By: Ramya Hariharan, Partner
Section 135 of Companies Act, 2013 (Act) requires companies to constitute a Corporate Social Responsibility Committee (CSR Committee) which is responsible for formulating a CSR policy for the company. This is mandatory for companies having net worth of INR 500 crore or more; turnover of INR 1000 crore or more or having net profit of INR 5 crore or more.
It is the duty of Board to ensure that the company spends at least 2% of average net profits made during three immediately preceding financial years or immediately preceding financial year where the company has not completed 3 financial years since its incorporation, in pursuance of its CSR policy. The Draft Rules, which have not been notified by the MCA as yet, propose further strengthening the CSR framework.
Amendments to the CSR Rules
The MCA had invited public comments on the Draft Companies (CSR Policy) Amendment Rules, 2020 (Draft Rules). Some of the key changes proposed under the Draft Rules are as follows:
- Amend definition of key terms including CSR by providing certain exclusions to the definition, such as:
- CSR activities that significantly benefit 25% or more of the employees of the company and their families
- Political contributions and any activity undertaken outside India or in ordinary course of business
- CSR Policy must provide a clear approach and direction, as per recommendations of the CSR Committee, for selection, monitoring and implementation of CSR activities
- Chief Financial Officer has been identified as the person responsible for ensuring utilization of the CSR funds
- Two or more companies can collaborate to undertake a CSR project as long as each of them is able to report on the project separately
- Definitions for terms such as ‘International Organization’, ‘Ongoing Projects’ and ‘Public Authority’ have been provided under the draft rules
- Registration of implementing authorities is mandatory under the Draft Rules
- Engagement with International Organizations has been allowed for implementation of CSR Policy with prior approval of Central Government
- Addition of Rule 10 which provides for the establishment of a National Unspent Corporate Social Responsibility Fund by the Central Government for transfer of the unspent CSR funds, and pending setting up of such fund, to any fund specified in Schedule VII