I. Introduction

The Companies Act, 2013 (“Act”) read with the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”) and the circulars issued by the Ministry of Corporate Affairs (“MCA”) from time to time lays down the primary legal framework for mandatory Corporate Social Responsibility (“CSR”) spends by companies in India. The provisions relating to CSR have been amended over the years, and the CSR regime underwent a significant overhaul pursuant to the amendments notified on January 22, 2021 (“2021 Amendments”) – which inter alia introduced mandatory obligation to ‘spend or transfer’ the prescribed CSR spends, registration of implementing agencies, requirement to transfer capital assets created or acquired from CSR funds as well as enhanced monitoring and reporting obligations on companies. A summary of key changes brought about by the 2021 Amendments can be found here.

By way of its General Circular No. 14 / 2021 dated August 25, 2021, MCA issued its responses to frequently asked questions (FAQs) on CSR (“CSR FAQs”), to clarify various queries arising from the 2021 Amendments. This post sets out the practical challenges being faced by the key stakeholders and learnings since the overhaul of CSR regime pursuant to the 2021 Amendments.

II. Practical challenges and learnings: These include-

1. At present, the only exception for activities undertaken outside India which are eligible for CSR are training of Indian sports personnel representing any State or Union Territory at national level or India at international level. CSR projects which may involve any other activities (like educational training or scholarships) outside India are hence affected, even if they may otherwise benefit Indian residents.
2. The CSR FAQs state that the time-period of an ongoing project shall not be extended beyond its permissible limit (i.e., 1+3 financial years). This affects the ability to commit to and fund longer-term projects which may otherwise be eligible for CSR funding.
3. Post the 2021 Amendments, contribution to the corpus of an entity is no longer an admissible CSR expense. Companies need to undertake CSR activities in ‘project’ or ‘program’ mode, which requires significant resources and time for identification, planning, monitoring and implementation of CSR projects (including putting in place mechanism for monitoring end-use of funds). Of course, the option of contributing to specified government funds in Schedule VII of the Act is available.
4. Disbursal of funds per se for implementation of a project does not amount to CSR spend unless the implementing agency utilises the whole amount. The CSR Committee is required to provide for modalities of utilisation of funds in the annual action plan, and disbursal of funds has to be planned in such a manner that the disbursed amount can be utilised by the implementing agencies during the relevant financial year.
5. The board is required to satisfy itself that the disbursed CSR funds have been utilised for the purposes and in the manner as approved by it and the Chief Financial Officer (or the person responsible for financial management) is required to certify to that effect.
6. Issues often arise if companies are expected to claw back any amount that remains unspent by the implementing agency(ies) during the financial year, even for reasons beyond their control – as such unspent amount is required to be transferred to one or more funds specified in Schedule VII of the Act or the unspent CSR account (as the case may be).

The above matters have necessitated companies to put in place requisite systems and processes to address these issues and to comply with their legal obligations. These obligations lead to stringent conditions being imposed on the recipient trust(s)/entity(ies) who act as the implementing agencies for undertaking CSR projects.

III. Conclusion and way forward

The CSR regime witnessed an overhaul pursuant to the 2021 Amendments which made CSR a priority item for India Inc. and has led to an alignment of CSR activities with key societal and environmental goals. However, given that the 2021 Amendments have been in place for over three years – it may be useful to review the functioning of the CSR framework, and address the challenges identified to meet the twin goals of effective CSR while streamlining compliance requirements.