Companies (Amendment) Act 2020: Effect & Analysis

Estimated Reading Time: 11 minutes

Based on the Companies Law Committee’s recommendations, the Companies (Amendment) Bill, 2020 was introduced in the Lok Sabha. The Bill was first passed in the Lok Sabha and then in the Rajya Sabha. On September 28, 2020, the Companies (Amendment) Act, 2020 received the President’s assent. Different dates can be set for different provisions of the Act under the Amendment Act of 2020. 

The following are the highlights of the Amendment Act of 2020[1]

  1. To decriminalise certain offences under the Companies Act, 2013 (‘Act) in case of defaults which can be determined objectively and which otherwise lack any element of fraud or do not involve larger public interest, 
  2. To add a new Producer Companies Chapter XXIA to the Act, which was previously part of the Companies Act of 1956. , 
  3. To create the National Company Law Appellate Tribunal’s Benches, 
  4. Exempting any class of persons from the requirements of section 89 relating to the declaration of beneficial interest in securities, as well as exempting any class of foreign companies from the provisions of Chapter XXII
  5. Cut down on the amount of time it takes to submit. for rights issues in order to expedite the process. 
  6. To provide that companies with a Corporate Social Responsibility(“CSR”) spending obligation of up to Rs. 50 lacs are not required to form a CSR Committee, and to enable qualifying companies under section 135 to set off any amount spent in excess of their CSR spending obligation in a given financial year against such obligation in subsequent financial years, 
  7. To make it easier for those types of unlisted companies to prepare and file their financial statements on a regular basis.
  8. To allow Indian companies to list their shares directly in legal foreign jurisdictions.

The MCA has issued a Notice[2] with certain provisions, including one concerning CSR, of the Act. Article 27, Companies Amendment Act 2020, amends Article 135 of the Act (relating to CSR). The MCA was also provided with a notice and modifications of the Companies’ Rules for 2014 (‘CSR Rules‘).

Analysis of the changes made by the Companies Amendment Act of 2020, as well as changes to the CSR Rules :

1.Set-off rules are being implemented: According to the Amendment Act, if a corporation spends more than the required amount (i.e. more than 2% of the company’s average net income for the three previous fiscal years), the excess amount may be set off against the obligation to spend for a specified number of subsequent fiscal years. The CSR Rules have been amended, according to the amendment. , if a company spends more than the stated requirement, the excess amount can be set off against the requirement to spend over the next three fiscal years, subject to the following conditions: 

  1. Any surplus resulting from CSR operations, if any, would not be included in the excess sum available for set off.  
  2. The excess sum available for set off must be approved by the company’s board of directors. The amendment is a positive step that allows businesses to invest in CSR initiatives. Companies can also spend more on CSR than is required by law in some years, which can then be used in subsequent fiscal years.  

2. Non-compliance with CSR provisions : According to the Amendment Act, if a company fails to comply with the provisions relating to CSR spending, the company will be fined twice the amount needed to be transferred by the company to the Fund listed in Schedule VII or the Unspent CSR Account, whichever is less. Any company officer who is in default will be charged twice the amount that needs to be transferred to the Fund in Schedule VII or the Unspent CSR, whichever is less. The unspent CSR number, if any, shall be transferred by the company to any fund included in Schedule VII of the Act until a fund is defined in Schedule VII for the purposes of section 135(5) and (6) of the Act, according to the amendments to the CSR Rules. The amendment to the Rules clarifies what constitutes a default in terms of CSR enforcement. Finally, the rules ensure that the money is either spent on CSR operations or allocated to a fund. Ensuring CSR enforcement would require more than just passing accounting entries.  

3. Committee on Corporate Social Responsibility : According to the Amendment Act, where a company’s CSR expenditure does not exceed Rs. 50 lacs, the provision for the formation of a CSR Committee is not applicable, and the functions of such Committee given under section 135 of the Act are discharged by the company’s board of directors. The company board of directors may pass a resolution dissolving the CSR Committee at its meeting.  

