Opportunities After Recent Amendment in CSR Rules
Updated: May 27, 2021
The local environment of every state varies. And therefore, it is important for businesses to study the environment and applicable laws before venturing into any new geography. With limited resources and time constraints, it becomes challenging for corporates to get an in-depth understanding of state laws and protocols, and their implications in the long run.
The concept of corporate social responsibility is not new to Indian companies. The Section 293 (e) of Companies Act of 1956 had allowed up to 5% of the average profit to be spent on social activities with the approval of Board of Directors and many companies were, in fact, spending a significant amount. The Act of 2013 expanded the scope by specifying a class of profit making companies to spend 2% of their average profits on CSR activities and also developed a framework through Companies (CSR Policy) Rules, 2014. However, as no specific penalty was stipulated in the Act, the CSR activity was presumed by few companies as voluntary provision and failure to spend stipulated amount had to be accepted openly.
The liberal construction of earlier Rules were prone to misuse, while some of the provisions created unintended hurdles. CSR funds opened doors to few unscrupulous organisations, one-year time frame for execution of projects was too short for social sector, companies faced tremendous local pressure to support half baked and low impact programmes. Some of these issues were highlighted in India CSR Report 2019 brought out by Gujarat CSR Authority. It was also pointed out in the report that some of the issues emanated due to lack of preparedness of companies to effectively handle social interventions.
The amended CSR Rules are a good improvement over earlier Rules. Amendment in the Section 135 of the Act makes CSR activities mandatory for certain category of companies by imposing penalties for non-compliances. Some of the terms are now better defined in the Rules, ownership of capital assets created through CSR funds are separated from the company, compliances are stronger, CSR projects can be of longer duration and, overall, the changes try to bring about greater professionalism in handling these activities.
By restricting the eligibility of NGOs that can implement CSR projects, incorporating few best practices for project management, making Chief Finance Officer, CSR Committee and Board of Directors accountable for proper use of funds, allowing engagement of skilled organisations for development of projects, monitoring and evaluation and stipulating a well defined annual action plan, the thrust is to use the past experience for improving the impact of interventions. Another welcome improvement is to allow set off of excess expenditure incurred during earlier years.
The amendments aim to improve the impact of CSR activities. However, for this to happen, companies will have to put into place clear protocols that will be applicable to every stakeholder. Explicit guidelines will be required for selection of implementing partners and mechanisms for incentivising and penalising them, ensuring participation of equal number of women and girls at every stage, purchase procedures for implementing agencies, monitoring and evaluation, ethical conduct while dealing with project participants, convergence with other companies and government programmes and visibility of the company in project area. Public sector undertakings that face considerable interference from local pressure groups for financial support will have to develop guidelines for stakeholder management.
Used imaginatively, the Rules now permit sufficient funds to engage a capable project management agency to take up training of project staff, conducting periodic need assessment, baseline and impact assessment exercises, developing high impact project ideas, short-listing of capable implementing partners, taking up concurrent monitoring & final impact assessment, besides developing guidelines and undertaking documentation.
Some of the unanswered questions that require further clarity are whether a company that intends to directly implement its CSR programme will also have to be registered at MCA website as an implementing agency? What will happen it the capital assets are created over land belonging to the company? The difference between “Programme” and “Project” is not clear and will lead to a question whether donation to a designated Central Fund will also be treated as “Project” and covered under Rule 8 (3)?
The author, in his capacity as Chief Executive Officer of GCSRA had commissioned this report. Please see chapter-8: Path Ahead of the report that highlights some of the major concerns.  Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021  Our sister agency, One Small Solution, imparts training to PSUs and other companies on the amended CSR Rules and how to integrate CSR activities with their non-market strategy.