Companies can't hold capital assets created with CSR funds: Experts

The recently notified corporate social responsibility (CSR) rules require companies to transfer any capital asset created or acquired by using CSR money to the beneficiaries of the project, charitable company or a public authority. 

If such capital expenditure was incurred as part of CSR in the past, the assets need to be transferred within six months. This deadline can be extended by a maximum of 90 days with the approval of the board after providing reasonable justification.  “Companies will need to review capital expenditure incurred in the past... This may involve some complexity for immovable property or assets that are of shared use. If such assets are reflected in the books, the carrying value will need to be written off,” said Sudhir Soni, partner, SR Batliboi and Co. 

The Ministry of Corporate Affairs last week made significant changes to provisions on CSR activities to be undertaken by companies according to section 135 of the Companies Act, 2013.

The addition made in Rule 7 says, “The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by — a company established under section 8 of the Act, a registered public trust or registered society, having charitable objects and CSR Registration Number. Such assets can also be held by beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities or a public authority.”

One way of interpreting the amendment is that the ownership of the capital asset can be with the company incurring its cost of acquisition, with the right to use such capital asset being given to beneficiaries, said Arvind Sharma, partner, Shardul Amarchand Mangaldas & Co. “This is a novel model in the context of CSR and it would help benefit a larger group as the right to use a capital asset can be given to more beneficiaries so that optimal utilisation of the asset can be ensured,” he said.

Experts said companies must consider some key aspects like the control of unauthorised use and maintenance of the capital asset.  

“A logical interpretation of this section would mean that only the amounts spent on capital expenditure that are claimed as CSR spend need to be transferred. Any capital assets of the company that are used for CSR, but have not been claimed as CSR expenditure, need not be transferred to such entities,” said Madhu Sudan Kankani, partner, Deloitte India.