CSR Rules Amendment: MCA Proposes Increased Monitoring Of Projects By Company Boards

The Ministry of Corporate Affairs has sought increased involvement of the board of directors of companies in the monitoring of corporate social responsibility projects through proposed amendments in the CSR Rules.

The proposed changes aim to bring existing rules in line with amendments made last year in the Companies Act, 2013, which among others, mandate transfer of unspent amount relating to the ongoing projects of a company within 30 days from the end of a financial year to a designated bank account. This transformed the existing comply-or-explain approach under the Companies Act to a mandatory requirement.

Here are the key proposed changes...

Increased Monitoring Of CSR Projects

The existing CSR framework splits responsibility of implementation and monitoring of projects between the CSR committee and the board of directors. It requires the board to specify reasons for not spending the required amount under CSR.

The MCA has sought increased involvement of the board by proposing that:

• The board must satisfy itself that funds disbursed under CSR activities are utilised as per approved plans. A certification requirement reflecting this compliance has been proposed.
• It must monitor and ensure that ongoing CSR projects are implemented within permissible timelines. The proposed time limit for ongoing projects under CSR rules is three years after which any unspent amount must be transferred to a dedicated account.

Ownership Of Assets Generated Through CSR

The existing CSR rules specify that any surplus generated by a company through its CSR activities will not be considered as business profit. The existing rules, however, were silent on treatment assets generated by a company through CSR funds. To address this, the MCA has proposed that:

• Surplus generated out of CSR activity or project can be ploughed back into the same project. Alternatively, such surplus can be transferred to an account designated to hold unspent CSR amounts.
• Companies can utilise CSR funds for creation or acquisition of new assets. However, the proposed rules mandate that such assets can only be held by a “not-for-profit company”. Companies making CSR spends cannot own such assets. Existing assets created by companies using CSR funds must meet this requirement within 270 days.

CSR Spends

Activities involving usage of CSR funds only for the benefit of its employees or their relatives isn’t considered a CSR activity under existing rules. The MCA has now proposed a relaxation in this requirement, according to which:

• CSR amounts spent by a company in activities benefiting its employees would be deemed to be a CSR activity if certain conditions are met.
• Such beneficiaries mustn’t be more than twenty-five percent of the company’s headcount.

The ministry has set a deadline of March 28 for public comments on the proposed rules.