to its ambiguity is going to hear a lot of opposition as it personally targets various investors and stake holders who have invested millions. It would be a learning experience to understand and analyze the various changes that the public are going to suggest with regards to the new CSR amendment bill. But only time will tell which course of action is going to be taken by the government and how it’s going to impact the companies. But essentially speaking the penal implications on the failure of fulfilment of CSR obligations seems like a necessary step.