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Impact of New Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 on Trusts/NGOs

impact-of-new-companies-csr-policy-amendment-rules-2021-on-trusts-ngos

Ministry of Corporate Affairs (MCA) on 22nd January 2021 has notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 (“New CSR Rules”) introducing substantial changes in the specifications and procedure to be followed by the companies and the charitable organizations/NGOs while discharging their CSR obligations. One of the major changes introduced for the NGOs is making registration compulsory for undertaking CSR activities on behalf of companies. Such registration is required to be taken in e-form CSR-1. The purpose of mandatory registration is for monitoring the activities of the NGOs and other agencies. Further, this has been done to create a database of authentic implementation agencies and promote transparency in the implementation of CSR activities.


New CSR Rules has amended the Companies (Corporate Social Responsibility Policy) Rules, 2014 to give effect to the changes introduced in CSR by the Companies Amendment Acts of 2019 and 2020.



Section 135 of the Companies Act, 2013, inter alia, provides for companies having -

(i) net worth of Rs. 500 crore or more or 

(ii) turnover of Rs. 1000 crore or more or 

(iii) a net profit of Rs. 5 crore or more 

in a financial year to spend at least 2% of the average net profits of the last 3 years for the company’s Corporate Social Responsibility (“CSR”) policy. 


In other words, profitable companies are required to spend at least 2% of their past 3 years’ average net profit towards CSR activities every year.


In case the said amount is not spent, the reasons for not doing so are to be disclosed in the Board’s Report. Activities which may be included in the CSR policy by the companies are specified in schedule VII of the Companies Act, 2013.


Section 135 along with Schedule VII and corresponding Companies (Corporate Social Responsibility Policy) Rules, 2014 have been notified on 27.02.2014 and have come into effect from 1st April 2014.


Corporate Social Responsibility was for the first time introduced as a statutory obligation for companies by way of Companies Act 2013 under Section 135. 


Compulsory registration of NGOs with MCA under New CSR Rules


Agencies implementing CSR projects for companies should get themselves registered with the Central Government by filing the Form CSR-1 electronically. The system will automatically generate a unique CSR registration number.


The registration requirement will be effective from April 1, 2021.


Also, international organisations have been permitted to carry out designing, monitoring and evaluation of the CSR projects or programmes. However, they cannot act as implementing agencies.


Entities eligible for undertaking CSR activities


New CSR Rules allows the implementation of CSR activities either by the Company itself or through -


(a) a Section 8 company,


(b) a registered public trust or a registered society registered u/s 12A and 80G of the Income Tax Act, 1961 established by the company singly or along with any other company,


(c)  a Section 8 company or a registered trust or a registered society, established by the Central Government or State Government


(d) any entity established under an Act of Parliament or a State legislature; or


(e) a Section 8 company or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.


Normally, an independent NGO falls in the category specified in (e) above. Thus an NGO shall be eligible to receive CSR funds from a company only if it is -


> A section 8 company, or

> A registered public trust, or

> A registered society,


registered under section 12A and 80G of the Income Tax and have at least 3 years of undertaking charitable activities. Hence, CSR spendings through an unregistered NGO is not eligible for counting towards CSR activities.


Readers should note that when the draft CSR amendment rules were issued, only a section 8 company or an entity established under an Act of Parliament or a State legislature were only eligible under CSR Rules. Societies or Trusts which constitute more than 90% of the NGO sector were excluded from CSR funds.


Thankfully, the trust and societies were included in the notified new CSR Rules. However, only registered trust and societies are included in the CSR rules, which won’t create any problem since almost all the NGOs which undertake CSR activities are registered.


How to file CSR-1 for obtaining registration on MCA


As stated above, the notified New CSR Rules, 2021 requires every entity undertaking CSR activities to file e-form CSR-1 effective from 1st April, 2020.


it is mandatory for all the NGOs to get itself registered with MCA if it wishes to raise CSR Fund from corporates. 


The registration with MCA is different from registering an NGO with DARPAN portal of the Niti Aayog. While registration with DARPAN is required for accessing government grants and FCRA contributions, registration with MCA is for accessing CSR funds of the corporates.


Rule 4(2) of the  New Companies CSR Amendment Rules, 2021 specifies the following procedure for the registration of an NGO with MCA portal for accessing corporate CSR funds-


(a) Every entity as stated above, who intends to undertake any CSR activity, shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar, with effect from the 01st day of April 2021:


(b) Form CSR-1 shall be signed and submitted electronically by the entity and shall be verified digitally by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.


(c) On the submission of the Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically. 


Documents required for CSR-1 Registration


There are no details released for the procedure for getting an NGO registered with MCA. It is only stated that the registration shall be taken by filing CSR-1 form electronically. The form shall be required to file online with MCA portal.


The New CSR Rules, 2021 notified the form CSR-1 titled “Registration of Entities for undertaking CSR Activities”. A perusal of the notified form reveals that the form has two parts. One part relates to the information about the entity who intends to undertake the CSR activities. Another part of the Form CSR-1 is related to the certification by a practising professional.


Clause 1 of the Form CSR-1 requires to specify the nature of the entity which intends to register itself viz., a section 8 company or a registered public trust or a registered society with section 12A and section 80G registration, etc.


It further requires to input the basic details of the entity viz, its registration number, name, address, PAN, email-id, etc. [Clause 3]


Clause 4 requires details of the governing body of the entity along with their DIN/PAN and email-id.


However, it appears that the only documents required to be uploaded are a Copy of the registration certificate and a Copy of the PAN of the NGO with Form CSR-1.


