Reform Perspective of Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020

Corporate Social Responsibility

Corporate Social Responsibility (“CSR”) is a regulatory mechanism whereby companies are made accountable for sustainable development of the society at large. A company involved in the activities of CSR is said to have its impact on the society, including the economic, social and environmental aspects. The concept of CSR is equally important to the company as well as the society. A society at large can be benefited by the CSR activities of the company and a company shall gain publicity and boost their brand value through CSR.

As part of its CSR activities, a company is expected to take initiatives to prevent pollution; manage and reduce waste; recycle; promote ecofriendly technologies, promote women empowerment , ensure gender equality; contribute to the government’s funds and projects etc.

Role of companies in CSR

Indian law has mandated CSR for companies under section 135 of the Companies Act, 2013 (“Act”) and listed out the activities which constitute CSR under Schedule VII of the Act. Thw said list under Schedule VII is deemed to be illustrative and not exhaustive.

Companies have a role to play in co-creating environmentally sustainable economies by proactively collaborating with non-governmental organizations, governments, international institutions, consumers, and the public to create rules of international trading game that globalize not just trade in goods, but make available basic human needs, recognize fundamental human rights, and preserve critical habitat and natural resources for future generations.

In Essar Oil Ltd. v. Haldar Utkarsh Samiti[1], the court reiterated this principle, emphasizing the role of voluntary organizations in  environment management.

The Supreme Court, while explaining the concept of right to life in Article 21 of the Indian Constitution, in K.M. Chinnappa v. Union of India[2] has observed as follows:

“Enjoyment of life and its attainment including the right to life with human dignity encompasses within its ambit, the protection and preservation of the environment, ecological balance free from pollution of air and water, sanitation without which life cannot be enjoyed”.

The Court further opined that preservation of material resources of the community such as forests, ponds etc. are needed to maintain ecological balance so that people would enjoy a quality of life, which is the essence of the right guaranteed under Article 21 of the Indian Constitution. The Courts have relied on this fundamental right in addressing a variety of aspects relating to protection of the environment. Rules under CSR The Ministry of Corporate Affairs (“MCA”) issued Companies (Corporate Social Responsibility Policy) Rules, 2014 (“Rules”) on February 27th, 2014 which came into effect on April 1st, 2014. These Rules apply to companies categorized under section 135 of the Act. However, in the recent times during the COVID-19 pandemic, MCA has released the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 (“Draft Rules”).

These Draft Rules seem to have undergone a transformation from the root level which includes redefining of a few important terms such as: (i) Corporate Social Responsibility; (ii) CSR Policy and (iii) International Organisation.

The term ‘Corporate Social Responsibility’ has been defined to be inclusive of the activities laid down under section 135 of the Act, thereby excluding the following activities:

• activities undertaken in pursuance of normal course of business of the company.
• any activity undertaken by the company outside India.
• contribution of any amount directly or indirectly to any political party under section 182 of the Act.
• activities that significantly benefit the employees of the company and their families.

In contrast to the Rules, the Draft Rules prescribe for different mode of CSR implementation, whereby the board of the company shall ensure that the CSR activities are undertaken by a company by the following means:

• by itself;
• through a company established under section 8 of the Act;
• through any entity established under an act of Parliament or a State legislature;
• by way of collaboration with other companies;
• by engaging international organizations for designing, monitoring and evaluation of CSR projects or program as per its CSR policy.

In the event that the company undertakes its CSR activities by way of clauses (ii) or (iii) as mentioned above, such company i.e either clause (ii) company or clause (iii) company, as the case may be, must register itself with the Central Government by filling E-form CSR-1 with the Registrar.

The Draft Rules increase the onus on the board to monitor the expenditure on CSR activities. The Board is required to disclose its composition of the CSR committee so constituted for formulation of the CSR policy of the company on its website along with the display of CSR policy which is approved by the board of the company.

The initial Rules were silent on the money unspent on the CSR activities. However, the Draft Rules have taken note of this aspect and propose that the unspent money for CSR activities are to be transferred to a designated account within thirty days from the end of the financial year. Further, it is stated that the unspent money for CSR activities shall be utilized within a period of three consecutive years from the date of transfer of such unspent money.

Conclusion

The Draft Rules lay down strict measures to ensure effective implementation of CSR activities are carried out by the companies.

The introduction of E-form CSR-1 enables the Ministry to track the clause 3.4. (ii) company or 3.4. (iii) company, which is spending the CSR funds on behalf of a company.

Apart from the amendments as discussed in the Clause 3, several other measures have been proposed in the Draft Rules to ensure accountability of the companies while undertaking CSR activities.

However, the notification by the MCA proposing these Draft Rules have invited public comments and suggestions and these Draft Rules are yet to be notified.

It has further been clarified by the MCA vide circular No. 10/2020 dated March 23, 2020 that the funds spent by a company for the activities under clause (i) and (x) of the Schedule VII such as promotion of health care, disaster management and sanitation work qualify for CSR activities during the pandemic of COVID-19.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of TLH, Advocates & Solicitors.

[1] AIR 2004 SC 1834.

[2] AIR 2003 SC 724.