9 minute read 10 May 2021
CSR rules, 2021

How well is your organization adjusting to the emerging paradigm of CSR?

Authors
Dr. Devesh Prakash

EY India Financial Accounting & Advisory Services Partner

Inspiring leader. Innovative client-centric advisor with a collaborative mindset. A prolific speaker. Change driver on Ind-AS, US GAAP and IFRS. Artist, painter and Indian classical singer.

Sampath K Rajagopalan

EY India Entity Compliance and Governance Partner

Sampath is responsible for corporate secretarial compliances. He specializes in corporate secretarial services with a career spanning more than 22 years.

9 minute read 10 May 2021

A look at some of the key considerations for your organization to evaluate and adjust yourself while responding to new rules and regulations of Corporate Social Responsibility (CSR).

The Government amended Companies (Corporate Social Responsibility Policy) Rules, 2014 with an objective to increase accountability, transparency and flexibility. These provisions have become more onerous with introduction of recent amendments and new rules (CSR Rules, 2021). Emerging paradigms of CSR  go beyond the matters of accounting and reporting. They potentially impact the internal controls and information systems and legal and tax compliances of companies and their business decisions, such as impact assessment reporting.

With the regulatory environment becoming more stringent, regulator’s and other stakeholder’s expectations from companies are increasing and they now demand enhanced level of transparency and disclosures. Consequently, there is a need for companies to proactively understand the changes, assess their impact and prepare their systems and processes to ensure smooth adjustment to these regulatory changes.

With these changes significantly affecting reporting for March 2021 and onwards, we have summarized the key changes, their impact and key points to consider for assisting companies in ensuring their compliance with CSR Amendments and CSR Rules, 2021.

Companies will have to consider these changes holistically from the systems, processes, compliance and reporting perspective. They may have to re-visit their existing policy and procedures to ensure that their CSR policy, procedures and systems are in compliance with these changes at all times. This will also require regular monitoring and checks and balances in balances for certain more onerous provisions such as last mile monitoring of funds spent by companies.

Introduction of negative list in definition of CSR with aim to ensure promotion of public good and regulate spending of the CSR fund for their own benefit. Financial transactions undertaken out of the CSR fund should not benefit the company or its employees and any benefit incidental is perfunctory. Introduction of need for impact assessment and mandatory registration of CSR vehicles are other steps in the aforesaid direction. Further, introduction of ceiling on the expenses incurred towards administrative activities, carrying forward of the excess spend and set-off excess spent in earlier period will require setting up of processes and systems to track these matters. Points to ponder relating to key changes are as below:

  • Definition of CSR

    • The CSR Committee and Board should finalize the CSR projects/ programs as per the amended provisions
    • Spend by a company in relation to the specific exclusions mentioned in CSR rules shall not be considered as CSR expenses in financial statements and such amounts shall be charged out of the profits of the company
    • Companies to re-assess whether their CSR expense policy is in compliance with newly defined CSR expenses in light of detailed negative list
    • Guiding principle for CSR spend is to promote public good and spend should not be for activities which are specifically restricted e.g. statutory obligation or political donation. Any financial transaction, e.g. purchase of goods and services from social enterprises that directly benefit the
    • Employees of the company (such as gifts purchased from local NGO for employees, set up of a school for the benefit of employees’ children etc) or the Company is not to be treated as CSR spend
  • Mandatory registrations for CSR vehicles

    • Boards need to set-up a process to ensure that CSR agencies associated with the companies are registered as prescribed. Further, control should be placed around receiving and verifying the registration certificates at the time of disbursement of funds and such verification may be carried out at periodic intervals to ensure continued compliance by the CSR agencies
    • Should verification of registrations in case of step-down implementation agencies be considered?
    • Should spend by unregistered implementation agencies during a financial year be disregarded in determining a company’s overall CSR spend?
    • Has Company completed a legal and reputational check of the Implementation agency? Does Company have a well-defined due diligence policy and underlying procedures in place to identify any potential ‘Red Flag’, if any?
  • Recognition of CSR obligations

    • CSR provisions require compulsory spending of 2% of average profits of preceding three years towards CSR activities by a company.
    • Has company assessed the unspent amount to be transferred to the specified funds and created liability in its books as at financial year end.
    • Has company aligned its accounting practices with the CSR spend to ensure that expenses are recorded on timely basis appropriately.
  • Creation/acquisition of assets

    Companies will need to review their significant accounting policies and past practices around capitalization of assets to meet the requirements of the CSR Rules. Further, Companies need to review their existing policies, procedures and controls around their CSR spends involving capital assets creation from a broader legal angle and from the perspective of compliance with the CA 2013 requirements i.e. appropriate handover of the assets to any of the prescribed transferee agencies;

    • Companies need to establish a mechanism for structuring transfer of existing capital assets, accounting for transfer and income tax obligations. If a company requires extended time of two hundred and seventy days, it needs to bring such agenda to the Board meeting for its approval in a time bound manner. Companies should evaluate whether such transfers could be considered as current year spend and reduce their obligation for financial year ended 2022?
    • Company will need to see tax implications associated with transfer of assets forming part of block of assets of the company to implementation agencies, beneficiaries or public authorities (i.e. the impact on past depreciation claims, trigger of capital gains/ losses, stamp duty implications etc) to be considered
  • Unspent amounts, carry forward and set-off of excess spend and surplus

