Compliance alert-

MCA has now notified an e-Form CSR – 2 for Report on CSR as an addendum to Form AOC-4 vide an amendment in the Companies (Accounts) Rules, 2014. This amendment brings in a two-fold requirement for compliance in the remaining one and a half months of the Financial Year 2021-22.

Firstly, companies which fall within the purview of CSR mandate under section 135 must file before March 31, 2021 Form CSR – 2 for the preceding financial year 2020-21. Even if a company has duly completed its annual filings, it has to now file this form. Logistically, this may pose some challenge as the companies may not even have the requisite data for the preceding financial year readily available. Be that as it may, companies will be well advised to make the filing to the best of their abilities.

Secondly, the form brings back in focus the momentous changes on the mandatory CSR regime brought about in January 2021. Now, with this Form CSR – 2, any non-compliance will be easy to spot. One can expect that non-compliant companies will start to get notices by this time next year. And to avoid being in that ignoble league of companies which would have been flagged for its failure to demonstrate good corporate citizenship, the next 45 days are critical. And there is another compelling reason, the onerous penalty leviable on non-compliant companies and their directors. As per the amended section 135, which took effect on January 22, 2021, every company in default of the substantive requirements is liable to pay a penalty of twice the unspent amount (otherwise required to the transferred to designated account or a fund) or INR 1 Crore, whichever is less. Every officer in default is liable to pay a penalty of one-tenth of such unspent amount or INR 2 Lakhs, whichever is less.

It is time to do a quick review of CSR compliances as per the 2021 mandate and fix gaps before the fiscal year ends. Please take a look at the list of compliances:

1. Amend CSR Policy.
2. Formulate an annual action plan.
3. Website disclosures – composition of the CSR Committee; CSR Policy; and Projects approved by the Board.
4. Annual CSR Report to be prepared as per the revised format.
5. Ongoing Project – Identify deficit in the spending and any ongoing project; set up Unspent CSR Account and transfer the deficit amount for ongoing project within 30 days of end of fiscal year; transfer any other deficit amount to Schedule VII Fund within 6 months from end of fiscal year.
6. Compliance for CSR vehicles and partners – Registrations under section 12A and section 80G of Income Tax Act; Registration under the Companies Act (Form CSR-1).
7. Responsibility of Board of Directors – Confirmation with respect to utilization of the CSR expenditure; monitoring of ongoing projects; placing of certificate of CFO about utilisation of CSR fund.
8. Keep account of administrative overheads, not to exceed 5% of total CSR expenditure.
9. Any profit arising out of CSR expenditure – Plough back into the same project, or transfer to the Unspent CSR Account and spend in pursuance of CSR policy and annual action plan, or transfer to a Fund specified in Schedule VII, within specified period.
10. Capital asset created or acquired by CSR expenditure to be held by certain designated class of entities.
11. Impact assessment through third party agency, wherever applicable.

It may be noted that under section 135 of the Act, mandatory CSR has been made applicable on certain classes of companies, and the determination is based on net worth, turnover or profitability in immediately preceding financial year. The provision applies to every company having a minimum net worth of INR 500 Crore, or turnover of INR 1000 Crore, or net profit of INR 5 crore. The companies breaching any of the three de minimis thresholds above are mandated to spend in a financial year two per cent (2%) of three preceding years’ average net profit.

To conclude, it can be said that this new e-form CSR – 2 is in line with the changes in CSR Rules notified in January 2021. This move is likely to bring in objectivity and accuracy in reporting and will also facilitate data analysis in substantial detail with reduced cost and enhanced speed, accuracy, and efficiency. Most importantly, in the light of new regime of hefty penalty for non-compliance, this e-form will help MCA detect non-compliance expeditiously. Companies will do well to complete their CSR compliances in the remaining one and a half months of the Financial Year, to avoid the risk of penalty for non-compliance.