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THE COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) AMENDMENT RULES, 2022 – OVERVIEW AND CRITICAL ANALYSIS
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THE COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY)
AMENDMENT RULES, 2022 – OVERVIEW AND CRITICAL ANALYSIS
AUTHORED BY
- ANEESA NAHAN
ABSTRACT
The Companies (Corporate Social
Responsibility Policy) Amendment Rules, 2022 (2022 Amendment Rules) in the
place of Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR
Rules) were issued recently by the Ministry of Corporate Affairs. Recommendations
were put forward by the Competition Commission of India, Ministry of Corporate
Affairs, Competition Law Review Committee (CLRC), and other stakeholders,
researchers, FICCI, etc. in the report[1] of The Joint
Parliamentary Committee on Finance on 14-12-2021. As of now, the
Amendment Rules will be in effect in a prospective nature. Discussing Corporate
Social Responsibility following corporate governance, the laws related to CSR
in India include Section 135[2]
and Schedule VII[3]
of the Companies Act, 2013 along with the CSR Rules. In the scenario of the recent
amendment, the Ministry of Corporate Affairs also amended the Companies
(Accounts) Rules 2022 to provide a new Form
CSR-2 (Report on Corporate Social Responsibility (CSR)). In
this article, we will discuss The Companies (Corporate Social Responsibility
Policy) Amendment Rules, 2022, key changes introduced, and also the robust
nature of Corporate governance, i.e. Corporate Social Responsibility rules.
KEYWORDS: corporate governance,
Company, corporate social responsibility, Company law, economics, social goals.
INTRODUCTION
The Companies
(Corporate Social Responsibility Policy) Amendment Rules, 2022 (2022 Amendment
Rules) aimed to make changes in the Competition Act, 2002[4]
which directly going to affect mergers and acquisitions to a greater extent
with include transactions above 2000 cr would require CCI approval with a
notion to reduce the time frame and also before amendment legal entities like
individuals or organisationswere considered parties to anti-competitive
agreements. Through this bill, there was a conscious effort to broaden the organisationsor
individuals that may be partied of those agreements. Also, attempt to stop the misuse
of the dominant position were taken seriously by offering a structure for
agreements and inquiries related to reports must be hastened.
According to the bill, the
evaluation of the deals must use the value of the transaction in case of acquisition
of firms dealing in digital markets[5].
This is because they might not come under standard assets since their valuation
deeply depends on specific business innovations. The Bill requires an amount to
be deposited along appeal against the order of CCI before NCLT. The amount is
specified as 25% of the amount imposed by CCI. Furthermore, defense in the name
of Intellectual property rights can be used often but this defense can’t be
used in case of abuse of dominant position. But here the ambiguous nature in the
case of the meaning of direct, indirect, and deferred consideration exists and
also there doesn’t exist a proper guide on how
the deal value is to be calculated[6]
in the definition of the transaction.
CORPORATE SOCIAL
RESPONSIBILITY
CSR (Corporate Social Responsibility) is a responsibility that the business
world assumes following their operations on every shareholder, consumer, community,
etc. The Corporate social responsibility concept in one way or another
benefits all the above-mentioned sectors of entities as it includes treating
the stakeholders ethically in a responsible manner under international
standards, in addition that defines how corporations run their business which
results in a good overall impact on society as a whole.
The definition of Corporate social responsibility comes
under Section 135 of
the Companies Act, 2013[7]. Under this act, it states that,
(1)
Every company having a net worth of rupees five hundred crores or more, or
turnover of rupees one thousand crores or more or a net profit of rupees five
crores or more during three shall constitute a Corporate Social Responsibility Committee
of the Board consisting of three or more directors, out of which at least one
director shall be an independent director.
Sub-section 3 of section 134[8] of
the Act, states that CSR committee composition must be disclosed mandatorily.
Also, the recommendations, and reports given by the company must be taken
seriously. CSR policy must be approved by the Board of the company and all
relevant information; policies must be displayed on the company’s official
website. Also, diligence performance must be frequently confirmed and any
variation from CSR policy must be strictly corrected immediately and also
reasons for such non-performance must be stated. The calculation of average net
profit required for the above is calculated according to
Section 198 of the Companies Act, 2013.[9] Furthermore, the CSR committee
composition consists of three or more directors with
at least one independent director, and they have the responsibility of
regulating all policies related to CSR annually. Also, they must revise the
policy and further put forward the recommendations to the company annually
related CSR activities and also supervise the CSR policy of the company.
