FAQs on Corporate Social Responsibility(CSR)
FAQs on Corporate Social Responsibility(CSR)
The Ministry of Corporate Affairs (MCA) has issued further Clarification on provisions of the Corporate Social Responsibility (CSR) vide a Circular dated 25th August 2021. The Circular contains clarifications on various issues of CSR in the form of frequently asked questions (FAQs).
Because of amendments in Section 135 of the Companies Act 2013 and the CSR Rules, MCA has released this updated set of FAQs on Corporate Social Responsibility(CSR), which supersedes all previous General Circulars/ Clarifications/ Letters of the MCA on the CSR.
The Gist of MCA Notification
As mentioned above, MCA has notified the amendments in Section 135 of the Companies Act 2013 and CSR Rules on 22nd January 2021 intending to strengthen the CSR ecosystem, by improving disclosures and by simplifying compliances. In response to such amendments, the sssssMinistry has received several references and representations from stakeholders seeking clarifications on the various issues related to CSR.
Accordingly, in suppression of clarifications and FAQs issued previously a set of FAQs along with the response of the Ministry is provided in this new circular for better understanding and facilitating effective implementation of CSR.
The updated set of FAQs on CSR by the MCA broadly explains the provisions of the CA 2013 and CSR Rules in respect of the following topics:
- Applicability of CSR
- CSR Framework
- CSR Expenditure
- CSR Activities
- CSR Implementation
- Ongoing Project
- Treatment of Unspent CSR Amount
- CSR Enforcement,
- Impact Assessment
- CSR Reporting & Disclosure
MCA FAQ on Applicability of CSR
MCA’s updated Frequently Asked Questions (FAQs) on the ‘Applicability of Corporate Social Responsibility (CSR)’ for the companies is as follows;
Companies Eligibility Criteria to Qualify for CSR
A company satisfying any of the following criteria during the immediately preceding financial year is required to comply with CSR provisions specified under section 135(1) of the Companies Act, 2013 read with the Companies (CSR Policy) Rules, 2014 :
- The net worth of the company should of rupees five hundred crores or more
- Turnover of the company need to rupees one thousand crores or more
- Net profit of the company should be rupees five crores or more
CSR for Holding or Subsidiary of a Company
The compliance with CSR requirements is specific to each company. A holding or subsidiary of a company is not required to comply with the CSR provisions unless the holding or subsidiary itself fulfills the eligibility criteria prescribed under section 135(1) stated above.
CSR for section 8 Company
Provisions of CSR apply to a section 8 Company. section 135(1) of the Act commences with the words “Every company…… ” and thus CSR provisions apply to section 8
CSR provisions to a company that has not completed the period of three financial years
MCA clarified that the provisions apply to a company that has not completed the period of three financial years since its incorporation.
If the company has not completed three financial years since its incorporation, but it satisfies any of the criteria mentioned in section 135(1), the CSR provisions including the spending of at least two percent of the average net profits made during the immediately preceding financial year(s) are applicable.
MCA’s FAQs on CSR Framework
MCA’s updated Frequently Asked Questions (FAQs) on the ‘Corporate Social Responsibility (CSR) Framework’ for the companies is explained below:
Composition of the CSR Committee
The composition of the CSR Committee for various categories of companies is given below:
- Listed companies: Three or more directors, out of which at least one shall be an independent director.
- Unlisted public companies: Three or more directors, out of which at least one shall be an independent director. However, if there is no requirement of having an independent director in the company, two or more directors.
- Private companies: Two or more directors. No independent directors are required as mentioned in the proviso under section 135(1).
- Foreign company: At least two persons out of which: (a) one shall be as specified under clause (d) of sub-section (1) of section 380 of the Act, and (b) another shall be nominated by the foreign company. [Refer rule 5(1) of the Companies (CSR Policy) Rules, 2014]
Functions of the CSR Committee
The function of the Corporate Social Responsibility Committee is as follows:
- Formulate and recommend the CSR policy to the Board
- Recommend the amount of expenditure to be incurred on CSR activities;
- Monitor the CSR policy of the company from time to time; and
- Formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the items as mentioned in rule 5(2) of the Companies (CSR Policy) Rules, 2014.
MCA’s FAQs on CSR Expenditure
CA’s updated Frequently Asked Questions (FAQs) on the ‘Corporate Social Responsibility (CSR) Expenditure’ for the companies is given below:
Calculation of Average Net Profit for CSR
The average net profit to determine the spending on CSR activities is to be computed in accordance with the provisions of section 198 of the Companies Act and will also be exclusive of the items given under rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014.
Section 198 of the Act specifies certain additions/ deletions (adjustments) to be made while calculating the net profit of a company (mainly it excludes capital payments/ receipts, income tax, set-off of past losses).
Profit before Tax (PBT) is used for computation of net profit under section 135 of the Act.
Maximum Permissible Limit for Administrative Overheads
Administrative overheads are the expenses incurred by the company for the ‘general management and administration of CSR functions. However, the expenses which are directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project or program, shall not be included in the administrative overheads.
