New CSR Rules: Simply Put

CSR is now just one vertical in the ESG (Environmental, Social, and Governance) initiative. Nevertheless, it continues to be an important part of the private sector to give back to society. CSR became mandatory in 2014 and has since seen multiple amendments. Off late, the Ministry of Corporate Affairs has announced the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022. India Inc contributes close to 25,000 cr via CSR every year, and this activity can't be ignored. 

Let us look at what the new rules say

In rule 3: What does the ministry say?

a. Sub-rule (1), After the proviso, the following proviso shall be inserted, namely: -“Provided further that a company having any amount in its Unspent Corporate Social Responsibility Account as per sub-section (6) of section 135 shall constitute a CSR Committee and comply with the provisions contained in sub-section (2) to (6) of the said section.”

In simple words:

Every company has to spend 2 percent of its profit on social interest. The list of activities where these expenses can take place is given in schedule 7 of the act. Chapter 9, section 135, Companies Act, company CSR policy rules tells us about which companies have to comply with these rules. In a nutshell these include companies whose net worth is 500 crore, turnover is 1000 cr, and net profit is 5cr. Now companies that have unspent CSR will have to form a CSR committee as per section 2 and 6 of section 135 of CSR act. These subsections talk about the nature of company that has to be CSR compliant

b. Sub-rule (2):  It shall be omitted.

Originally, it said every company that ceases to be a company under section 2 will not be required to constitute a CSR committee.

In simple words: Companies that do not comply with the financial parameters mentioned above are not required to comply with CSR rules. This luxury has been omitted.

In rule 4 What does the ministry say?

for sub-rule (1), the following sub-rule shall be substituted, namely: -

‘(1) The Board shall ensure that the CSR activities are undertaken by the company itself or through, –

A company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act, 1961 (43 of 1961), established by the company, either singly or along with any other company; or (b) a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government; or (c) any entity established under an Act of Parliament or a State legislature; or (d) a company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.

In simple words:

This amendment makes things more specific.  Earlier it was companies that were registered under Section 8, a Registered Trust, Registered Society under section 12A, and 80G of the Income Tax Act, 1961. Previously, many organisations have gotten into trouble for violating the same. While these talk about not-for-profit companies in particular, which are required to spend 85 percent of their income on CSR and related activities, brining them under the 2 percent bracket may or may not be logical.

One issue with these amendments is not giving further clarity on where to invest their CSR money, nor are there guidelines for stakeholders who are putting immense pressure on companies off-late to become increasingly CSR compliant. However, despite its issues, in a nutshell, it is time for companies to pull up their socks. This is especially true for companies that were earlier escaping CSR activities via loopholes. The work for chartered accountants and company lawyers is cut out for them, while massive revision of company profits for smaller corporations will become the need of the hour. This is true for companies incurring losses, who will have to pay up later if not sooner.