    • Has the company evaluated its existing policy, procedure and controls to closely monitor spending per the prescribed requirement either by itself or by its implementing agencies?
    • Has the company evaluated the implications of underspend in relation to years prior to the year of commencement of the amended CSR Rules i.e. year ended March 31, 2021?
    • In view of the introduction of the concept of ‘ongoing projects’, has the company identified the CSR projects that should fall within this category? Projects with a known duration exceeding 4 years (including year of commencement) cannot be treated as ongoing projects. Company should transfer unspent CSR amounts from Unspent CSR Account to funds specified in Schedule VII
    • What happens if an ongoing project extends beyond the prescribed period? How should related Unspent CSR amounts be treated? Do separate unspent CSR accounts need to be opened for each project?
    • Has the company analysed the treatment of the CSR expenditure transferred to implementing agencies but not entirely spent by such agencies within the relevant financial year?
    • What happens to surplus CSR spend of years prior to the year in which the amended CSR Rules have been notified i.e. year ending March 31, 2021?
    • Has the Company analysed the implications of surplus if the project is already completed and closed?
  • Impact assessment (IA)

    • The revised Rules provide that a Company shall mandatorily carry out Impact Assessment for projects having an outlay of more than one crore and completed at-least one year prior to the date of assessment. Has the Company put in place, a policy and process to identify the projects to be selected for the impact assessment? Do 100% of all qualifying projects completed at least 1 year prior to notification of the amended Rules need to be considered?
    • Decision on choice of the specific agency to be appointed for carrying out the Impact Assessment. Whether a Board approval is required for such selection of projects and appointment of professional agencies?
    • What should be the criteria adopted for concluding the Impact Assessment of the identified projects?
    • What is the next step for the Company after impact assessment i.e. what are the steps a Company should take if the desired results are not achieved from a CSR project? How can the Board or CSR Committee effectively use the impact assessment for remedial action?
    • Tax deductibility of the excess spend on Impact Assessment (beyond 5%) considering that the excess amount will not be treated as CSR spend?
  • Increasing responsibility of Board, CSR committee and Chief Financial Officer

    • Are existing policy, procedure, systems and processes agile to meet the emerging requirements of CSR consequent to CSR Rules, 2021?
    • Do Company has sufficient in-house capacity to manage the change required to pace up with regulatory framework of CSR?
    • There are now both general and specific penalties leviable under the CA 2013 for non-compliance with the CSR provisions. The Board should prepare a detailed checklist of processes with owners and timelines, to monitor continued compliance of CSR regulations by the Company. The compliance agenda could be strengthened if the related monitoring could be undertaken by an independent agency on a periodic basis
  • Enhanced disclosures

    • A Company needs to assess and put in place, suitable mechanisms to collate the data required for disclosures. Also, an evaluation of the completeness of financial disclosures in the Annual Report is required
    • CSR rules mandatorily require impact assessment report to be placed before the Board and the reports to be annexed to the Annual Report on CSR. Companies should evaluate whether the full impact assessment report should be annexed to the report or an abridged version  could be appended, with a reference to the Company’s website, if any, where the detailed report shall be hosted or provide details of a designated person who could be contacted for the full report, in case the company does not maintain a website
    • Company to review their existing policy and process of disclosure to ensure compliance with the revised CSR rules
    • If a Company has only a web page on the website and not an independent website, would it still need to comply with this requirement?

Amended CSR rules makes compliance more onerous and specific penal provision for both Companies and officers of the Company making it imperative to review existing policies, procedures and controls around formulation, implementation, monitoring and reporting of CSR.

Following “Next Steps” could assist companies in preparing for the compliance:

Amended CSR rules
Changes emerging out of revised CSR rules have wider implications and should be evaluated holistically from accounting, tax, business process and compliance perspectives. The amendments have enhanced obligation for members of the Board individually as well as collectively, which requires enhanced scrutiny of the legal compliance's by the company and may need reviewing existing processes and systems. It is sine qua non for the Board to review the existing policy, systems and processes to carry out re-structuring for meeting the expectations of regulators.
Dr. Devesh Prakash
EY India Financial Accounting & Advisory Services Partner
With the evolving statutory framework of Corporate Social Responsibility (CSR), there is greater emphasis on the roles and responsibilities of the Board of Directors, CSR Committee and the CFO. It is therefore time for companies to review their policies and procedures, relook at their CSR programs and create adequate governance and compliance mechanisms.
Sampath K Rajagopalan
EY India Entity Compliance and Governance Partner

Summary

The amended rules became effective from 22 January 2021 and require close review as they directly impact implementation of a company’s CSR initiatives and introduce new concepts like a specific negative list in the CSR definition, mandatory treatment of CSR underspend, mandatory impact assessment, mandatory registration by NGOs undertaking CSR activities. These changes are likely to trigger impact across regulatory, accounting, finance and tax domains.

About this article

Authors
Dr. Devesh Prakash

EY India Financial Accounting & Advisory Services Partner

Inspiring leader. Innovative client-centric advisor with a collaborative mindset. A prolific speaker. Change driver on Ind-AS, US GAAP and IFRS. Artist, painter and Indian classical singer.

Sampath K Rajagopalan

EY India Entity Compliance and Governance Partner

Sampath is responsible for corporate secretarial compliances. He specializes in corporate secretarial services with a career spanning more than 22 years.