CSR: Game Changing Amendments

February 2021

1. Introduction

Corporate Social Responsibility or CSR has existed in some form since centuries. Historically, it manifested in community engagement backed by a belief that every company has a moral responsibility to play an active role in discharging its social obligations, provided it was economically viable. While it was never codified, but that changed with the introduction of the new Companies Act, 2013 (“Act”) which came into effect from April 1, 2014. Apart from many other changes, it incorporated a specific provision, section 135, on CSR obligations for Indian companies. And, effectively India became the first country to legislate on the subject, undertake CSR activities and mandatorily report CSR initiatives. In September 2020, section 135 was amended[1] and, on January 22, 2021 the Ministry of Corporate Affairs notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (“CSR Rules”) which have introduced many key changes to the CSR regime.

This newsletter focuses on the amendments and the modifications introduced both in the section and CSR Rules and their consequential impact.

2. The Framework and Key Changes

CSR is compulsory when companies meet or cross certain financial thresholds in the preceding financial year. These are

  • profit of INR 50 million or about USD 670,000
  • net worth of INR 5 billion or about USD 69 million
  • turnover of INR 10 billion or about USD 138 million, or

When any one is triggered, companies must constitute a CSR committee with at least 2 directors and prepare a policy specifying the CSR projects plus its monitoring process. They must spend in a financial year at least 2% of their average net profits made during the immediately three preceding financial years and the Board is also obligated to ensure that such spend is done in sync with the CSR policy.

The following amendments have been implemented in section 135.

Firstly, a new proviso has been inserted in section 135(5) which permits that where a company has spent in excess of its obligations in respect of a financial year, such excess can be set-off against its obligations for future spend. So far, there was no carry forward of excess CSR spend, but now, companies that spend more than 2% on CSR in a particular fiscal may carry it forward as credit for fulfillment of its CSR obligations for the next few years. The methodology is prescribed in Rule 7(3) of CSR Rules, which stipulate that (a) the excess amount to be utilized in the future shall not include any surplus i.e. excess of income over expenditure arising out of an implemented CSR project; (b) the board must pass a resolution about the excess available for its CSR initiatives while excluding surplus generated out of any approved CSR activity. Needless to say, this amendment is a step in the right direction since it will lower the burden to spend in a lean year.

Secondly, a new sub-section 7 stipulates that for breach of sections 135(5) and (6) a company shall be liable to pay a penalty which shall be twice the amount required to be transferred to the fund[2] specified in Schedule VII[3] or to the Unspent CSR Account (described below), as the case may be, or INR 10 million, whichever is lower. Additionally, the company’s officers responsible for the non-compliance shall be liable to penalty which may extend to 1/10th of the amount required to be transferred to the funds referred to above or INR 200,000, whichever is lower. Previously, the proposed monetary penalties were lower combined with a potential risk of imprisonment for violations. Absent risk of imprisonment, hopefully, organizations will comply voluntarily.

Section 135(6) is unchanged and stipulates that any unspent amount will have to be transferred within 30 days from the end of fiscal to a new special account called the “Unspent CSR Account.” The company will have to spend the sum in such account within three financial years from the date of such transfer, else it will have to be transferred to a fund specified in Schedule VII within thirty days from completion of the third fiscal.

3. The New CSR Rules and Impact

The changes to the Rules are bigger and effectively are aimed to provide greater accountability by the companies with respect to their CSR obligations, though some changes may prove to be onerous. Amongst others, the amended rules allow companies to undertake multi-year projects. Some important changes are listed below:

3.1        CSR Policy: has been defined in Rule 2(f) to mean a statement which articulates the approach and direction given by the Board after considering the suggestions of the CSR Committee. It covers the guiding principles leading up to the selection, implementation and monitoring of activities and formulation of an annual action plan, which did not exist before.

3.2       Registration: Companies can undertake CSR obligations by themselves or through certain specified agencies[4] who will have to be registered[5] with the government effective April 1, 2021 and mandatorily obtain a CSR registration number. These agencies include section 8[6] companies, registered public trusts, as well as certain registered societies. Going forward, entities which conduct CSR activities through private trusts will either have to stop acting as intermediaries or convert to registered public trusts. The projects undertaken prior to April 1, 2021 shall not be obligated to obtain registration.

3.3       CSR Committee & Responsibilities: Under section 135(1), a company obligated to fulfill CSR commitments has to constitute a CSR Committee consisting of three or more directors, out of which at least one must be an independent director. For unlisted public company or a private company, the CSR Committee must have two or more directors, but without an independent director. The primary functions are to (a) formulate and recommend the CSR policy, defined above, which describes the activities to be undertaken; (b) recommend the likely expenditure that may be incurred in the implementation process; and (c) monitor the CSR Policy of the company. The responsibilities have been elaborated in Rule 5 and the Committee has to, as noted before, formulate and recommend to the Board an annual action plan. Such plan should factor (a) list of the projects or programs that are approved to be undertaken in areas or subjects specified in Schedule VII; (b) their manner of execution; (c) modalities for utilization of funds and implementation schedules for the projects or programs; (d) monitoring and reporting mechanism to be followed about the projects; (e) details of the need and impact assessment regarding the projects undertaken.

