Thursday, January 28, 2021

Further Analysis of CSR Provisions 2021

We had written a brief on the recent changes in CSR requirements by Companies here. We are now delving on a few other details of such changes in light of the Companies (Amendment) Act 2020.

Set-off Provisions

If the company spends an amount exceeding the required 2% of average net profits for the 3 immediately preceding financial years, such excess amount may be set off against the requirement to spend in the immediate succeeding 3 financial years subject to the following conditions:
(i) Excess amount available for set off shall not include the surplus arising out of the CSR activities;
(ii) Board of Directors shall pass a resolution to that effect.

Consequence of Not Spending on CSR

If a company does not spend the amount as required to be spent under CSR provisions, the company shall be liable to the following as per the Companies (Amendment) Act 2020:
(i) Penalty of two times the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent CSR Account, as the case may be, or Rs. 1 crore, whichever is less; and (ii) Every officer of the company who is in default shall be liable to a penalty of 1/10th of the amount required to be transferred by the company to such Fund, or the Unspent CSR Account, as the case may be, or Rs. 2 lacs, whichever is less.

According to the amendments to CSR Rules 2021, until a fund is specified in Schedule VII for the purposes of section 135(5) and (6) of the Act, the unspent CSR amount, if any, shall be transferred by the company to any fund included in schedule VII of the Act.

Thus, the CSR liability of 2% of average profits, as applicable, may either be spent on CSR activities or transferred to a Fund as specified.

Requirement for CSR Committee

Where the amount to be spent by a company for CSR does not exceed Rs. 50 lakhs in a financial year, a CSR Committee is not required to be formed.

In such cases, the Board of Directors may fulfill the duties otherwise to be carried out by such Committee.

A resolution for dissolution of CSR Committee may be passed by the Board of Directors in its meeting.

Defining "Ongoing Projects"

An "Ongoing Project" means a multi-year project undertaken by a company in fulfilment of its CSR obligation having timelines not exceeding 3 years excluding the financial year in which it was commenced. However, it shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond 1 year by the Board based on reasonable justification.

The said ongoing project shall be disclosed in the Annual Report on CSR Activities as annexure to the Directors' Report.

CSR Expenditure, Administrative Overheads and Capital Asset

(i) The Directors shall ensure that Administrative Overheads shall not exceed 5% of total CSR expenditure of the company for the financial year.

(ii) Any surplus arising out of CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year.

(iii) The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by a Company established under Section 8 of the Act, or Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number; or by the Beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or by a Public Authority.

Disclosure on the Website

The website of the company should mandatorily disclose:
(i) Composition of the CSR Committee
(ii) The CSR Policy
(iii) Projects approved by the Board

Statutory Auditor's Responsibility

The Statutory Auditor shall comment on the following as per CARO 2020:

(i) whether, in respect of other than ongoing projects, the company has transferred unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of 6 months of the expiry of the financial year in compliance with second proviso to section 135(5) of the said Act; and

(ii) whether any amount remaining unspent under section 135(5) of the Companies Act, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of section 135(6) of the said Act.