CSR Impact Assessment: Is it really the game changer?
Mandating impact assessment for development projects does sound good. But, is it really worth it in 2021?
Mandating CSR impact assessment for developmental projects does sound good. But, is it really worth it in 2021?
The Companies (CSR Policy) Amendment Rules, 2021 has introduced a significant amount of changes including the mandate for CSR Impact Assessment and is supposedly expected to transform the way CSR activities were executed by businesses till the year 2020.
With the recently laid CSR Policies, 2021, underlies slight ambiguity on it’s relevance to businesses and the society and in what context they differ from the past.
Without further ado, let’s unveil the prime propositions of the CSR Policy Amendment Rules, 2021 starting right off from the basics.
What is CSR (Corporate Social Responsibility):
CSR or Corporate Social Responsibility is essentially a business management practice through which companies invest a part of their profit into development sectors such as Education, Health, Hunger, etc. for social welfare. India happens to be the first country to make CSR mandatory under the Companies (Amendment) Act, 2013.
To further simplify the concept of CSR, it can be defined as a strategic business management approach through which businesses tend to induce a positive impact on the society be it in terms of environmental, societal or economical perspective. Corporate Social Responsibility is a broad concept and might take multiple forms depending on the company or industry.
CSR holds it’s uniqueness and value for both the society as well as for the company as it helps businesses create a bond with the world outside through their positive efforts of enhancing the society.
Without further ado, let us take a look at the prime propositions according to the Companies (Amendment) Rules, 2021.
Following is a summarization of the CSR Amendment Act, 2021:
1) According to the CSR Amendment Rules 2021, no activities related to a company’s normal course of business shall fall under CSR, with the only exception that if the company’s normal course of business is researching and developing new COVID-19 vaccines, drugs and medical devices, then it can fall under their CSR activity for 2021-23 timespan.
2) If a company undertakes an activity outside India, then it will not be considered as a CSR activity, with an only exception that the activity involves training Indian sports persons who will be representing India internationally or representing a state or union territory nationally.
The Rules further suggest that donations to a political party, company activities for employee benefits, or sponsorship activities targeted to yield marketing outcomes shall not be considered as CSR.
3) According to Rule 4, a company can perform CSR by itself or through another company which must either be a registered public trust or incorporated under the Act (Section 8). However, the company or public trust must have a minimum of 3 years experience in doing such activities.
4) If a company or entity wants to or needs to undertake CSR activities then it needs to fill up the CSR-1 form and register its name in the Registrar of Companies. This Rule is going to be applicable starting from April 2021.
5) The board of the company needs to be responsible for taking care that the funds are being utilized for the approved purpose and the timeline for the CSR project is maintained properly throughout the implementation of their CSR.
6) Furthermore, the board of the company can also make decisions to alter the CSR project if necessary. In a whole, the board of the company needs to be satisfied and must approve the CSR activities and the way the funds are going to be utilized in it.
7) The CFO (Chief Financial Officer) of a company would also be responsible to certify funds that are disbursed for a CSR project. A company can engage external organizations (either national or international) for monitoring, evaluating, designing or capacity building in the said project.
8) In 2021 Amendments, Rule 6 has been omitted as Rule 4 now incorporates the related provisions.
9) According to Rule 5, in order to undertake a CSR activity, a company first needs to form a CSR committee. Not only that, but the so-called CSR committee will further need to prepare an annual action plan. This action plan must always be made in agreement with the company’s CSR policy as well as the board of the company.
The action plan is subject to alteration if necessary, given that the CSR committee itself recommends the alteration. However, the below items are mandatory in a valid CSR action plan:
- List of CSR projects that are approved
- How the projects are to be executed
- Timeline of the project
- Funds utilization details
- Project purpose and impact assessment
- Monitoring and reporting of the ongoing activities under the project
10) According to Rule 7, in a financial year, a company can allocate only 5 % of the CSR funds or expenditure to the administrative aspects of the CSR. Here, the administrative aspects of CSR indicate only the general management and administration part of a CSR project, excluding all of the design, implementing, evaluation and monitoring aspects. In case there arises any requirement for an excess funding, that particular amount has to be reinvested in the same CSR project. It cannot be used for any ancillary purposes or business profits. Or, the company can also transfer it to another unused or unspent CSR account included in their CSR action plan or CSR policy.
11) As per the 2021 amendments, the CSR expenditure of a company can go upto 3 financial years against the 2 % expenditure in a financial year before. However, a resolution has to be passed by the board of the company in case such excess amount arises in a CSR project. It cannot include the extra that will arise from the CSR activities.
12) The 2021 Amendment Rule 7 now also allows spending of the CSR funds in creating or acquiring capital assets, held by the beneficiaries like a registered public trust, a public authority, a company incorporated under Section 8 of the Act or a charitable organization.
13) Rule 8 has undergone some alteration where a CSR annual report is to be included by the board, following the specified clauses. To be more precise, Rule 8 suggests that if a company has an average CSR obligation of at least ten crore rupees, then the company needs to conduct an Impact Assessment. An independent agency must handle the entire process of Impact Assessment.
14) A company can book their CSR expenditure upto 50 % or 50 lac rupees where the expenditure comes from performing the CSR Impact Assessment of that specific organization. In the annual report which is to be shown to the board of the company, it must be included.
15) According to Rule 9, a company has to disclose on its website the following CSR details: (a) its CSR policy, (b) the composition of the company’s CSR committee and (c) the list of CSR projects that has already been approved by the board of the company.
All of these above said Amendment Rules in CSR became effective from January 22, 2021.
Making impact assessment mandatory seems like a good move from the government as it provides some accountability to the bigger ongoing projects. However, it begs us to question, why is it that Impact Assessment has not been mandated for everyone and only for corporates having budgets more than 10 Crore?
Also, it is quite surprising to see that there are no mandatory checks involved in these assessments which makes us wonder, how is the government going to analyse the legitimacy of the Impact Assessment reports?
Apart from this, we still believe that there are a few clarifications that the government needs to address in terms of this mandatory impact assessment. It is still not clear what exactly is the outcome going to be after an impact assessment is done for a CSR Project, as in, what if the assessment results are poor? Will the government look into this specifically or would it ask the corporate to shut down the project?