3.4       Activities: The list of activities that can be undertaken has been expanded. Generally, activities undertaken as part of the normal course of business of the company do not qualify towards CSR. However, an exception was carved due to the pandemic. On August 24, 2020 the Ministry of Corporate Affairs issued a notification which permitted companies, engaged in research and development activity of new vaccine, drugs and medical devices as part of their normal course of business, to undertake R&D development related to the pandemic as their CSR obligation for three financial years, starting from the current one and until March 31, 2023. It is important that the R&D activities relating to the pandemic should be (a) done collaboratively with any institute or organizations listed in Schedule VII, item (ix), i.e., technology incubators located within academic institutions approved by the Central Government; (b) reported by the Board to the members. Further, activities undertaken outside India can constitute CSR where it is for training of sportspersons, representing at the national level or international level.

3.5       Capital Assets: A company may use CSR funds to create or acquire capital assets which will be considered its CSR spend, provided the assets are held by the following entities who should possess a CSR registration number

  • section 8 company, or a registered public trust or registered society having charitable objects and a CSR registration number;
  • beneficiaries of the CSR project such as self-help groups or collectives; or
  • a public authority.

Where capital assets were acquired prior to Jan 22, 2021 they have to be transferred to the foregoing entities within 180 days from the commencement of the CSR Rules i.e., by third week of July 2021 with the possibility of a further 90 days extension with the approval of the Board and based on reasonable justification.

3.6       Board’s obligations: The Board is now required to disclose the composition of the CSR committee, its policy and approved projects on the company’s website. It is responsible for ensuring and monitoring the projects and needs to satisfy itself that:

  • the funds disbursed for CSR have been used in accordance with its approval;
  • the progress of the ongoing projects[7] is in accordance with the approved timelines, and the funds are properly used in line with the annual allocations. If required, the Board has the ability to modify the project to ensure implementation within the overall timelines.

The CFO of the company will have to assure the Board and certify about the end-use of the funds. No timeline is prescribed for this, and it may be prudent each organization identifies its best practices in that regard Additionally, the annual report of the Board for each fiscal year has to contain a report on CSR, with details in the prescribed form. Further, the directors must ensure that the administrative overheads, as defined in the Rule 2(b), are capped to 5% of the CSR expense for the year. These are expenses incurred by a company towards general management and administration of its CSR functions and exclude expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or program.

3.7       Impact assessment: A new requirement is embodied in Rule 8(3). Every company which has an average CSR obligation of at least INR100 million or about USD 1.38 million, in the three immediately preceding financial years, is now required to undertake an impact assessment of its specified CSR activities (which have an outlay of INR 10 million or about USD 138,000) through an independent agency. The study should cover those projects which have been completed at least one year before and the reports of such assessments will have to be annexed to the Board’s CSR report.

3.8       Foreign entities: According to section 384(2) of the Act[8] CSR provisions apply to a foreign company, or a foreign company that has a branch or a project office in India, provided the threshold limits are met for the Indian business operations of such entities. Such foreign entities that file their audited and balance sheets in India are also required to contain details of CSR activity in the annual report with the prescribed information (stated in Annexure I or Annexure II of the Rules). Furthermore, Rule 4(3) permits a company to engage international organizations for designing, monitoring and evaluation of its CSR projects and for capacity building of its own personnel too for its CSR projects.

4. Conclusion  

The new rules clearly underscore the message that CSR is mandatory and a statutory obligation, making India the first country to have done so. In order to take its statutory obligations to the next level, it is necessary that companies understand that devising a persuasive CSR program, aligned and integrated with their business strategies and goals, is crucial. With these amendments, there will be accountability for social responsibility like never before and given the tightening of the regulations, it will be tough for unscrupulous entities to divert funds through trusts or section 8 companies. Hopefully, the jurisprudential principles that a company is a social institution which has to maximize social welfare and common good will get increasingly entrenched in the DNA of organizations and India Inc. will slowly, but surely, move closer towards aligning a company’s social and environmental activities with its business purpose and values, thereby making these amendments a game-changer for the world of CSR.  


Priti Suri

[1] This was done through Companies (Amendment) Act, 2020

[2] These funds include the Clean Ganga Fund, the Prime Minister’s National Relief Fund and the PM CARES fund

[3] This Schedule specifies the permissible CSR activities & includes those relating to eradicating hunger, poverty & malnutrition; providing and promoting healthcare; promoting education; environmental sustainability; promoting gender equality & women empowerment; setting up old age homes, day care centers and homes & hostels for women and orphans; and contribution to the government relief and disaster management funds

[4] These include section 8 companies, registered public trusts, as well as certain registered societies

[5] The registration requirement is provided in Rule 4(2) of CSR Rules

[6] This is an entity registered with the objective of promoting charitable causes and prohibited from distributing dividends to shareholders

[7] These are defined as projects of a long-term nature, beyond a financial year and to be completed within 3 years and includes those not approved as a multi-year project but which the Board extended for justifiable reasons

[8] Chapter XXII of the Act deals with foreign companies while 384 deals with debentures, annual return, registration of charges, books of account and their inspection