In response to a call for public suggestions issued vide the Circular of the Ministry of Corporate Affairs, Government of India on the draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020, ("Amendment Rules") we have provided our comments and suggestions below.
Summary of Comments and Suggestions
Our key suggestions, highlighted in detail in the note ("Note") below, are as follows:
- Definition of the term "Corporate Social Responsibility" be updated to exclude one-off events as well as expenses incurred towards compliance with statutory obligations.
- The exemption to CSR activities benefiting up to 25% of employees and their families be deleted from the definition of "Corporate Social Responsibility".
- Rule 4 of the Amendment Rules be modified to ensure that public trusts with charitable purposes and societies with charitable purposes are also specifically included in Rule 4(a) permitting them to act as implementing agencies.
- All implementing agencies should be subject to eligibility criteria at the time of registering under e-Form CSR 1.
- The Amendment Rules clarify whether the corporate's liability is discharged by transferring the CSR funds to the implementing agency.
- Rule 7(3) clarifies that the expenses incurred to acquire assets is spent towards capacity building or acquisition of assets for beneficiaries and prescribe maximum limits for such expenses.
- Rule 8 of the Amendment Rules prescribes eligibility criteria for impact assessment firms which could be in the nature of track record/past expertise in conduct of impact assessments, professional qualifications, or recognition by an industry association.
DETAILED OBSERVATIONS AND RECOMMENDATIONS
1. Modifications to the Definition of the term "Corporate Social Responsibility"
1.1.1. The Amendment Rules proposes that the definition of the term "Corporate Social Responsibility" in Rule (2)(1)(c) be substituted to include all activities undertaken by the Company in pursuance of its statutory obligations laid down under Section 135 and the Companies (Corporate Social Responsibility Policy) Rules, 2014 ("Existing Rules") with certain specified exclusions. The exclusions specified in the proposed definition are as follows:
- Activities undertaken in pursuance of normal course of business of the company;
- Any activity undertaken by the company outside India;
- Contribution of any amount directly or indirectly to any political party under section 182 of the Act; or
- Activities that significantly benefit the employees of the company and their families. However, in case an activity has less than 25% of employees as beneficiary, then such activity will be deemed as "CSR Activity" and will not fall within the ambit of this exclusion.
1.1.2. The definition of the term "Corporate Social Responsibility" under Section 2(1)(c) of the Existing Rules is inclusive in nature and is defined to include projects/programs that relate to activities, areas or subjects specified in Schedule VII of the Companies Act, 2013 ("the Act").
1.1.3. We note that the exclusions outlined in the definition of the term "CSR" are largely based on the provisions of Rule 4 of the Existing Rules. For instance, the exclusion specified in Paragraph 1.1.2 (a), (b) and (c) is from Rule 4(1), Rule 4(4) and Rule 4(7) of the Existing Rules, respectively. Further, the exclusion specified in Paragraph 1.1.2 (d) above was covered under Rules 5 of the Existing Rules. The only difference is that Paragraph 1.1.2 (d) has now introduced a 25% threshold, which was not specified in the Existing Rules.
1.1.4. As per the FAQs previously published by the Ministry of Corporate Affairs, the following do not qualify as CSR Activities:
- One off event like marathons, awards, charitable contributions etc. would not qualify as part of CSR expenditure;
- Expenses that a company incurs to fulfil its statutory obligations like social security contributions like provident fund, ESI, etc. would also not qualify as CSR expenditure; and
- Statutory compensation to be paid to employees for any injury they sustain during the course of their employment would also not qualify as CSR expenditure.
1.1.5. The definition of the term "Corporate Social Responsibility" proposed under the Amendment Rules does not make any mention as regards the treatment of the above-mentioned activities. It is unclear as to whether the intent is to include such activities within the scope of CSR Activities or if these activities would continue to remain outside the scope of the term "Corporate Social Responsibility".
1.1.6. Further, the Amendment Rules propose to allow a company to include activities that benefit up to 25% of their employees as CSR activities. In our view, this poses significant difficulties:
- Firstly, we believe this proposal is a significant change from the previous position adopted under the Existing Rules, which do not permit any activity that benefits employees and their families. This would potentially give rise to situations where companies spend their CSR funds on projects that are designed to benefit only 25% of their employees/their families, thereby defeating the spirit of the requirement of CSR expenditure.
- Secondly, there will be significant practical difficulties in monitoring and tracking that the CSR beneficiaries are limited to 25% of the employees and their families. This would only make the task of the regulators even more difficult.
- Lastly, there appears to be no specific reason for adopting the threshold of 25% of a company's employee base.
1.2. GLA Recommendation–
- We recommend that the activities mentioned under Paragraph 1.1.4 above are specifically excluded by way of inclusion in the list of excluded activities under the proposed definition; and
- The allowance to companies to spend their CSR funds on activities that benefit on 25% of their employees and their families be deleted.
2. Modifications with respect to agencies that can undertake CSR Activities
2.1. Rule 4 of the Existing CSR Rules dealt with what would constitute CSR Activities and how a company can implement its CSR Policy. We note that Rule 4 of the Existing Rules has been largely subsumed into the definition of "Corporate Social Responsibility" under the Amendment Rules.