Administrative overheads generally comprise items such as employee costs, utilities, office supplies, legal expenses, etc. However, expenses that are attributed to the project implementation shall be included in the project cost only.
Surplus arising from CSR activities
The surplus arising out of CSR activities shall be utilized only for CSR purposes. Surplus refers to income generated from the spend on CSR activities, e.g., interest income earned by the implementing agency on funds provided under CSR, revenue received from the CSR projects, disposal/ sale of materials used in CSR projects, and other similar income sources.
Funds specified for the purpose of CSR contribution
Contributions to the following funds shall be admissible as CSR expenditure:
- Swachh Bharat Kosh
- Clean Ganga Fund
- Prime Minister’s National Relief Fund (PMNRF);
- Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund); and
- Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities, and women.
MCA’s FAQs on CSR Activities
MCA’s updated Frequently Asked Questions (FAQs) on the ‘Corporate Social Responsibility (CSR) Activities’ for the companies,
Activities not eligible for CSR activity
Rule 2(1)(d) of the Companies (CSR Policy) Rules, 2014 defines CSR and the following activities are specifically excluded from being considered as eligible CSR activity:
- Activities are undertaken outside India, except for training of Indian sports personnel representing any State or Union Territory at national level or India at international level;
- Contribution of any amount, directly or indirectly, to any political party under section 182 of the Act;
- Activities benefitting employees of the company as defined in section 2(k) of the Code on Wages, 2019;
- Sponsorship activities for deriving marketing benefits for products/services;
- Activities for fulfilling statutory obligations under any law in force in India.
- Activities are undertaken in pursuance of the normal course of business of the company.
However, the exemption is provided for three financial years, till FY 2022-23, to companies engaged in R&D activities for new vaccines, drugs, and medical devices in their normal course of business, related to COVID-19. This exclusion is allowed only in case the companies are engaged in R&D in collaboration with organizations as mentioned in item (ix) of Schedule VII and disclose the same in their Board reports.
MCA’s FAQs on CSR Implementation
MCA’s updated Frequently Asked Questions (FAQs) on the ‘Corporate Social Responsibility (CSR) Implementation for the companies
Different modes of implementation of CSR activities
A company may undertake CSR activities through the following three modes of implementation:
- Implementation by the company itself
- Implementation through eligible implementing agencies as prescribed under sub-rule (1) of rule 4.
- Implementation in collaboration with one or more companies as prescribed under sub-rule (4) of rule 4.
Eligible entities for acting as an implementing agency
Rule 4(1) of the Companies (CSR Policy) Rules, 2014 provides the eligible entities which can act as an implementing agency for undertaking CSR activities.
- Entity established by the company itself or along with any other company:– a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961.
- Entity established by the Central Government or State Government:– a company established under section 8 of the Act, or a registered trust or a registered society.
- Statutory bodies:– any entity established under an Act of Parliament or a State legislature.
- Other bodies:– a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.
MCA’s FAQs on CSR Ongoing Project
The ongoing project has been defined under rule 2(1)(i) of the Companies (CSR Policy) Rules, 2014 as follows:
- A multi-year project, stretching over more than one financial year;
- Having a timeline not exceeding three years excluding the year of commencement;
Includes 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.
MCA’s FAQs on Treatment of Unspent CSR Amount
If a company spends less than the amount required to be spent under their CSR obligation, the Board shall specify the reasons for not spending in the Board’s report and shall deal with the unspent amount in the following manner:
Nature of unspent amount
|Unspent amount pertains to ‘ongoing projects’||Transfer such unspent amount to a separate bank account of the company to be called as ‘Unspent CSR Account’.||Within 30 days from the end of the
|Unspent amount pertains to ‘other than ongoing projects’||Transfer unspent amount to any fund included in Schedule VII of the Act.||Within 6 months from the end of the financial year.|
MCA’s FAQs on CSR Impact Assessment
The objective of providing impact assessment of CSR activities
The purpose of impact assessment is to assess the social impact of a particular CSR project. The intent is to encourage companies to take considered decisions before deploying CSR amounts and assess the impact of their CSR spending.
Companies are required to undertake an impact assessment
Rule 8(3) of the Companies (CSR Policy) Rules, 2014 mandates the following class of companies to conduct impact assessment:
- Companies with a minimum average CSR obligation of Rs. 10 crores or more in the immediately preceding 3 financial years
- Companies that have CSR projects with outlays of minimum Rs. 1 crore and which have been completed not less than 1 year before undertaking impact assessment.
The impact assessment shall be carried out project-wise only in cases where both the above conditions are fulfilled. In other cases, it can be taken up by the company on a voluntary basis.
MCA’s FAQs on CSR Reporting and Disclosure
As per rule 8(1) of the Companies (CSR Policy) Rules, 2014, the Board’s Report pertaining to any financial year, for a CSR-eligible company, shall include an annual report on CSR containing particulars.
The Board of Directors of the company shall mandatorily disclose the following on their website, if any, for public access:
- Composition of the CSR Committee
- CSR Policy
- Projects approved by the Board
As per rule 9 of the Companies (CSR Policy) Rules, 2014, all CSR projects approved by the Board are required to be disclosed on the website of the company
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