CSR – What is the meaning of Utilisation - MMJC

• Background

‘Corporate’ is a concept of the modern world that has separate legal entity. Corporates are allowed to undertake business activities, earn profits, and are required to pay taxes also like any other citizen. As responsible citizens, corporates are also expected to meet their obligations towards society and the environment. Corporate Social Responsibility (‘CSR’) is a mode through which corporates are expected to meet this obligation by spending at least 2% of their profits every year on any one or more areas prescribed for CSR. As the name suggests, CSR is a responsibility and hence, it is expected to be discharged like a duty.

In this article, we shall deliberate on how a corporate is expected to spend its CSR funds and what care it should take w.r.t utilisation of CSR funds?

• Mandatory spending

CSR provisions were introduced under the Companies Act, 2013, and have undergone multiple amendments over these years. Since 2013, the language of Section 135 which deals with CSR provisions indicated that corporates are expected to either spend a minimum 2% of profits OR explain the reason for not spending in the Director’s Report, although Regulator had been taking contradictory view and had been sending show cause notices to various companies which had not spent towards CSR. In order to strengthen the enforcement framework in relation to CSR spending and various other matters, MCA has again amended the CSR provisions vide the Companies (Amendment) Act, 2019 and the Companies (Amendment) Act, 2020. On 22nd January 2021, these amended provisions became effective and corresponding amendments were also made in the Companies (CSR) Rules.

Post this amendment, corporates are either required to spend complete 2% of their profits for a particular cause as prescribed under Schedule VII of the Act and as permitted by CSR Policy OR if they are not able to spend 2% of their profits, then there are two options available to them:-

• If the Company has already commenced any CSR project, then the Board of Directors can approve it as a multi-year on-going project and earmark the unspent funds and transfer it to a separate bank A/c to be opened with the name as “Unspent CSR Account for FY ____” and spend the unspent amount in three succeeding years [As per section 135(6)] OR
• In case there is no on-going project, then to transfer to the unspent CSR funds to any Fund as prescribed in Schedule VII of the Companies Act, 2013. [second proviso to section 135(5)]

In case any company does not spend the entire 2% of profits towards CSR in any particular year and if does not comply with either of the above options, then penal provisions are prescribed for this non-compliance of spending on the company and the officer in default shall also be made personally liable for the default.

• Certificate of utilisation of CSR spending

Even before the above-mentioned amendment dated 22^nd January 2021, the CSR Committee and the Board of Directors were required to monitor the utilisation of CSR spending done by the Company. Pursuant to this amendment, the Chief Financial Officer (CFO) needs to certify to the Board of Directors that “the funds disbursed have been utilised for the purposes and in the manner as approved by the Board.” [Rule 4(5) of CSR Rules]

If we refer dictionary meaning of “utilisation” in Cambridge Dictionary, it states as “the act of using something in an effective way”

In the backdrop that non-spending of CSR towards the prescribed avenues shall attract penal provisions and the responsibility to be taken by the CFO w.r.t utilisation of amounts disbursed for CSR, it becomes all the more important to understand when shall an amount disbursed will be considered as utilised and when it may not be considered as utilised?

• Contribution v/s utilisation

Section 135(3)(a) requires that “the CSR Policy shall indicate the activities to be undertaken by Company in areas or subject specified in Schedule VII.” Rule 4 of CSR Rules prescribe that “the Board shall ensure that the CSR activities are undertaken by the Company itself or through…” (certain prescribed entities, commonly referred to as ‘Implementing agencies’).

Before the above-mentioned amendment dated 22^nd January 2021, the erstwhile Rule 7 said that “CSR expenditure shall include all expenditure including contribution to corpus, or on projects or programs relating to CSR activities approved by the Board….” However, post this amendment, this provision no longer continues in CSR Rules. Instead of the concept of ‘on-going project’ has been introduced, as mentioned in the above paras, which permit the company to extend the CSR spending to 3 additional financial years (as on-going project explained in Para 2 above) instead of contribution in the same financial year towards corpus (of NGOs).