2.2. Further, Rule 4 (2) of the Existing Rules provides that a Board of the Company may decide to undertake its CSR activities through:
- A company established under Section 8 of the Act, or a registered trust or a registered society established by the company either on its own or along with any other company;
- A company established under Section 8 of the Act, or a registered trust or a registered society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State legislature;
- A company established under Section 8 of the Act, or a registered trust or a registered society other than those specified above in (a) and (b), provided however, that such company, trust or society, as the case may be, shall have an established track record of 3 (Three) years in undertaking similar projects or projects; and
- Through "collaboration" with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of the respective companies are in a position to report separately on such projects or programs in accordance with the Existing Rules.
2.3. The Amendment Rules limits the ability of a company to use other entities to implement its CSR activities. The only permissible implementing agencies proposed are:
- A Section 8 company; or
- Any entity established under an Act of Parliament or a State legislature.
2.4. It does not permit collaboration of one or more companies for forming a Section 8 Company, neither does it recognize a registered trust or a registered society as permissible entities to carry out CSR Activities.
2.5. Rule 4(1) (b) of the Amendment Rules refers to entities as established under "an Act of Parliament or a State legislature". Whether the same implies that only incorporated entities can be used to implement CSR Activities is unclear. Given that many CSR implementing agencies are incorporated as trusts and societies, unless a clarification comes forth from the MCA permitting the trusts/societies to continue implementing CSR Activities, such trust/societies will cease to be eligible entities for implementing CSR Activities. Today, given the relative difficulty involved in setting up and managing a Section 8 Company under the Companies Act, 2013, most not-for-profit organisations in the field of undertaking CSR activities are incorporated as public trusts or charitable societies. In light of the same it is unclear as to why these forms of entities are not mentioned in the proposed Rule 4 of the Amendment Rules.
2.6. The Amendment Rules require a Section 8 company or an entity registered under any Act of Parliament/ State legislature that is incorporated for channelling the CSR expenditure to register itself with the Central Government by filing e-Form CSR 1 with the ROC and that the registration has to be done before undertaking any CSR activities by such entity. Neither Rule 4 nor the e-Form CSR-1 makes any reference to the pre-conditions for registration as an implementing agency. It is unclear as to why the 3-year track record requirement as specified in the Existing Rules have been omitted by way of the Amendment Rules. The removal of this requirement may give rise to situations where Section 8 Companies are created, and CSR Funds are transferred to such newly formed companies without any diligence, prior experience, or expertise.
2.7. GLA Recommendation-
- We recommend that Rule 4 of the Amendment Rules be modified to ensure that public trusts with charitable purposes and societies with charitable purposes are also specifically included in Rule 4(a) permitting them to act as implementing agencies;
- While registration with the Central Government to be recognized as "Implementing Agencies" is a welcome step, we recommend that an eligibility criteria with respect to years of experience in implementation of CSR or notable work in the subject field of activities, or recognizing the work of the promoters in these fields, be specified under Rule 4.
- There currently exists an ambiguity with respect to the point of time at which a company's liability may be considered as discharged, if they were to utilize an implanting agency to carry out their CSR activities. We recommend that the Amendment Rules addresses this ambiguity under Rule 4 to clearly specify whether the company's liability is discharged upon transfer of CSR funds to the Implementing Agency.
3. Creation of Assets
3.1. Rule 7(3) of the Amendment Rules states that assets can be created out of CSR Funds only if the assets are held by a Section 8 Company or by a public authority. It appears that this provision does not refer to administrative expenses or other expenses towards capacity building of the company or the implementing agency. Hence, it appears that expenses towards acquisition of assets will fall beyond the administrative expenses cap specified in the Existing Rules.
3.2. GLA Recommendation-
- We recommend that Rule 7(3) of the Amendment Rules be modified such that a clear distinction is made between (a) assets procured for capacity building of the company; and (b) assets procured for the beneficiaries and in relation to the CSR program.
- Consequently, it should also clarify the maximum limits for incurring expenditure for both the above sub-categories.
4. Requirement of Conducting Impact Assessment
4.1. Rule 8(3) of the Amendment Rules requires that every company having CSR spending of INR 5,00,00,000/- (Rupees Five Crores Only) or more in the 3 (three) immediately preceding financial years needs to undertake an impact assessment of its CSR projects and disclose such assessment in its Annual Report on CSR.
4.2. While this is a welcome introduction, further clarity is required on the criteria that will be used to determine what entity can be recognized as an "impact assessment firm".
4.3. If the Amendment Rules are notified "as-is", there will be ambiguity on whether an "impact assessment firm" can be a for-profit organisation or not-for profit organisation, and whether there are any requirements as regards the desired experience and track record etc. of such "impact assessment firm", any recognition/certification from any industry body, etc.
4.4. GLA Recommendation-
We recommend that eligibility qualifications or criteria are specified for an entity to act as an "impact assessment firm" under Rule 8(3) of the Amendment Rules. Such criteria could be in the nature of track record (such as past impact assessment experience), professional qualifications of the promoters, any recognition/affiliation with an industry body (akin to the International Association for Impact Assessment).
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