CSR Draft Rules Strict on Charitable Trusts

The Ministry of Corporate Affairs (MCA) has released the Draft Companies (CSR Policy) Amendment Rules, 2020 proposing amendments to CSR policy rules of the Companies Act, for public comments. Among other things, the new CSR draft rules will clamp down on trusts and foundations to avoid misuse of CSR funds.

In the past, charitable trusts have been hired by several large companies to comply with the mandatory CSR spending on paper and fool the MCA. While these foundations and trusts receive a cut of the funds, the money that is supposedly spent on CSR activities is funnelled back into the company. The Indian government had earlier clarified that without a specific written complaint there was little they were willing to do on misuse of these funds, which didn’t help matters either.

What is new under the CSR draft rules?

Under Clause 4(2)(a) of the Existing rules, the Company may by itself or along with any other company can carry out the CSR activities, through a Section 8 Company or Registered Trust or Registered Society. This proviso enabled the Companies to route their CSR expenditure through Registered Trusts / Registered Societies if they fulfil the eligibility criterion. However, this proviso has been missing under the Draft Rules. Thus, Registered Trusts or Registered Societies cannot be used for channeling the CSR Expenditure by the Companies in the revised Rules.

However, the revised rules will not have any impact on the CSR Projects / Programmes which were approved prior to the notification of the Revised Rules. This implies for the projects which were approved under the existing rules, even if the conditions specified in Rule 4 of the Draft Revised Rules are not complied, they can be continued.

Spending on employees and events

While the existing rules provide a blanket ban on the expenditure for the benefit only for the employees of the company and their families to be considered as CSR Expenditure, the amended Rule prescribes a threshold up to which such expenditure can be considered as CSR expenditure and if the threshold is exceeded then such expenditure will not be covered as CSR Expenditure. Only such activities which cover less than 25% of its employees as its beneficiaries will be covered as CSR activity as per the revised rules.

One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure. Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act.

Change in definition of CSR policy

The Draft Rules define CSR Policy as:

“CSR Policy” means a statement containing the approach and direction given by the board of a company, as per recommendations of its CSR Committee, for selection, implementation and monitoring of activities to be undertaken in areas or subjects specified in Schedule VII of the Act.”

This definition is more elaborate than the earlier definition and explicitly mentions what should be covered under CSR policy and how should the CSR Policy be made.

Administrative expenditure

Administrative Expenditure shall not be more than 5% of the Total CSR Expenditure. This means the Administrative Expenditure in the Company spending on CSR activities, the administrative expenditure shall not be more than 5%. However, if the CSR Activities are being done by another company, then this limit is not applicable because of the use of words “administrative overheads incurred in pursuance of sub-section (4) (b) of section 135 of the Act” which shall not cover the activities per se. If the Impact Assessment is also conducted in a particular financial year then the limit is increase to 10%.

Unspent CSR funds

Surplus or unspent CSR funds shall be transferred to Unspent CSR Account and spent only on CSR Activities.

Unspent Balances of CSR funds as of the date of notification of the revised rules shall be transferred to an account designated as Unspent Corporate Social Responsibility Account’ within 30 days of end of Financial year 2020-21 i.e. 30th April 2021. Such unspent balance shall be spent within a period of three financial years from the date of such transfer i.e. three years from the date of transfer.

Further unspent balance after the expiry of the three years prescribed shall be transferred to a Fund specified under Schedule VII in this regard within 30 days. Amount transferred to ‘Unspent CSR Account’ pursuant to sub-rule (4) of Rule 7 of Companies (CSR Policy) Rules, 2014 for the financial year 2014-15 to 2019-20.

The Ministry of Corporate Affairs is taking complaints of money laundering seriously with respect to the growing sector of corporate social responsibility. The new CSR draft rules proposed by the MCA in 2020 are a step towards curbing the misuse of this money.