Contributions to a charitable trust or undertaking such socio innovative
project can be considered as such a socio-impact initiative towards spending
CSR amount. It can happen in the name of the company, or through its unit or
such project activity can happen through
non-governmental organisations(NGOs).[10]
Discussing exactly in numbers, as per CSR laws companies are
necessitated to be part of CSR activities, and also 2% of their average net profit from the three fiscal
years before the current one need to spend on CSR initiatives.
A Company with Rs 500 crore or more
net worth, Rs 1000 crore or more turnover, and Rs 5 crore net profit or more
must act according to the CSR provisions. Also in the case of foreign branches
those who have a branch in India must comply with CSR provisions if they match the
above number criteria. Furthermore, activities that are only beneficial for
employees, taken as a part of the course of business, sponsorship, political
contributions, and spending on statutory obligations outside India can’t be
included as a part of proper CSR spending of the company. There is an exclusion
of the above said in case of money spend on training sports entities.
EVOLUTION
OF CSR LAW
Evolutionarily
we could see 5 phases of CSR development in India. Initially in 1914 CSR was
recognized as a charity scheme. Afterward the arrival of British people and
further colonization, industrialization made significant changes in CSR too.
Major entities that had a part in the economy and considered economic factors
were TATA, Godrej, Bajaj, Birla, etc. Nevertheless, those initiatives taken by
entities were a result of government interests. Pre-independence movement just
rocketed phase II of CSR development. The need to build a healthy relationship
between consumers and stakeholders also assisted this process. Phase III of CSR
evolution was more uprooted in increasing transparency, to improve social accountability,
and that happened in the Post-independence era, where many public sector
undertakings came up, and CSR law emerged at the same time. To increase transparency,
there were workshops conducted, the aim was to improve corporate governance and
thereby reduce corporate malpractices. But the workshops weren’t a huge
success. Phase IV was characterized by replacing conventional methods of CSR
with sustainable business policies. This came along with an economic hike and
also Globalization, Privatization, and Liberalization. Many government
initiatives and policies helped the business firms to flourish at this time so
they were able to contribute to social needs thereby creating a social balance.
These contributions hustled the government the action to formulate CSR laws.
After all this again globalization was at its peak, and the country received
magnificent investments from overseas markets leading to more need to draft the
CSR law. During the 4th phase, there was an initiative from part of the
government that some firms were made to spend CSR mandatorily. Phase V was
characterized by Intellectual and social capital initiatives. This made an
effect on the product manufacturing strategy which enhanced the sustainability
of corporate along with human capital, along to grew to a stage where it could
be a substitute to enhance fair practices. Altogether Phase V aimed at society
wellness and restructuring the business. This was a sustainability-promoting
phase and helped to know the positive
impacts of industrialization in society.
ACTIVITIES
THAT CAN NOW BE INCLUDED AS CSR AS PER THE NEW AMENDMENT:
Until the
financial year 2022-2023, Covid related activities which include the company’s
working on medical services, equipment, masks, and vaccines can include those
expenditures in CSR. However, in their annual sum up/ journal, there needs to
be a separate disclosure, and also such activities must be in collaboration
with the institute specified in Schedule VII of act.[11]
The organizations, self-help groups, and
public organisationsmust own the assets and projects which utilized the CSR
fund.
Until the financial year 2022-2023,
Covid related activities which include the company’s working on medical
services, equipment, masks, and vaccines can include those expenditures in CSR.
