Analysis of Companies (Corporate Social Responsibility) Amendment Rules, 2021: A Complete Overhaul
Corporate Social Responsibility (“CSR”) was introduced as a statutory obligation in India under Section 135 of the Companies Act, 2013, effective from April 1st, 2014. The Section requires companies with a specific turnover and profitability to spend 2% of their net profits for the last three years to invest in a philanthropic, social or charitable organisation as part of their CSR structure. However, what has been peculiar is the fact that despite the legal mandate of the Section, companies have failed to implement CSR adequately.
In this context, the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“Rules”) was formed in furtherance of Section 135 of the Companies Act, 2013. These Rules came into effect on April 1st, 2014 and laid down the procedure to be adopted by companies while dealing with CSR. Only recently, effective from 22nd January, 2021, an amendment was made to the Companies (Corporate Social Responsibility Policy) Rules, 2014 via the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021. This article aims to analyse the new amendments aimed to revise the CSR process within India. Although the Rules have made drastic changes to strengthen the mandatory process of CSR in multinational companies in India, the law has become more strenuous, thereby furthering the gap between the law and he actual implementation of it.
The Current CSR Regime in India
Section 135 read with the 2021 Rules have created a stringent regulatory framework that reinforces the legal mandate of CSR. However, post the introduction of these new Rules, the CSR regime has become too prescriptive, as will be noted subsequently. This is tricky as corporations require flexibility to fulfil their CSR obligations and the rigidity may act as a deterrence for many, especially after imprisonment provisions in case of non-compliance were revoked. Moreover, since the law has only been recently enacted, time will confirm its success in ensuring compliance with the CSR structure. Thus, unless amendments are made, the new Rules aimed to improve the CSR process may actually cause more harm than good.
Rule 2 of the CSR Rules: A Double Edged Sword
The first major change was within the definitions clause under Rule 2. “Administrative Overhead” was included under Rule 2(b) to refer to expenses incurred by the company for ‘general management and administration’ in relation to its CSR functions. In addition, the terms “International Organization”, “Ongoing Project”, and “Public Authority” were added as Rule 2(g), Rule 2(i) and (j) respectively. CSR had also been redefined under Rule 2(d) of the Rules, and the new definition lays down the ambit of activities that fall under CSR. This amended definition correctly took into account the Covid-19 pandemic through the MCA notification dated August 24th 2020, which allows for companies to access drugs and medical devices related to COVID-19 while indulging in research and development of the new vaccine. Inclusion of companies’ expenditure to fight the pandemic as a valid CSR activity is a step in the right direction. Even though the inclusion of new terms within the ambit of Rule 2 has brought clarity and is a welcoming change especially with regard to Rule2 (g) and 2(j), there are still certain issues. What constitutes as ‘general management and administration’ under Rule 2(b) is still unclear, Ongoing Projects add to corporate’s responsibilities as they require monitoring of implementation under Rule 4(6) and further, there is no mention of projects that go beyond the permitted 4 year period within Rule 2(i).
Rule 4 and 5 of the CSR Rules: Governance of CSR Activities and the formation of a CSR Committee
The next set of modifications were made to Rule 4, which was previously labelled as ‘CSR Activities’, and now renamed as ‘CSR Implementation’. This Rule has been revamped by the amendments made to it. Rule 4(1) lays down the partners through which a company may undertake its CSR activities, to provide accountability. Furthermore, Rule 4(3) introduces the role of international organizations while Rule 4(5) now requires that the Board must be satisfied that CSR funds are utilised in the manner approved. Lastly, Rule 4(6) allows the inclusion of “ongoing projects” in CSR activities. These have broadened the mandate of CSR by bringing in new concepts which the 2014 Rules lacked. Thereafter, Rule 5 deals with CSR Committees and Rule 5(2) was amended and a new obligation was inserted, i.e., the CSR committee has to prepare an annual action plan with a detailed list of requirements. In comparison, the earlier Rules were vague regarding the constitution of a transparent monitoring mechanism. They did not lay down any requirements, but the addition of these provisions can be seen as another responsibility on the corporations.
Further amendments made to Rule 7, 8, 9 and 10 of the CSR Rules
Furthermore, Rule 7 that deals with CSR expenditure, was heavily amended under the 2021 Rules. Under the 2014 Rules, there was no division or breakup made regarding what constitutes CSR expenditure. In contrast, the 2021 Rules specify guidelines regarding the percentage of administrative overhead allowed, setting off excess amounts and surplus not included within CSR expenditure. A significant change was also made to Rule 8 with the introduction of impact assessment. Companies through an independent agency of their CSR projects having outlays of one crore rupees or more, can undertake impact study and report the same to appropriate authorities. This would ensure that there is proper monitoring and recording of the CSR process. Rule 9 has further been expanded to include CSR Committee, Policy and Projects for mandatorily displaying upon company’s website for easier access for the public, which provides transparency and accountability to the public. Lastly, Rule 10 was introduced in the 2021 Rules, which mandates companies to transfer unspent CSR to any fund mentioned under Schedule VI. Hence, this adds to the burden of compliances for corporations.
The impact of the new CSR rules has been heavily dependent on the Covid-19 pandemic, as the 2021 Rules were introduced only months prior to the second wave. The pandemic has gravely affected most corporations’ profitability that has in turn, impacted their CSR schemes. The Ministry of Corporate Affairs has been routinely widening the scope of CSR in the past few months to help corporations in their compliance towards their CSR budgets for the current financial year. However, as the new Rules have created even greater obligations for companies such as increased monitoring and evaluation through annual action plans under Rule 5, impact study assessment under Rule 8 and also for utilisation of CSR expenses under Rules 4(5) and 7, it has been even more difficult for companies to comply. Further, under Rule 7, capital assets acquired due to CSR by corporations cannot be held directly but through NGO or other beneficiaries. This causes concerns for companies who do not have their own CSR beneficiaries and it would be extremely burdensome to form new entities in the present difficult times.
As noted, massive changes were introduced via the 2021 Rules and they have completely overhauled the pre-existing CSR regime in India. In theory, the new Rules are more structured, detailed and stringent than the previous 2014 Rules, which lacked proper guidelines and where requirements were ambiguous. The previous regime allowed companies to take advantage of the Rules and operate in a manner that best suited their own interest, which was why new rules had to be introduced. As a result, the new Rules were enacted to ensure uniformity in the CSR regime while increasing transparency and accountability from companies. However, the Rules may now appear dictatorial in nature. The extensive obligations and duties upon corporations have had a far from incentivising effect upon the market, as companies lack motivation to comply with the CSR regimes, especially during the current pandemic. Moreover, the lack of criminal law penalties, as mentioned earlier, gives them an easy way out, which goes against the mandatory nature of CSR and allows it to remain voluntary. This in turn defeats the purpose of its creation in the first place. Therefore, even though the new Rules completely renovated the entire CSR process, they still fail to properly implement the concept of CSR. The need of the hour is to amend the Rules and loosen their hold to ensure transparent and adequate CSR regimes.