Changes introduced by the CSR Amendment Rules 2022 - MMJC

Corporate Social Responsibility (“CSR”) is mandatory in India for companies exceeding certain thresholds of net worth, turnover or profits. On September 20, 2022 the Ministry of Corporate Affairs (MCA/Ministry) notified various amendments to the Companies (Corporate Social Responsibility Policy) Rules, 2014. The amendments and its practical implications are as follows:

1. CSR Committee

Section 135(9) states that, if the amount to be spent by a company in a financial year towards CSR as per sub-section (5) does not exceed Rs. 50 lakhs, the requirement of constituting CSR Committee shall not be applicable to such company and the functions of such committee shall be required to be discharged by the Board of Directors of such Company.

However, this amendment mandates constitution of CSR Committee for the Companies who have any amount in Unspent CSR Account i.e., w.r.t Ongoing projects as per section 135(6), irrespective of amount of spending mandated for the Company.

Therefore, reconstitution of CSR committees will be required in case of such companies which have dissolved the CSR Committees pursuant to Section 135(9) but have any amount in Unspent CSR Account w.r.t. ongoing project(s)

2. Omission of Rule 3(2)

Sec. 135(1) was amended pursuant to Companies Amendment Act, 2017 with effect from 19th September 2018. Post this amendment, the criteria of net worth of Rs. 500 crores OR turnover of Rs. 1000 crores OR net profit of Rs. 5 crores for applicability of CSR provisions was limited only to the extent of immediately preceding financial year.

However, Rule 3(2) which, before this amendment, was the guiding provision as to the number of years for which a company needs to comply with CSR provisions was not amended. Rule 3(2) mentioned that every company which ceases to be a company covered under section 135(1) of the Act for three consecutive financial years shall not be required to comply with CSR related provisions.  As the guiding provision was shifted to Section 135(1) itself but Rule 3(2) was not amended to that effect, there arose an ambiguity with regard to CSR applicability. In case of companies which did not have net worth of Rs. 500 crore or above, did not have turnover of Rs. 1000 crore or above and not even had the net profit of Rs. 5 crore or more in the immediately preceding financial year; but had net profit of Rs. 5 crore or more in any of the three preceding financial years,

On harmonious reading of Section 135(1) and rule 3(2), it appeared that:

The provisions of Section 135(1) will have to be read for the purpose of initiation of applicability of CSR provisions  whereas Rule 3(2) will have to be read for the purpose of deciding till which financial year, the CSR provisions shall remain applicable, i.e., if in any immediately preceding financial year, the criteria under Section 135(1) are triggered, CSR provisions will become applicable. But just because in any one financial year, a Company did not meet the criteria specified under Section 135(1), it will not be allowed to discontinue the CSR activities. Only if a company did not meet the criteria specified under Section 135(1) for three consecutive financial years, then it can discontinue with CSR activities. But in this case, it meant that the amendment in section 135(1) done in 2018 could not be implemented at all.

To end this ambiguity, rule 3(2) has now been omitted w.e.f 20^th September, 2022.

The effect of this deletion will be that, if a Company does not fulfil criteria of net worth, turnover and net profit as on financials of FY 2021-22, but net profit was more than Rs. 5 crores in as per financials of 2020-21, then it need not comply with the CSR provisions during FY 2022-23. This means the applicability of CSR provisions may keep changing on yearly basis, depending on the financials of immediately preceding financial year only.

3. Expenditure Towards Impact Assessment

The Ministry has changed the limit up to which the expenditure incurred towards carrying out an impact assessment could be claimed as CSR expenditure for that particular financial year. The law pre-requisites certain CSR spenders above the prescribed threshold of CSR expenditure to conduct an autonomous impact assessment of the  projects undertaken by them exceeding a prescribed threshold, eventually allowing companies and investors to comprehend the impact of the social investments respectively made by them.

The new rule states that the expenditure for social impact assessment, which can be included in the CSR spending, shall not exceed 2 % of total CSR obligation for the relevant financial year or ₹50 lakh whichever is higher; unlike the earlier rule that had allowed up to 5% of the total CSR obligation for the relevant financial year or ₹50 lakh whichever is less.

The change permits higher spending on impact assessment in case of significant CSR projects.

The amendment provides relaxation to large companies doing CSR and who are mandatorily required to undertake impact assessment.

4. The course of implementing agencies have also changed and that the same is widened.

From here onwards the Section 8 Companies or registered public trust or a registered society exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 and approved under 80 G of the Income Tax Act, 1961 established by the Company or if not established by the company, then having an established track record of at least 3 years in undertaking similar activities, are eligible to act as implementing agency.

Earlier abovementioned entities registered under section 12A and approved under Section 80G of the Income Tax Act, 1961 were only recognised to act as implementing agencies.

The scope is widened and now entities who are exempted under prescribed clauses of Section 10(23C) of Income Tax Act, 1961 can also act as implementing agencies subject to registration with Ministry through filing form CSR-1.

5. Format of Annual Report on CSR – Disclosure in Board’s Report

The Ministry simultaneously also modified the format for the annual report on CSR activities to be included in the board’s report.  

The disclosures under annual report are reduced to certain extent i.e. the detailed information which is required to be given w.r.t On-going projects is now not a part of disclosure in Board report.

The Companies who have not yet approved Board’s report as on 20^th September, 2022 shall opt for disclosure w.r.t. Annual report on CSR as per new prescribed format.

These relaxations in CSR provisions will go a long way in helping corporates to carrying out CSR obligation in a proper manner.