However, in their annual sum up/ journal, there needs to be a separate
disclosure and also such activities must be in collaboration with the institute
specified in Schedule VII of act[12]
within 30 days (like PM National Relief Fund, PM Cares Fund etc. Furthermore if
the reallocation of funds happens to any CSR project, the within 6 months of
the end of the financial year, all unspent money has to be transferred to any
Schedule VII[13]
specified funds. Additionally in case any surplus amount of CSR activities, then
could spend on same project, transferred to an unspent CSR account and also
could transfer to the funds in Schedule VII of act.[14]
Also if a company ceases to be a
company under section 135(1) of the companies act[15]
for a period of three consecutive financial years, then no need to comply with
CSR mandatory provisions.[16]
On harmonious reading of Section
135(1) and Rule 3(2), we get to know that: For initiating the application of
the CSR scheme we need to read Section 135(1) and Rule (3) gives an idea of
till which financial year CSR applicability exists. There is an important point
to add here, i.e. for any one financial year, if a company doesn’t meet the
criteria mentioned under sec 135(1) doesn’t exclude it from CSR-related
activities. Therefore the word ‘three consecutive financial years’ has its
significance. Always there was an ambiguity related to rule 3(2) and now it's
been omitted accordingly.
NEW FORMAT OF ANNUAL REPORT ON
CSR
The government
has released a new modified format for the annual report on CSR-related
activities. This new format seems to be more comprehensive and also synced with
newly introduced changes in CSR rules. The disclosure amount has been reduced
dramatically. Now there is no obligation to provide CSR project-specific
information in detail. This relaxation will help corporates to go on with their
business in an easy manner and to oblige the CSR provisions properly.
Additionally, the CSR committee composition is required to provide a summary of
CSR projects carried out and hyperlinks to CSR initiatives implemented. Also in
the annual report, there need to publish the CSR amount allocated to ongoing
projects, also information regarding excess or unspent CSR amount if any for
the preceding three financial years. Also, details of assets brought by CSR
amount need to be disclosed in the new format of the report. Additionally if
the company in the three preceding financial years fails to spend 2% of average
net profits, reasons for such a failure must be provided in the report.
INTERNATIONAL ORGANISATION’S AID
PROVISION
In the
history of CSR rules, the First time amendment allowed corporates to receive
assistance from international organisations and thereby allowing them to play a
role in the corporate governance ecosystem. The definition of an international
organization is defined under the United Nations (Privileges and
Immunities) Act, 1947.[17]
Thus this covers entities like ILO, UNESCO, WHO, the Food and Agriculture, etc.[18] under this newly added rule provision
companies can appoint an international organization for evaluating CSR
projects, supervising same as per its policy. However, there is a cap of five
percent, if it is related to general management area and administration of CSR
functions, on administrative overheads.
CASE STUDY: HOW HAVE CSR PRACTICES IMPACTED
THE COMPANIES BOOST OPPORTUNITIES
CSR has attracted new business
opportunities and created job opportunities. In this section, we are going to
discuss the positive social impact of CSR and also the business aspect of CSR
through two case studies.
In the year 1921 Nestle started their
business and they had their major activities in developed foreign countries.
Nestle was established as one of the world's largest renowned food and beverage
companies. Around the 1960s Nestle attempted to enter the Indian market. At
that time India was facing severe poverty and economic disaster. Nestle
contributed to Indian Economy through CSR provision. Furthermore indulging in
that activity Nestle helped the farmers, peasants, and dairy sector. CSR
increased the reputation of companies and at the same time created a sense of
trust among the consumers and stakeholders, also helped to boost the Indian
economy by creating job opportunities. As time passed business flourished,
supply and chain management got strengthened, more foreign investments came
also the ratio of charitable contributions also increased. We could conclude 3
types of hypotheses from the above case study regarding CSR policy. The first
one is the sustainable business model put forward by Nestle, which helped all
level employers in the long run. Secondly, the value creation model was rooted
in loyalty towards enterprise from employees and consumers. Also, the surplus
made by the enterprise was equally shared among underprivileged people through
this policy, gradient among customer trust, satisfied employees, and market
shares were steady. Thirdly, to implement CSR and thereby build True value for
the enterprise, the major driving forces are increased market share and
satisfied customers. These are all conclusions we could drive from above and
also the benefits of implementing CSR policy.
In Polycab Wires (P.) Ltd.,
In re,[19] here
the applicant, who is a dealer in electrical goods, had supplied electrical
items to Kerala State Electricity Board (KSEB) through its distributors spread
across the State in connection with reinstating connectivity as a part of the ‘mission
connectivity’. The applicant also distributed cables, fans, etc. without
collecting money under CSR expenses to the people of flood-affected areas.
