Regulatory updates

Section 2(85) of the Companies Act, 2013 read with Rule 2(1)(t) of the Companies (Specification of Definition Details) Rules, 2014 (Definition Rules) defines a ‘small company’ as:

A company, other than a public company,

1. paid-up share capital of which does not exceed INR50 lakh, or such higher amount as may be prescribed (as per the Definition Rules, this amount is INR2 crore) which shall not be more than INR10 crore, and
2. turnover of which as per profit and loss account for the immediately preceding financial year does not exceed INR2 crore, or such higher amount as may be prescribed (as per the Definition Rules, this amount is INR20 crore) which shall not be more than INR100 crore.

Provided that nothing in this clause would apply to:

1. a holding company or a subsidiary company,
2. a company registered under Section 8, or
3. a company or body corporate governed by any special Act.

On 15 September 2022, the Ministry of Corporate Affairs (MCA) issued the Companies (Specification of Definition Details) Amendment Rules, 2022 (Definition Amendment Rules), thereby amending the threshold of paid-up share capital and turnover, for determining a ‘small company’.

As per the revised definition, the paid-up share capital and. turnover of a small company should not exceed INR4 crore (earlier, INR2 crore) and INR40 crore (earlier, INR20 crore) respectively.

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To access the text of the Definition Amendment Rules, please click here

10. Section 173: Meetings of the Board

Background

Over the years, with the continuous evolution of corporate reporting around the globe and increase in emphasis towards sustainability and non-financial information disclosures, MCA has from time to time, introduced various amendments and other key developments to the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules).

Recently, MCA, vide a notification dated 20 September 2022 issued the Companies (CSR Policy) Amendment Rules, 2022 (CSR Amendment Rules). Some of the significant amendments issued include:

• Constitution of CSR Committee by a company having amounts in its unspent CSR account: Rule 3(1) of the CSR Rules requires every company, including its holding or subsidiary company, and a foreign company, fulfilling the prescribed criteria¹¹, to comply with the provisions of Section 135 of the Companies Act, 2013. Further, as per Section 135(6) of the Companies Act, 2013, companies that have not spent any CSR amount pursuant to any ongoing project, undertaken by a company in pursuance of its CSR policy, should be transferred by the company within a period of 30 days to an ‘unspent CSR account’. This amount is required to be spent within a period of three years.

MCA has now added a proviso to Rule 3(1), stating that a company that has amounts outstanding in its unspent CSR account should constitute a CSR Committee and comply with the relevant provisions of Section 135 of the Companies Act, 2013.

The insertion of this proviso will enable continuous monitoring of CSR activities by the CSR committee, which cannot be dissolved till the time an amount is lying in the unspent CSR account of the company.

• Omission of Rule 3(2) of the CSR Policy Rules: This rule dealt with a situation when CSR committee could be dissolved. However, this rule has been omitted. Therefore, a company would continue to constitute a CSR committee as long as it has funds to run those initiatives.
• Clarification on the category of entities that can implement CSR activities: Rule 4(1) of the CSR Policy Rules provides that the Board of Directors must ensure that CSR activities are undertaken by a company itself or through certain prescribed entities, i.e., the company may appoint another entity, called the implementing agency, to implement CSR activities on its behalf.

The MCA, vide the CSR Amendment Rules has added additional class of entities that may act as an implementing agency with respect to the CSR activities undertaken by a company- these are:

1. A Section 8 company, or a registered public trust, or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of Section 10¹² and approved under Section 80G of the Income Tax Act, 1961, established by the company, either singly or along with any other company, or
2. A Section 8 company, or a registered public trust, or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of Section 10 and approved under Section 80G of the Income Tax Act, 1961, and has an established track record of at least three years in undertaking similar activities.

• Expenditure on impact assessment that can be considered as a CSR spend: Rule 8 of the CSR Rules require certain entities to undertake an impact assessment of their CSR projects that meet prescribed thresholds¹³.

Such companies may book the expenditure towards the impact assessment undertaken for that financial year as a CSR expenditure. Before the amendment, the threshold up to which such an expenditure could be considered as CSR spend could not exceed five per cent of the total CSR expenditure for that financial year or INR50 lakh, whichever is less. As per the CSR Amendment Rules, the limit of expenditure incurred on impact assessment that can be considered as CSR spend has been revised to two per cent of the total CSR expenditure for that financial year or INR50 lakh, whichever is higher.

Change in the format for annual report on CSR activities: Annexure II of the CSR Rules prescribes a format for the annual report on CSR activities which needs to be included as a part of a company’s Board of Directors’ report. The MCA has amended the same and issued the revised format for reporting.

Effective date: The amendments are effective from the date of their publication in the official gazette i.e., 20 September 2022.

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11. Section 135(1) of the Companies Act, 2013 states that a company which meets any of the given threshold in the immediately preceding FY is required to comply with the CSR norms:
    1. Net worth of INR500 crore or more, or
    2. Turnover of INR1,000 crore or more, or
    3. Net profit of INR5 crore or more.

12. Following entities are covered under sub-clauses (iv), (v), (vi) and (via) of clause (23C) of Section 10 of the Income Tax Act, 1961:
    1. Sub-clause (iv): any other fund or institution established for charitable purposes which may be approved by the Principal Commissioner or Commissioner, having regard to the objects of the fund or institution and its importance throughout India, or throughout any State or States,
    2. Sub-clause (v): any trust (including any other legal obligation), or institution wholly for public religious purposes, or wholly for public religious and charitable purposes, which may be approved by the Principal Commissioner or Commissioner, having regard to the manner in which the affairs of the trust or institution are administered and supervised for ensuring that the income accruing thereto is properly applied for the objects thereof,
    3. Sub-clause (vi): any university or other educational institution existing solely for educational purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiab) or sub-clause (iiiad), and which may be approved by the Principal Commissioner or Commissioner, and
    4. Sub-clause (via): any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness, or for the reception and treatment of persons during convalescence, or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, other than those mentioned in sub-clause (iiiac) or sub-clause (iiiae), and which may be approved by the Principal Commissioner or Commissioner.
13. Every company having an average CSR obligation of INR10 crore or more in pursuance of Section 135(5) of the Companies Act, 2013 in the three immediately preceding financial years, should undertake impact assessment, through an independent agency, of their CSR projects having outlays of INR1 crore or more, and which have been completed not less than one year before undertaking the impact study

To access the text of the notification, please click here