Corporate Social Responsibility (CSR) has been a soft law in most countries and is considered voluntary, self-regulated and beyond the scope of legislation. The concept of CSR is usually associated with companies voluntarily undertaking activities to achieve social and environmental objectives during the course of their daily business operations.

The Companies Act, 2013

With the Companies Act, 2013 ("Act"), India introduced provisions related to mandatory CSR, making India one of the only countries in the world to impose statutory CSR spending on certain companies. Prior to the Act, few companies had long practiced some form of corporate social responsibility. But with the introduction of the Act, all companies having:

  • a net worth of rupees five hundred crore (Rs. 500 crore) or more; or
  • a turnover of rupees thousand crore (Rs. 1000 crore) or more; or
  • a net profit of rupees five crore (Rs. 5 crore),

during the immediately preceding financial year are required to constitute a CSR committee1, draft a CSR Policy, and spend, in every financial year, at least two per cent (2%) of the average net profits of the company made during the three (3) immediately preceding financial years, in accordance with the activities and other provisions of its CSR policy2.The Act, along with the Companies (Corporate Social Responsibility Policy) Rules, 2014 and the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 (the rules are collectively referred to as the "CSR Rules") govern CSR activities in India. As per the Act, the CSR committee is required to be constituted of the Board of Directors ("Board") consisting of three (3) or more directors, out of which at least one (1) director should be an independent director3. The Act further mandates that the CSR Policy to be formulated by companies is required to set forth a list of CSR projects or programs which the company plans to undertake and the same are related to the areas and subjects specified in the schedule provided by the Act ("Schedule").

The Act maintains that companies are required to give preference to the local areas around where it operates for spending the amount earmarked for CSR activities. The list of activities and programs that can be undertaken need to fall within the scope of or related to the activities listed in the Schedule o. One important thing that India Inc. should take note of is that the CSR activities are to be undertaken in India only.

The Companies Amendment Act, 2019 ("Amendment Act 2019")

The Amendment Act, 2019, though passed and in force as on today's date, has not notified its CSR related provisions because of several concerns and representations by India Inc. regarding the changes proposed. One main change that was proposed was the move from "comply or explain" to "comply or imprisonment". Changes that the Amendment Act 2019 provides for are:

CSR for New Companies

For a company that complies with the eligibility criteria of the mandatory CSR provisions but has not completed the period of three (3) financial years since its incorporation, the Board is required to ensure that the company spends, in every financial year, at least two per cent (2%) of the average net profits of the company made during such immediately preceding financial years in accordance with the activities and other provisions of its CSR Policy.

Unspent Corporate Social Responsibility Account

The Amendment Act 2019, introduced a concept wherein if any amount from the total allocated amount for CSR remains unspent, pursuant to any ongoing CSR project (in accordance with the company's CSR Policy), the company is then required to transfer such unspent amount to a special account within a period of thirty (30) days from the end of the financial year. The special account is required to be opened in the name of "Unspent Corporate Social Responsibility Account" in any of the scheduled banks. This amount must be spent in consonance with the CSR Policy within the stipulated time period of three (3) financial years from the date of such transfer. On failure to do so, the company is required to transfer the unspent amount to a fund specified under the Schedule within thirty (30) days from the date of completion of the third (3rd) financial year.

The Amendment Act 2019 also mandates that any unspent CSR earmarked amounts that are not pursuant to ongoing CSR projects, are required to be transferred to a fund specified in the Schedule, within a period of six (6) months of the expiry of the financial year.

Penalty

The Amendment Act 2019, in a move that shocked India Inc. prescribed jail time for upto three (3) years and/or a penalty for non-compliance with the mandatory CSR provisions. This provision however has now been replaced with a new provision (explained further in this Article) that scraps imprisonment time (explained further in this Article) and maintains only a penalty amount payable.

The Companies (Amendment) Act, 2020 ("Amendment Act 2020")

The Amendment Act 2020 has been passed by both houses of the Parliament and received the President's assent only on September 28, 2020. It however has still not been notified. Changes that the Amendment Act, 2020 has brought about are:

Excess Spending

The Amendment Act, 2020 provides for a new insertion that states that if the company spends an amount in excess of the required amount set under the Act, the company may set off such excess amount for such number of succeeding financial years and in such manner, as may be prescribed.

Penalty Amount

The Amendment Act, 2020 provides for replacement of the penalty section inserted by the Amendment Act, 2019 and states that if a company defaults in complying with the provisions of spending the required amount or transferring the unspent amount:

  • the company shall be liable to: (a) a penalty of twice the amount required to be transferred by the company to the fund specified in the Schedule or the Unspent Corporate Social Responsibility Account; or (b) Rupees One Crore (Rs. 1,00,00,000/-), whichever is less; and
  • every officer of the company who is in default shall be liable to: (a) a penalty of one-tenth of the amount required to be transferred by the company to such fund specified in the Schedule, or the Unspent Corporate Social Responsibility Account; or (b) Rupees Two Lakhs (Rs. 2,00,000/-), whichever is less.

Non-Applicability of the CSR Committee

The Amendment Act, 2020 also provides that if the amount to be spent by a company for CSR under the Act does not exceed Rupees Fifty Lakhs (Rs. 50,00,000/-), the requirement for constitution of the CSR committee shall not be applicable and the functions of such CSR committee in such cases, can be discharged by the Board of such company.

COVID - 19 Related CSR Clarifications/Changes

In the background of COVID - 19, certain clarifications and amendments related to CSR were brought about by the Government of India. One such main clarification was that spending of CSR funds for COVID - 19 is an eligible CSR activity and funds may be spent for various activities related to COVID - 19 under items (i) to (xii) under the Schedule in relation to promotion of health care, including preventive health care and sanitation and disaster management4.

The CSR Rules5 were also amended and state that any company engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business may undertake research and development activity of new vaccines, drugs and medical devices related to COVID - 19 for financial years 2020-21, 2021-22 and 2022-23 subject to the following conditions:

  • Such research and development activities shall be carried out in collaboration with any of the institutes or organisations mentioned in the Schedule.
  • Details of the activity are to be disclosed separately in the annual report on CSR included in the Board Report.

Amendments in the Pipeline

With the aim to further streamline CSR related provisions, the Government of India has now proposed the Draft Companies (Corporate Social Responsibility Policy) Rules, 2020 ("Draft Rules") and invited comments from the public and stakeholders with respect to the same. The Draft Rules, amends, amongst other things, certain basic terms such as the definition of CSR and what it includes, CSR Policy, what is meant by ongoing projects and the requirement to undertake an impact assessment for certain companies. The final form that these Draft Rules will take is still uncertain and is eagerly awaited.

Footnotes

1. Section 135(1) of the Act.

2. Section 135(5) of the Act.

3. Rule 5 of the CSR Rules.

4. General Circular No. 10/2020 dated March 23, 2020.

5. Inserted proviso to Rule 2(1)(e) in the CSR Rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.