4. Defining the term “corporate social responsibility” : The 2014 update to the CSR Rules about the concept of CSR is very intriguing. According to the amendment, CSR refers to activities carried out by a corporation in order to fulfil its contractual responsibility under section 135 of the Companies Act, in compliance with CSR law, but does not include the following: 

(i) Activities carried out in the ordinary course of business of the company; 

Also Read  Sarla Verma & Ors. v. Delhi Transport Corporation & Anr. (2009)

(ii) Any operation carried out by the company outside of India, with the exception of training of Indian sports personnel who represent any State or Union Territory at the national level or India at the international level; 

(iii) Making some overt or indirect contribution to any political party in violation of section 182 of the Act; 

(v) Any activity carried out by the company outside India, except for training of Indian sports personnel representing any State or Union territory at national level or India at international 

(vi) Activities that favour the company’s workers, as described in section 2 clause (k) of the Code on Wages, 2019. 

(vi) Sponsored activities that corporations fund in order to gain marketing advantages for their goods or services. 

(vii) actions carried out in order to fulfil any other legislative duties imposed by Indian law. Before the amendment to the CSR Rules in 2014, CSR only referred to projects or programmes relating to activities areas or subjects specified in Schedule VII of the Act; or projects or programmes relating to activities undertaken by the board of directors of a company in accordance as per the recommendations of the Board’s CSR Committee the company’s declared CSR Policy, subject to the condition that sui generis. The concept of ‘CSR’ has been expanded to include some key points from MCA Circulars and FAQs released during the interim period (i.e. 2014 to 2020). 

5. Other CSR operations for a specific group of businesses: 

The amendment to the CSR Rules, 2014 also states that any organisation engaged in research and development of new vaccines, drugs, and medical devices in the ordinary course of business may engage in research and development of new vaccines, drugs, and medical devices related to COVID-19 for the fiscal years 2020-21, 2021-22, and 2022-23, and that such operation will be considered CSR. 

The MCA has set out the following requirements:  

(a) These research and development activities must be carried out in a timely manner conjunction with any of the prescribed Institutes or Organizations, and 

(b) Information of such activities will be included in the Board’s Annual Report on CSR separately. Companies involved in R&D for new vaccines, medications, and medical devices (generally pharmaceutical companies) relating to COVID-19 are encouraged to regard their ‘usual course of business’ as CSR because the requirements are not difficult to meet. It’s a one-off, but it’s in the best interests of the economy and CSR investment. For the FYs 2020-2021, 2021-2022, and 2022-2023, Such expenses, on the other hand, would be counted as CSR. Companies in this group will also benefit from the provisions of the Companies (Amendment) Act, 2020, which include: Companies may spend an amount in excess of the criteria given (i.e. more than 2% of net profits), and such excess amount may be set off against the obligation to spend for a specified number of subsequent financial years. Such expenses, on the other hand, would be counted as CSR. Companies in this group will also benefit from the provisions of the Companies (Amendment) Act, 2020, which include: Companies may spend an amount in excess of the criteria given (i.e. more than 2% of net profits), and such excess amount may be set off against the obligation to spend for a specified number of subsequent financial years. 

6. Projects in Progress: 

The government has established a definition for the term “ongoing project.” It refers to a multiyear project undertaken by an organisation to meet its CSR obligations, with a timeline of not more than three years except the financial year in which it began. It shall, however, include any project that was not accepted as a multi-year project at the outset but whose term has been extended beyond one year by the board on appropriate grounds. The said “ongoing operation” will be disclosed in the Annual Report on CSR Activities, which will be included in the Board’s Report for the financial year beginning April 1, 2020 or later.  In the case of an ongoing project, the board of directors shall oversee the project’s execution in accordance with the agreed deadlines and year-by-year allocation, and shall be competent to make any necessary changes to ensure that the project is completed within the maximum allowable time frame. 

7.Implementation of CSR: 

The board of directors shall ensure that CSR activities are carried out by the company itself or through: (a) a company established under section 8 of the Companies Act, or a registered public trust or registered society, registered under sections 12A and 80G of the Income Tax Act, 1961, established by the company, either alone or in conjunction with another company, or (b) a company established under section 8 of the Act, or a registered public trust or registered society, registered under section 12A and 80G of the Income Tax Act 

(c) Anybody created by an Act of Parliament or a State legislature; or (d) a company founded under section 8 of the Act, or a registered public trust or registered society, registered under sections 12A and 80G of the Income Tax Act, 1961, and with at least three years of experience in similar activities. 

