Draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020: An Analysis

[Unnati Sinha is a second-year student at Narsee Monjee Institute of Management Studies]


Introduction

Corporate Social Responsibility (CSR) was made a statutory requirement for the very first time in the Companies Act of 2013 under Section 135. Following that, on 27 February 2014, the Firms (Corporate Social Responsibility Policy) Rules (CSR Policy Rules 2014) were published, laying out the requirements and procedures that companies must follow while fulfilling their CSR duties. The Companies Amendment Acts of 2019 and 2020 made significant revisions to Section 135 of the Companies Act's CSR clause. The Companies Amendment Act was further modified in the subsequent years of 2015, 2017, 2019 and 2020. The aim of the modification has varied over all these years, spanning from convenience of business operations to corporate life. On 18 September 2019, the government established a Company Law Committee with the objective of making life easier for law-abiding companies. The Companies (Amendment) Bill 2020 (CAB) was tabled in the Lok Sabha on 17 March 2020, proposing changes to the Companies Act 2013 (Act). Due to the spread of COVID-19 Pandemic, the Parliament has been deferred sine die since the spread of the COVID-19 pandemic on 23 March 2020 and the proposal is still to be sanctioned; However, it has now been asserted that, if needed, the government is enthusiastic for implementing the proposed amendments swiftly through a legislation. A thorough examination of the revisions presented is required to determine if the structural improvements offered in CAB 2020 are a move in the right direction.


Companies Amendment Bill, 2020

The CAB 2020 was formed in September under the presidency of Shri Injeti Srinivas and was built onto to the Committee on Company Law (CLC). The CAB 2020, for example, allows for the following:

1. Decriminalize offenses that can be accurately quantified and have no sense of illegality, or that do not provide a greater public gain under the Act.

2. Making up for the lack of adequate pay for non-executive directors in the case of inadequate revenues by matching it with the regulations on executive director compensation in such situations.

3. Creating a new Chapter XXIA in the Manufacturer Companies Act (MCA), which was formerly included in the Companies Act of 1956 (Act).

4. Establishing Regional Corporate Law Appeal Tribunals.

5. Easing rules pertaining to the imposition of larger default extra costs on two or more times when submitting, filing, enrolling, or documenting any document, information, or data as required by Section 403.

6. Extending the application of Section 446B, which provides for lesser fines for small and one-person businesses, to all parts of the Act that impose punitive damages, as well as manufacturers and start-up businesses.


Evolution and Development

By defining new words such Administrative Overheads, International Organization, and Public Authority, the Proposed Regulations have made significant revisions to the description clause of the CSR Policy Rules 2014. It has also introduced certain adjustments to the traditional concepts of corporate social responsibility and corporate social responsibility policy.


The Board was obligated to make sure that administration overheads paid in advancement of CSR did not exceed 5% of the company's overall CSR spending under Rule 7(1) of the Draft Rules. The definition of administrative overheads, on the other hand, was not defined in the Draft Rules. The addition of a description to the word in the New Rules is a positive move that provides firms with more clarification.

Corporate Social Responsibility is now stated in Section 2(d) of the Companies Act to relate to actions performed by a company in order to meet its CSR obligations under the Companies Act as a consequence of the New Rules. The revised rule also specifies the following actions as not qualifying for a company's CSR necessity:

Activities carried out in the context of the corporation's regular operations. Even so, in light of the COVID disease outbreak, special consideration was developed by MCA notification dated 24 August 2020, enables corporations involved in discovery and development of new vaccines, drugs, and medical equipment in their ordinary course of events to use such research and development as their CSR duty for three financial years with regards to COVID-19 (from 2020 to 2023). This exemption has been properly integrated into the New Rules, but only under the following requirements:

· These research and development activities must be developed in cooperation with any of the institutions or entities listed in item (ix) of Schedule VII of the Act, such as public financed universities, IITs, and the Indian Council for Medical Research (ICMR), among others.

· Information of such activities are included in the Financial Statement on CSR, which will be included in the Board's Report.

· With the exception of coaching of Indian sports professionals serving any State or Union Territory at a national scale or India at an international level, any exercise conducted by the firm outside India is not deemed CSR.

· Activities benefiting workers of the firm as described in Section 2(k) of the Code on Wages, 2019 do not count as CSR; contributions made explicitly or implicitly to any political organization under Section 182 of the Act by a corporation do not constitute as CSR.

· Activities carried out for the accomplishment of any other statutory requirements under any legislation in effect in India; actions funded by corporations on a funding basis in order to get business benefits for their goods or services.


CSR Policy is now defined in Section 2(e) as a statement containing the method and direction taken by a company's board of directors, bearing in mind the suggestions of its CSR Committee, and including moral principles for activity selection, execution, and surveillance, as well as the synthesis of an annual strategic plan.

The Proposed Regulations are more thorough than the old ones. Previously, the appropriate clause could be located in Rule 6 of the CSR Policy Rules 2014, which said that the mechanisms of implementation and deployment schedule of CSR projects are a component of the CSR Policy, but did not specify how to design them or who was accountable for doing so. The former Rule 6 pertaining with CSR Policy has been eliminated as a part of the recent provision.


The phrase 'ongoing project,' which was referenced in passing in the CSR Policy Rules 2014, has ultimately been described as a multi-initiative conducted by a firm in satisfaction of its CSR responsibility, with a maximum period of four years (three years excluding the year of commencement as mentioned in the New Rules). The term also covers initiatives that were not authorized as multi-year at the outset but were subsequently spread by the Board further than year on acceptable grounds.

Companies with current projects have additional obligations, such as the duty to oversee their execution in accordance with agreed deadlines under Rule 4(6) of the New Rules.


Concluding Remarks

India's CSR regulation has been revised by the Companies (CSR Policy) Amendment Rules 2021. The New Rules have launched innovative prerequisites such as impact analysis of CSR efforts and involvement of international groups for CSR projects, in addition to offering influence modifications introduced to Section 135 of the Companies Act as a consequence of the Companies Amendment Acts of 2019 (regarding transfer of unspent CSR amount) and Companies Amendment Act 2020 (regarding setting off of excess CSR expenditure). Even in terms of topics already contained in the 2014 Rules, such as the definition of CSR, CSR Policy, and CSR Execution, the New Rules appeared to be more extensive and explicit.

This is welcomed since it has decreased a company's extreme liberty, increased transparency, and established some consistency by spelling down the processes to be followed in specific situations. Some regulations remain ambiguous, such as Rule 10 of the New Rules, which refers to the transmission of unexpended CSR funds to funds listed in Schedule VII but does not tackle the concerns of establishing a new Fund for the meaning of Section 135(5) and 135(6) of the Companies Act, as mentioned in the Draft Rules of 2020.

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