Corporate Laws Newsletter: Corporate Social Responsibility provisions- Significant Amendments-Feb-2021

In a significant move to boost transparency and effectiveness, the Ministry of Corporate Affairs (MCA) has introduced major changes to the corporate social responsibility (“CSR”) regime in India through notifications dated January 22, 2021. Section 135 of the Companies Act, 2013 (“Act”) has been amended vide the Companies (Amendment) Act, 20191 to clarify that calculation of the 2% amount of average net profits for the entities who have not completed three financial years since incorporation, will now make the contribution based on calculations made since its incorporation, during such immediately preceding financial years. In addition, a mechanism to deal with any unspent amount pursuant to any ongoing project has been prescribed.

Companies need to transfer the amount within 30 days from the end of the financial year to the unspent corporate social responsibility account and such should be spent by it within 3 financial years from the date of transfer, post which the fund must be transferred in accordance with Schedule VII of the Act. A penalty clause for both company and every officer in default has been introduced2 . In furtherance to the above, the MCA has notified3 Corporate Social Responsibility (Amendment) Rules, 2021 (“CSR Rules”) providing a framework for implementing the changes introduced in Section 135 of the Act.

Some important amendments introduced through the CSR Rules are discussed below:

(a) With effect from April 1, 2021, entities covered under the CSR Rules intending to undertake CSR activity are required to register themselves by filing of Form CSR-1 with the MCA.

(b) Definition of CSR has certain exclusions consisting of activity undertaken by the company outside India except for training of Indian sports, contributions to political parties, expenses for the benefit of employees, fulfilment of any other statutory obligations, activities in normal course of business, sponsorship events for benefits of own products and services and so on.

(c) CSR Committee is now required to formulate an annual plan of action which the Board may alter based on the recommendations of the CSR committee.

(d) Board will be required to monitor the implementation of CSR projects and shall have a right to suggest modifications.

(e) Companies which have an annual CSR obligation of minimum INR 10 Crore in 3 preceding financial years shall undertake impact assessment for their projects having a value of more than or equal to INR 1 Crore and such impact assessment report shall form part of the annual board report.

(f) Information pertaining to excess CSR funds carried forward/ set-off, surplus generated through CSR activities, unspent CSR funds, ongoing projects for CSR will be required to be disclosed in the annual reports. The amendments in the Act as well as the rules governing CSR have focused on internal control, transparency and accountability. The newly introduced CSR Rules have brought about significant amount of clarity and transparency in implementation of the CSR regime in India along with ensuring stricter accountability in case of default on the part of the company and its officers.

Important Amendments in the Foreign Contribution (Regulation) Act, 2010

The Foreign Contribution (Regulation) Act 2010 (“FCRA”) was introduced with the objective to regulate the acceptance, utilization and disclosures of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilization of foreign contribution or foreign hospitality for any activities detrimental to national interest and for matters connected therewith or incidental thereto. The Foreign Contribution (Regulation) Amendment Act, 20204 has brought about some important changes in the FCRA.

Few key changes are discussed below:

(a) Public servants5 are now included in the list of parties that are prohibited from accepting any foreign contributions.

(b) Persons who is registered and granted certificate or has obtained prior permission under FCRA and receives any foreign contribution, is prohibited from transferring such foreign contribution to any other person.

(c) Cap on utilisation of foreign contribution for administrative expenses is reduced from 50% to 20%.

(d) Every person receiving foreign contribution is now required to open an “FCRA Account” dedicated for deposit/credit of foreign contribution.

(e) Certificate of registration of a registered person may be suspended by the Central Government for a period of up to 360 days.

(f) Voluntary surrender of registration certificate may be permitted provided the Central Government is convinced that such person has not contravened the provisions of FCRA.

(g) Any person seeking prior permission, registration or renewal of registration is required to provide Adhaar details for all its office bearers, directors for the purpose of identification.

The amendments introduced in FCRA are intended to provide clarity, strengthen the compliance, increase transparency in the receipt and utilisation of foreign contributions. Amendments would definitely facilitate the Central Government to monitor all the foreign contributions received and utilised. However, given the stringent provisions introduced through the amendments, the foreign contributions received especially by charitable institutions, NGOs may be impacted and such recipients of foreign contributions will be required to ensure due diligence in view of the amendments.