Hence a question arises that in cases where activities are undertaken through these prescribed entities (for eg: a section 8 company or Trust formed by the company itself for carrying on CSR activities), then whether disbursement of CSR funds to these entities for carrying out CSR activities shall be considered as CSR spending and utilisation of CSR funds OR whether CFO needs to monitor even at that entity level, that whether the amount disbursed to these entities for carrying out CSR activities has been utilised for these activities or not?

• Permitted contributions

It can be seen that these provisions imply that the Company needs to spend CSR amount towards activities prescribed in Schedule VII. This Schedule VII prescribes activities relating to points (i) to (xii) which may be undertaken for CSR. Among these 12 activities, the following are 2 items are in the nature of contributions:-

• Item 8 – Contribution to PM National Relief Fund or PM Cares Fund or any other Fund set up by the Central Govt ….
• Item 9 (a) – Contribution to incubators or research and development projects… and
  9(b) contribution to public funded universities … engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).

Hence, it appears that contributions made to the entities/funds mentioned in these two items shall, in itself, be considered as activities. Hence, if the contribution to these funds is approved by the Board of Directors as CSR activity, then as soon as CSR amount is transferred to these funds, it can be considered that the amount disbursed is utilized for the purpose and manner approved by the Board. The CFO need not investigate the actual utilisation of these funds.

• Agent-Principal Relationship

If the Board has approved any activity other than contribution to the above-mentioned funds, then the amount will be treated as the amount that is spent or utilised only when it reaches to the concerned beneficiary of the activity which is approved by the Board for undertaking CSR. Say for example if a company engages implementing agency to undertake CSR activity identified by the Company and Company disburses the amount to such implementing agency, it cannot be treated as utilisation of funds, unless said funds are utilised by implementing agency towards that project /activity approved by the Board.

This is because Rule 4 of CSR Rules says “the Board shall ensure that the CSR activities are undertaken by the Company itself or through…” This shows the ultimate obligation of undertaking the activity is of the Company and not of the agency which is hired by the Company for undertaking the activity. The position of implementing agency is of an Agent and the position of the Company is of Principal. Therefore, unless the amount disbursed to the Implementing agency is not utilised towards the cause, i.e., the activity approved by the Board, it will not be considered as CSR amount utilised, and hence it appears that CFO will have to check till this level and then only certify about the utilisation of CSR funds to the Board of Directors.

Recently, on 25^th August 2021, MCA came up with a circular wherein Frequently asked questions on CSR were issued, in said FAQs also, MCA clears this view that “mere disbursal of funds for implementation of project does not amount to spending unless the implementing agency utilises the whole amount.” (FAQ No. 7.4)

So notable point here is that it will not be correct compliance if the company merely disburses money to implementing agency and claims that it has fulfilled CSR obligation, but disbursal of the same along with monitoring the utilisation of funds disbersed vis-à-vis the Action Plan for the identified cause and whether ultimate beneficiary gets benefitted out of it is the litmus test to be applied to consider whether we can term it as utilisation or not.

• Some good practices which can be implemented

Some practices which corporates can adopt while undertaking CSR activities that shall lead to effective utilisation of CSR funds can be if the CSR implementation satisfies the following points:

• When it is done as duty and not as favour
• Undertaking need and impact analysis before undertaking any project/activity
• Following proper process like identifying project and laying down action plan and monitoring the same as per laid plan
• Undertaking activities with motive of public good and not blended with motive to derive benefits out of it
• When Company undertakes activities only through eligible implementing agency and monitor the same and ensure that the said implementing agency further utilises it for ultimate beneficiary
• In case any related party is involved directly or indirectly, proper processes to be followed and necessary compliance should be made

• Conclusion:

Post amendment and post-publication of CSR FAQs, the stance of MCA is quite clear that mere Post amendment and post-publication of CSR FAQs, the stance of MCA is quite clear that mere contribution or mere disbursement of funds does not amount to CSR. The objective of CSR provisions is to involve the corporates as partners in the social development process. CSR should not be interpreted as a source of financing the resource gaps in Govt. schemes but to use of corporate innovations and management skills in the delivery of “public Good.”