Afterward in the invoice issued, the distributor valued the goods and it was
shown as a 100% discount. In the preliminary ruling, it was required to
"Determine the GST liability of free supplies to KSEB by the petitioner's
distributors for restoration of connectivity in flood-affected areas and
admissibility of the input tax credit on the purchase of such goods. Thus,
under Section 17(5)(h)[20]
of the applicability of CSR expenditure under the KSGST Act and the CGST Act[21]
under which no ITC can be claimed.
The expenses incurred as a result of
CSR will not be considered in the “furtherance of business”. This can be
concluded from GST provisions. But CSR boosts the business profitability and
also thereby increases the corporate financial performance. Thus we could say
in a matter that say that CSR expenses are “in furtherance of business”. But as
far as we consider the laws and related provisions, CSR expenses are still not
seen in a business profitability aspect.
CONCLUSION
To strengthen the CSR regime in India
the 2022 Amendment Rules are very essential. 2022 Amendment rules include a
broader spectrum of entities. After this more corporates were eligible for CSR
activities and related project implementation. There have been enormous changes
in the role of the business sector worldwide. The growth of poor nations has
taken a major turn on financing and new businesses. The organisationsof the
21st century will have no real option except to follow CSR. CSR policies become
increasingly crucial for whatever business's existence as a result of
globalization and liberalization. Additionally, existing key requirements like
the CSR committee constitution, the format of reporting, CSR expenditure norms,
etc were more justified and explained due to Amended CSR rules.
However, some drawbacks need to be
discussed which include the new format of CSR being made applicable for the
financial year commencing on or after 1,2020 instead of on or after April 1,
2022, itself creates an impression of inadequate drafting by the Ministry of
Corporate Affairs. Additionally releasing a new format of CSR REPORT on 2022
says its implementation from financial year 2020 itself drew the practical
difficulty in implementation. Furthermore, Rule 3 was omitted and the effect of
this deletion includes that suppose if a company’s net worth was more than Rs 5
crores as per financials of FY 2020-21 but if the company didn’t fulfill the
criteria of turnover and net profit in the financial year 2021-22, then company
don’t need to comply with the CSR provisions in the financial year 2022-23.
This implies that on yearly basis applicability of CSR provisions may keep on
changing. Therefore there has to be more clarification, excellent drafting, and
provide appropriate time to constitute the CSR committee. Also, Ministry needs
to make sure that supervisory activities, management activities, composition,
constitution, and election of CSR committee members happen judicially.
[1] Joint Parliamentary
Standing Committee on Finance, Report on Competition (Amendment) Bill, 2022, <https://164.100.47.193/lsscommittee/Finance/17_Finance_52.pdf>.
[2] Companies Act 2013, s.135
[3] Companies Act 2013, schedule
VII
[4] Competition Act 2002
[5] Pavan Burugula, “Anti-trust
Regulator to get a Say in Global Digital M&As”, The Economic Times
(8-8-2022), <https://economictimes.indiatimes.com/tech/technology/global-digital-ma-set-to-come-under-the-purview-of-anti-trust-regulator/articleshow/93413829.cms?from=mdr>.
[6] Pavan Burugula,
“India Inc Worried over Lower Deal Value Limit under Competition Bill”, The
Economic Times (26-11-2022), <https://economictimes.indiatimes.com/news/india/india-inc-worried-over-lower-deal-value-limit-under-competition-bill/articleshow/95773652.cms?from=mdr>.
[8] Companies Act, 2013, s. 134
[9] Companies Act, s.198
[10] Nilesh Vasa
and Anindita Sarkar, A taxing “Corporate Social Responsibility for Companies under GST?” dated 14-5-2018 published
in LSI LawStreetIndia.
[11] Companies Act 2013, schedule VII
[12] Ibid
[13] Ibid
[14] Ibid
[15] Companies Act 2013, sec 135(1)
[16] Companies (Corporate Social Responsibility Policy) Rules 2022,
Rule 3(2)
[20] Kerala General Sales Tax Act 1963,
sec 17(5)(h)
[21] Central Goods and Service Act 2017
Article Information
THE COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) AMENDMENT RULES, 2022 – OVERVIEW AND CRITICAL ANALYSIS
Authors: ANEESA NAHAN
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/07/21
- Issue 7
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International Journal for Legal Research and Analysis
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