The good, the bad and the ugly of new CSR rules

According to the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, which came into effect from January 22, a company now needs to spend 2% of the average net profit of the previous three financial years on corporate social responsibility (CSR) activity. A chief financial officer (CFO) will now have to factor in CSR as a major element in her tax planning since the new rules make it close to impossible to save on the mandatory CSR spend. Any unspent amount will be seized by GoI with the tool of a new corpus. Further, the CFO will be made legally liable for any lapse in undertaking the mandated CSR expenditure.It is also the responsibility of the CFO to ensure that if she has signed a CSR cheque, the intended impact on society is commensurate and quantifiable. The only saving grace is that GoI has dropped an earlier plan to have a provision to send the CFO to jail for CSR non-compliance. The level of compliance reporting required now is very high. The list is long: forms one needs to sign with details of money spent, a detailed impact assessment report by an independent body on the kind of measurable difference one makes to society, a distinct identification code for each NGO project, etc.That said, GoI has now given corporates a much longer period — three years — to complete CSR projects. But, every year, the mandated CSR funds shall be appropriated to a dedicated account, maintained in a separate bank account. Basically, the amount will be treated as an expense for the year and charged to the statement of profit and loss.Foundations by corporates would also now fall under the CSR compliance framework, since every paisa granted to a foundation by the donor corporate has to be reported to the ministry of corporate affairs via a registry. Capital assets created under the CSR obligation shall no longer remain under the ownership of the foundation, but with the beneficiary or a designated trust making use of the asset. However, if one creates one’s own Section 8 company, and establishes a three-year track record, one may be able to own the assets.Compliance by NGOs is another striking feature. Bundling of projects, or showing the same projects in multiple CSR reports of donors, will need to stop now. Each project requires separate registration to draw funds from donor corporates. The corporate affairs ministry shall track if any of these projects are drawing more funds than required for the scale of operations. If found violating norms, they then run the risk of losing their licence. Remember how, in 2016, GoI had cancelled over 20,000 NGO licences that drew funds from abroad under the Foreign Contribution (Regulation) Act (FCRA) route?Multinational companies (MNCs) now have an additional onus. Gone are the days when they could cite FCRA ‘anomalies’ for their inability to deploy overseas foundation activities in India. As per the new rules, MNCs will enjoy no exception.With a Covid pandemic still upon us, is this the right time to adopt a stringent CSR policy? Of course, these amendments were in the works for a long time. But, then, will this stop the widely relevant ‘payback practices’? Say, when one pays an NGO a tidy sum to inflate one’s CSR spend and later asks it to return half of it to one’s related entity? Not sure if these amendments could tackle such unethical practices. An NGO may be able to still ‘honour’ these payback requests and continue to operate in this revised framework. This will be technically possible if a project is broken up into smaller pieces and shown in the reporting standards as different units with separate sets of beneficiaries.The recent amendments compel companies to unfailingly publish impact assessment reports on their public websites. This may lead to firms to break up their CSR project into smaller pieces. The smaller the project size, the more chances of escaping the independent assessment requirement.Like any new rule meant to clean up, this one too will face short-term challenges till the industry adapts to the new order. According to a Central Bureau of Investigation (CBI) submission to the Supreme Court, less than 10% of India’s 32.97 lakh NGOs are ‘ethical’ — have filed audited accounts before the regulator concerned. But only a full-time regulator can oversee CSR practices to ensure rules are complied with. While CSR behaviour of listed companies can be monitored, it is unreasonable to expect company registrars to meaningfully track all those 11 lakh-odd unlisted companies in India.

The good, the bad and the ugly of new CSR rules
According to the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, which came into effect from January 22, a company now needs to spend 2% of the average net profit of the previous three financial years on corporate social responsibility (CSR) activity. A chief financial officer (CFO) will now have to factor in CSR as a major element in her tax planning since the new rules make it close to impossible to save on the mandatory CSR spend. Any unspent amount will be seized by GoI with the tool of a new corpus. Further, the CFO will be made legally liable for any lapse in undertaking the mandated CSR expenditure.It is also the responsibility of the CFO to ensure that if she has signed a CSR cheque, the intended impact on society is commensurate and quantifiable. The only saving grace is that GoI has dropped an earlier plan to have a provision to send the CFO to jail for CSR non-compliance. The level of compliance reporting required now is very high. The list is long: forms one needs to sign with details of money spent, a detailed impact assessment report by an independent body on the kind of measurable difference one makes to society, a distinct identification code for each NGO project, etc.That said, GoI has now given corporates a much longer period — three years — to complete CSR projects. But, every year, the mandated CSR funds shall be appropriated to a dedicated account, maintained in a separate bank account. Basically, the amount will be treated as an expense for the year and charged to the statement of profit and loss.Foundations by corporates would also now fall under the CSR compliance framework, since every paisa granted to a foundation by the donor corporate has to be reported to the ministry of corporate affairs via a registry. Capital assets created under the CSR obligation shall no longer remain under the ownership of the foundation, but with the beneficiary or a designated trust making use of the asset. However, if one creates one’s own Section 8 company, and establishes a three-year track record, one may be able to own the assets.Compliance by NGOs is another striking feature. Bundling of projects, or showing the same projects in multiple CSR reports of donors, will need to stop now. Each project requires separate registration to draw funds from donor corporates. The corporate affairs ministry shall track if any of these projects are drawing more funds than required for the scale of operations. If found violating norms, they then run the risk of losing their licence. Remember how, in 2016, GoI had cancelled over 20,000 NGO licences that drew funds from abroad under the Foreign Contribution (Regulation) Act (FCRA) route?Multinational companies (MNCs) now have an additional onus. Gone are the days when they could cite FCRA ‘anomalies’ for their inability to deploy overseas foundation activities in India. As per the new rules, MNCs will enjoy no exception.With a Covid pandemic still upon us, is this the right time to adopt a stringent CSR policy? Of course, these amendments were in the works for a long time. But, then, will this stop the widely relevant ‘payback practices’? Say, when one pays an NGO a tidy sum to inflate one’s CSR spend and later asks it to return half of it to one’s related entity? Not sure if these amendments could tackle such unethical practices. An NGO may be able to still ‘honour’ these payback requests and continue to operate in this revised framework. This will be technically possible if a project is broken up into smaller pieces and shown in the reporting standards as different units with separate sets of beneficiaries.The recent amendments compel companies to unfailingly publish impact assessment reports on their public websites. This may lead to firms to break up their CSR project into smaller pieces. The smaller the project size, the more chances of escaping the independent assessment requirement.Like any new rule meant to clean up, this one too will face short-term challenges till the industry adapts to the new order. According to a Central Bureau of Investigation (CBI) submission to the Supreme Court, less than 10% of India’s 32.97 lakh NGOs are ‘ethical’ — have filed audited accounts before the regulator concerned. But only a full-time regulator can oversee CSR practices to ensure rules are complied with. While CSR behaviour of listed companies can be monitored, it is unreasonable to expect company registrars to meaningfully track all those 11 lakh-odd unlisted companies in India.