How CSR expenditure rules have changed for Indian companies

The Corporate Affairs Ministry has amended the rules for Corporate Social Responsibility (CSR) expenditure by India Inc to allow companies to undertake multi-year projects, and also require that all CSR implementing agencies be registered with the government. We look at some of the key changes.

How do the new rules enable corporations to undertake multi-year CSR projects?

All companies with a net worth of Rs 500 crore or more, a turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more, are required to spend 2 per cent of their average profits of the previous three years on CSR activities every year. The amended CSR rules allow companies to set off CSR expenditure above the required 2 per cent expenditure in any fiscal year against required expenditure for up to three financial years. Experts do, however, note that there was ambiguity whether the rule would apply for expenditure undertaken prior to the amendment.

“The government may consider allowing corporates which have in good faith incurred excess CSR expenditure in the past to set it off against future CSR expenditure requirements,” said Harish Kumar, partner at law firm L&L partners.

What are the changes required for implementing agencies?

A large number of companies conduct CSR expenditure through implementing agencies, but the new amendment restricts companies from authorising either a Section 8 company or a registered public charitable trust to conduct CSR projects on their behalf. A Section 8 company is a company registered with the purpose of promoting charitable causes, applies profits to promoting its objectives and is prohibited from distributing dividends to shareholders. Further, all such entities will have to be registered with the government by April 1.

Experts note that the change would impact CSR programmes of a number of large Indian companies that conduct projects through private trusts.

Kumar said the change would mean such private trusts would either have to be converted to registered public trusts, or stop acting as CSR implementing agencies “given that a sizeable amount of CSR is being contributed through their private trusts by many companies, including blue-chip companies.”

An expert who did not wish to be quoted said private trusts such as the Reliance Foundation, Bharti Foundation and DLF Foundation, which handle a majority of CSR expenditure for affiliated companies, would be impacted by this change.

What are other key changes?

The amended rules require that any corporation with a CSR obligation of Rs 10 crore or more for the three preceding financial years would be required to hire an independent agency to conduct impact assessment of all of their project with outlays of Rs 1 crore or more. Companies will be allowed to count 5 per cent of the CSR expenditure for the year up to Rs 50 lakh on impact assessment towards CSR expenditure.