Form CSR-1 is required to be signed digitally by the Secretary or Trustee or CEO of the Trust or Society.


CSR expenditure by NGO and certification by CFO of the company: This is one of the major amendments in the new CSR amendment Rules of 2021 impacting the workings of the NGOs. Rule 4(5) of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 provides that the Board of Directors of the donor company shall satisfy itself that the funds so disbursed have been utilised for the purposes and in the manner as approved by it and the Chief Financial Officer (CFO) or the person responsible for financial management shall certify to the effect. Therefore, the workings of the NGOs shall now be under the supervision of the donor companies. Now, the question arises how the CFO of the company shall satisfy himself that the funds so disbursed is actually used by the NGO on the CSR activities as directed by the company. In this context, it should be noted that the Institute of Chartered Accountants of India ( ICAI ) has issued an advisory on 29th May 2020 to advise that the Companies should obtain Independent Practitioner’s Report on utilisation of such CSR Funds from the auditor/CA in practice of the third party/NGO, to whom the funds are given by the Company for implementing CSR activity. The advisory was issued for the Members of the ICAI and for the purposes of section 135 of the Companies Act, 2013 which deals with the CSR provisions. In the advisory, ICAI said that the auditor/CA in practice of the third party/NGO should submit the Independent Practitioner’s Report on the utilization of CSR Funds after verifying that the third party has spent the funds on CSR activities as per Section 135 of the Companies Act, 2013, read with Schedule VII to the Act and related regulations in accordance with the Guidance Note on Reports or Certificates for Special Purposes issued by the Institute of Chartered Accountants of India. The ICAI also released the draft format of Independent Practitioner’s Report on Utilization of CSR Funds. Therefore, it is imperative for the NGOs to keep and maintain separate books of accounts and documentation for proper reporting of the CSR expenditure for the funds received from each and every company. The said expenditure shall be required to be verified by the auditors of the NGOs who shall issue the report or certificate to the company. On the basis of such an audit report, the CFO of the company shall comply with the rules of the new amended CSR regulations.

Download ICAI Advisory dated 29.05.2020 on CSR Funds Utilization


The ICAI advisory and the draft format of Independent Practitioner’s Report on Utilization of CSR Funds is available here for download.


Restriction on Administrative Overheads to impact NGOs’ workings (Rule 7 of New CSR Rules, 2021 related to CSR Expenditure)


Another Rule that will impact the workings of NGOs is Rule 7 of the New Companies CSR Amendment Rules, 2021. This rule has capped the administrative overheads to 5% of the total CSR expenditure. The definition of ‘administrative overheads’  is redefined [as per Rule 2(b)] to mean the expenses incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company but shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme.


The board has to ensure that the administrative overheads of CSR activity shall not exceed 5 per cent of the total CSR expenditure of the company for the financial year.


Further, surplus arising out of the CSR activities will not form part of the business profit of the company and is required to be ploughed back into the same project or be transferred to the Unspent CSR Account.


Henceforth, any capital assets acquired or crested out of CSR funds cannot be held by the company. It shall be held in the name of beneficiaries or a public authority or registered trust, registered society or section 8 company. Hence, companies shall have no right over the capital assets so acquired out of CSR funds. In other words, companies cannot hold capital assets created by the CSR funds. [Rule 7(4)]


Impact Assessment: Every company having an average CSR obligation of Rs. 10 crore or more in the three immediately preceding financial years, will have to undertake an impact assessment study of its projects, through an independent agency. However, this is mandatory only for such projects having outlays of Rs. 1 crore or more and which have completed at least one year before such impact study. [CSR Reporting Rule 8]


New CSR rules have increased disclosure requirements for companies. Every company has to mandatorily disclose its composition of CSR Committee, CSR Policy and Projects approved by the Board on its website for public access.


Since the reporting requirement of the company is dependent on the activities of the NGOs, it is desired that NGOs should get themselves registered with the MCA in Form CSR-1. Further, it should strengthen its accounting, bookkeeping and reporting system.



Annexure-ICAI Advisory dated 29.05.2020 on CSR funds Utilization

CSR Committee
The Institute of Chartered Accountants of India
29th May, 2020
ADVISORY
Advisory for Members of the Institute of Chartered Accountants of India (ICAI) and Companies to whom CSR provisions under Companies Act, 2013 apply
Wherever a Company is required to comply with CSR Regulations under section 135 of the Companies Act, 2013, it may undertake the CSR activity, either:     By the Company itself; or     Through a Third Party being a Trust / Society or Section 8 Company / NGO Wherever the company undertakes the CSR activity through a third party / NGO, it is advised that all such companies should obtain an Independent Practitioner’s Report on Utilisation of such CSR Funds from the auditor / CA in practice of the third party/ NGO, to whom the funds are given by the Company for implementing CSR activity. In such cases the auditor / CA in practice of the third party / NGO is advised that they should submit the Independent Practitioner’s Report on Utilization of CSR Funds after verifying that the third party has spent the funds on CSR activities as per Section 135 of the Companies Act, 2013, read with Schedule VII to the Act and related regulations in accordance with the Guidance Note on Reports or Certificates for Special Purposes issued by the Institute of Chartered Accountants of India. The draft format of Independent Practitioner’s Report on Utilization of CSR Funds is attached. Thanking you, Chairman, CSR Committee, ICAI Encl: Draft format of Independent Practitioner’s Report on Utilization of CSR Funds Note: The format of the Utilization Report is being issued after being duly vetted by the Auditing and Assurance Standards Board of ICAI



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