“It must be remembered that law is not a mausoleum. It is not an antique to be taken down, dusted, admired and put back on the shelf. It is rather like an old vigorous tree, having its roots in history, yet continuously taking new grafts and putting out new sprouts and occasionally dropping dead wood.”
- Justice Bhagwati in Motilal Padmapat Sugar Mills Co (P) Ltd. Uttar Pradesh,
AIR 1979 SC 621
Though the primary objective of Corporate Social Responsibility (‘CSR’) was not slated to be to bridge resource gap for the Government, the second wave of the pandemic Covid-19 has once again brought back into light the participation of Corporate India in supplementing the efforts of the Government.
Since the inception of CSR provisions, under the Companies Act, 2013 (‘2013 Act’), corporates have contributed heavy amounts to the social fabric of the country, with health care and education sectors receiving up to 65% of the total contribution[1]. As of March 2020, the corporates have spent INR 89,335 crore towards CSR contributions.
Looking at the level of its impact over the years, there were two High Level Committees (‘HLC’) that were set up to suggest necessary changes to the CSR provisions, one in 2015 and the second one in 2018. Being one of the first nations to impose CSR obligation as a statutory requirement, the provisions required modifications based on the learnings from the initial implementational years.
Accordingly, the Companies (Amendment) Act, 2020 (‘2020 Amendment’) amended the CSR provisions provided under Section 135 of the 2013 Act. The said amendment was notified on 22 January 2021, along with the Companies (Corporate Social Responsibility) Amendment Rules, 2021. These were based on the recommendation of the HLC 2018.
Due to the nature of the amounts being spent i.e., the companies are either to spend or give reasons for not spending approach, the HLC 2018 had noted that on account of various reasons such as not finding a suitable project, delay in implementation of the plan and long duration projects, lack of prior experience, etc., companies were not fully spending the allocated funds in a given financial year. Therefore, the amendments that were brought in address these issues to a large extent. Some of the significant amendments are as follows:
Shift from ‘Discretionary’ to ‘Mandatory’ regime
The provisions were initially interpreted as discretionary as, by merely specifying reasons for not spending funds towards CSR obligations in the Board Report, a company can be discharged from the obligation to undertake CSR activities.[2] The 2020 Amendment now rectifies this issue and makes it mandatory to transfer the unutilized CSR funds to funds specified under Schedule VII of the 2013 Act, within 6 months from the closure of the relevant financial year.
The HLC 2018, in its report (‘HLC 2018 Report’), noted that mandating huge spending by corporates in one year without considering financial and operational challenges will not lead to desirable outcomes. It has, therefore, recommended that unspent CSR amount for a year be transferred to a separate designated account created for the purpose, and such unspent amount, and the interest earned thereon, be spent within a period of three to five years.
Acting on the recommendations, the 2013 Act now incorporates a provision under Section 135(6) of the said Act to enable corporates to transfer unspent amounts concerning an ‘on-going project’ to a separate account designated as an ‘Unspent CSR Account’ and the amounts be spent in the next 3 financial years towards that on-going project. The amounts concerning an ‘on-going project’ remaining unspent after 3 years are to be transferred to the funds specified in Schedule VII of the 2013 Act.
Concept of On-going Project
The Companies (CSR Policy) Rules, 2014 (‘CSR Rules’) defines an ‘on-going project’ as a multi-year project undertaken by a company in fulfilment of its CSR obligations, having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the board based on reasonable justification.
To be able to claim the benefit of multi-year spending of CSR funds, a company is required to approve a CSR initiative as a multi-year project initially or extend an already approved one-year project beyond one year with reasonable justification.
The unspent CSR account to be opened under Section 135(6) of the 2013 Act is year specific. If a company has one or more multi-year projects approved by the Board, for transparency and tracking the funds, the number of unspent CSR accounts can be one for each multi-year project. General allocation to activities of NGOs may not qualify as an on-going project, as they may not have any defined timelines, which is essential to qualify as an on-going project. Further, the obligation to open an unspent CSR account is on the company and there cannot be a joint account or delegation of the obligation to the implementing agencies.
The provisions provide enough liberty to the Board of the company to decide what constitutes a multi-year project. It can be even phases of a large project, that may constitute an on-going project. Further, companies may also club multiple initiatives under one project provided there is a rationale between two or more initiatives that tie them together. The Board may also provide modifications to an ongoing project to ensure proper implementation of the ongoing project.[3]
Can the unspent amount be re-allocated to a different project?
The amounts that are required to be transferred to an unspent CSR account are the unspent amounts allocated for a project in a given financial year in the said financial year. Further, as per the annual CSR report in the specified format to be provided in the Board’s report, each project is to be assigned a Project ID. If CSR projects are recognized under different project IDs in the Board’s report, the amounts remaining unspent against an on-going project after the end of a financial year cannot be diverted to another project, as long as the project against which it was initially allocated remains incomplete.
If an on-going project is completed before the period planned, and some part of the allocated amounts are left unspent, the Board may pass a resolution, based on the recommendation of CSR Committee appointed under the 2013 Act, and allocate the amounts to other projects or transfer it to funds established in Schedule VII of the said Act. We may note that the philosophy of CSR is to engage businesses as partners in social development, wherein fiduciary duties have been cast upon directors of the company to ensure the same are implemented in the best interests, inter alia, of the community and environment[4], and therefore the transfer of CSR funds to Schedule VII specified funds is to be the last resort.
At this juncture, it is also important for the Board to carefully approve multi-year projects. Transferring more than required amounts to an unspent CSR account can result in the amounts ultimately being transferred to funds specified in Schedule VII, if they remain unspent after 3 years.
Obligations of the Board in case the amounts are transferred to a Section 8 Company, registered trust, or society
The company may engage agencies for implementing its CSR Activities. As provided in the HLC 2018 Report, mere disbursal of funds to implementing agencies is not to be construed as a company spending towards CSR. The company must ensure that the funds are utilized for the stated projects by the implementing agencies. In the event that the amounts disbursed to the implementing agencies remain unspent after a financial year, the obligation is on the company to comply with the provisions of the law and transfer the unspent CSR amounts to the funds specified under Schedule VII of the 2013 Act, and treat them as spent, once the said agencies have actually spent them. This may also be applicable to ongoing projects conducted through implementing agencies as well, but this may pose a variety of issues as to what amounts have been spent, when it comes to seeking for transfer of funds.
Parting remarks
The on-going project provisions will encourage companies to take up long-term projects that create social capital. It is recommended that companies undertake prior and proper due diligence before engaging any implementation agency for implementation of its CSR activities, as the ultimate obligation still lies with the company to ensure proper expenditure of the CSR amounts. Further with effect from financial year 2021-22, the chosen implementing agencies must be registered by filing form CSR-1 to be eligible to act as such and receive CSR funds. The amendments are based on the learnings from initial implementational years of the CSR regime and are aimed at transforming the companies into Socially Responsible Corporates (‘SRC’).
[The authors are Partner and Associate, respectively, in the Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, Hyderabad]
[1] Data as available at: https://CSR.gov.in.
[2] See HLC 2018 report dated 7 August 2019, available at: https://www.mca.gov.in/Ministry/pdf/CSRHLC_13092019.pdf
[3] See Rule 4(6) of the CSR Rules.
[4] HLC CSR Report 2018