8. Registration of organisations engaged in CSR activities is required: By April 1, 2021, any entity (as described above) intending to engage in any CSR operation must register with the Central Government. The rules do not apply to CSR initiatives or programmes that were accepted before April 1, 2021. The system will automatically create a unique CSR Registration Number upon submission of the said e-Form on the MCA portal. From the standpoint of efficient control of CSR activities and expenditure, such mandatory registration will be beneficial. 

Also Read  Sarla Verma & Ors. v. Delhi Transport Corporation & Anr. (2009)

9. CSR Expenditure: The concept of ‘CSR expenditure’ has been fully revised as a result of the change to the CSR Rules. CSR expenditure, according to the current provisions, includes all expenditures, including contributions to the corpus, or projects or programmes relating to CSR activities approved by the board of directors on the recommendation of its CSR Committee, but excludes any expenditure on an item that is not in conformity or in line with activities that fall within the areas or subjects specified in. 

The board of directors must ensure that administrative overheads do not exceed 5% of the company’s overall CSR expenditure for the financial year, according to the amendment to the CSR Rules. Any surplus arising from CSR activities, on the other hand, shall not be included in a company’s business profit and shall be ploughed back into the same project, or transferred to the Unspent CSR Account and spent in accordance with the company’s CSR policy and annual action plan, or transferred to a Fund specified in Schedule VII, within six months of the project’s completion. 

The CSR sum may be used by a company to create or acquire a capital asset that is owned by: 

  • a company founded under Section 8 of the Act, or a Registered Public Trust or Registered Society with charitable objects and a CSR Registration Number; 
  • or beneficiaries of the said CSR project, in the form of self-help organisations, collectives, or entities; 
  • or a public authority[3]

10. CSR Reporting: An Annual Report on CSR containing listed specifics must be included in the Board’s Report of a business covered by CSR Rules for any financial year. In the case of a foreign corp., the balance sheet must provide an Annual Report on CSR with specific information. 

11. Impact Assessment: 

Any organisation with an average CSR obligation of Rs. 10 crore or more in the three preceding financial years must conduct a ‘impact evaluation’ of their CSR ventures with outlays of Rs. 1 crore rupees or more, and which have been completed not less than one year before the impact report, through an independent agency. The impact evaluation reports must be presented to the board of directors and attached to the CSR Annual Report.  A business conducting an impact assessment may book CSR expenditure for that fiscal year that does not exceed 5% of total CSR expenditure for that fiscal year or Rs. 50 lacs, whichever is lower. This amendment aims to ensure that CSR expenditure and programmes are carried out effectively. 

12. Display of CSR activities on its website: The board of directors must make the composition of the CSR Committee, as well as the CSR Policy and projects approved by the board of directors, publically available on their website, if one exists. Prior to the amendment, the company’s board of directors only published the contents of its CSR policy in its annual report and, if applicable, on the company’s website. The changes to the CSR provisions have now been notified, and the CSR system for businesses has been revised. CSR will now be examined from a different angle: successful implementation, appropriate disclosures, and the effects on the company’s cashflows. CSR has recently changed its policy from “compliance or explain” to “compliance and invest.” Though the MCA requires CSR projects to register as entities, it will be interesting to see how the MCA tracks trust and communities for CSR purposes. 

The Statutory Auditor must also state in CARO 2020: 

  • if, in respect of non-ongoing ventures, the company has transferred unspent funds to a Fund specified in Schedule VII to the Companies Act within 6 months of the financial year’s end, in accordance with the second proviso to subsection (5) of section 135 of the said Act; and 
  • whether the company has transferred unspent funds to a Fund specified in Schedule VII to the Companies Act within 6 months of the financial year ; and 
  • if any amount remaining unspent under sub-section (5) of section 135 of the Companies Act, pursuant to any ongoing project, has been transferred to a special account in accordance with the provisions of sub-section (6) of said Act. The effect of the changes to CSR provisions on legislative audit and reporting by Auditors will be important. Though the Companies Amendment Act and Rules fix most of the key issues related to CSR spending, it will be fascinating to see how well it is implemented by corporations and other stakeholders.

[1] The Companies (Amendment) Act, 2020.

[2] MCA Notification No. F. No. 1 /3 /2020-CL.I dated January 22, 2021

[3] ‘Public Authority’ as defined in clause (h) of section 2 of the Right to Information Act, 2005.

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