THE LEGAL BRIDGE

Topic 72 — Post-2021 Compliance Layer

Companies Act, 2013 — CSR Impact Assessment, SBO under Section 90, and Recent Reforms

I. Conceptual Foundation: From Compliance to Accountability

Between 2018 and 2023, the Companies Act, 2013 has been substantially reshaped through three Amendment Acts (2017, 2019, 2020) and a series of MCA notifications and rule changes. These amendments are not cosmetic — they collectively shift the corporate compliance regime from a 'paper compliance' culture to a 'demonstrable accountability' culture. Two reforms stand out as exemplars of this shift: (i) the CSR Impact Assessment regime introduced by the 2021 amendment to the CSR Rules, requiring large CSR projects to be evaluated by independent agencies with measurable impact metrics; and (ii) the Significant Beneficial Ownership (SBO) framework under Section 90, requiring identification of natural-person ultimate owners hiding behind layered corporate structures.

This topic — building on Topic 70 (CSR foundations) — examines the post-2021 CSR architecture (Companies (CSR Policy) Amendment Rules, 2021), the SBO regime under Section 90, and other post-2021 reforms that any judicial aspirant or commercial lawyer must master. These are the most actively litigated provisions in the present moment.

II. CSR Impact Assessment — Rule 8(3)

Triggers for Mandatory Impact Assessment

• Trigger A — Company Threshold: average CSR obligation of ₹10 crore or more in the three immediately preceding financial years (i.e., the 2% obligation, not actual spend). Companies below this threshold may voluntarily undertake impact assessment but are not legally required.
• Trigger B — Project Threshold: outlay of ₹1 crore or more on a specific CSR project.
• Trigger C — Time Threshold: project completed at least 1 year before the impact study is initiated.
• All three conditions must concur. If a company crosses the ₹10 crore aggregate but has no individual project crossing ₹1 crore, no impact assessment is required.

Independent Agency

The impact assessment must be undertaken by an independent agency. The Rule does not prescribe specific accreditation requirements, but MCA's General Circular 14/2021 clarifies that 'independent' means an agency without any conflict of interest with the company or the project. Such agencies typically include third-party CSR consulting firms, NGOs accredited by Niti Aayog, government-appointed bodies (NCAER, ASCI), academic institutions (TISS, IRMA, Azim Premji University, IITs/IIMs centres), and chartered accountancy firms with a CSR specialisation. The agency must apply rigorous evaluation methodologies — typically OECD-DAC criteria (relevance, effectiveness, efficiency, impact, sustainability).

Reportable Expense

Companies are permitted to book the cost of impact assessment as part of CSR expenditure, capped at the lower of: (i) 5% of total CSR expenditure for that financial year; or (ii) ₹50 lakh. This proportional cap discourages excessive consultancy spending while incentivising meaningful evaluation. Prior to the 2022 amendment, the cap was 5% or ₹50 lakh — restricted to the financial year of the assessment, not the project year.

III. Other Post-2021 CSR Changes

A. CSR-1 Registration of Implementing Agencies

From 1 April 2021, every implementing agency (any entity other than the company itself that the company channels CSR funds through) must obtain a CSR Registration Number by filing Form CSR-1 with the MCA. Without this registration, no company can use the agency for CSR delivery. The form requires: details of the entity, registration certificates (Section 8 / 12A / 80G under IT Act), three-year track record (where applicable), bank details. The aim is to eliminate fly-by-night CSR vendors and create a public registry of credible implementing agencies. Over 70,000 entities have registered by 2023.

B. Mandatory Annual CSR Format — CSR-2

From 1 April 2022, every company subject to Section 135 must file Form CSR-2 with the MCA — separately from the Annual Report — disclosing detailed CSR information for the preceding financial year: average net profit, prescribed CSR amount, amount actually spent, ongoing-project allocation, transfer to Schedule VII Fund, transfer to Unspent CSR Account, project-wise expenditure with implementing agencies. The form must be filed by 31 March of the financial year subsequent to the financial year for which it relates.

C. Set-Off of Excess CSR Spending — Rule 7(3)

If a company spends more than the prescribed 2% in a financial year, the excess can be set off against the CSR obligation of the next 3 financial years — provided: (a) the excess does not include surplus arising from CSR activities; (b) the Board has passed a resolution; (c) reporting in CSR-2 reflects the set-off. This was introduced in 2021 to incentivise generous early spending and accommodate lumpy multi-year project structures.

D. Capital Asset Restriction — Rule 7(4)

CSR funds may be used to acquire or create a capital asset — but the asset must not be owned by the company itself. The asset must be held by: (i) a Section 8 company / public charitable trust / registered society having a CSR Registration Number; (ii) the beneficiaries directly (e.g., self-help groups, BPL families); or (iii) a public authority. This rule prevents a company from using CSR funds to build assets that ultimately enrich its own balance sheet.

E. Surplus from CSR Activities — Rule 7(2)

Any surplus arising from CSR activities (e.g., interest on CSR funds parked, fees collected from beneficiaries) shall not form part of business profit. It must be ploughed back into the same CSR project or transferred to the Unspent CSR Account or to a Schedule VII Fund. This closes a loophole where CSR-derived income could be quietly routed back to the company's profit and loss account.

IV. Significant Beneficial Ownership — Section 90

Conceptual Foundation: Why SBO?

Modern corporate structures often use multiple layers — a holding company in Mauritius, a subsidiary in Cayman Islands, an Indian operating company — to obscure who ultimately owns and controls. While these structures may serve legitimate tax-planning and asset-protection ends, they have also been weaponised for money laundering, terrorist financing, sanctions evasion, and tax fraud. The Financial Action Task Force (FATF) requires every member jurisdiction to identify the 'beneficial owner' — the natural person who ultimately owns or controls — of every legal entity. Section 90 is India's compliance with FATF Recommendation 24.

Threshold and Definition — Rule 2(1)(h) of SBO Rules, 2018

An SBO is a natural person who, either alone or together with others, possesses one or more of the following rights or entitlements in a reporting company:

• Indirectly, or together with any direct holdings, holds not less than 10% of the shares (substantially reduced from the statutory 25% by Rule 2(1)(h)).
• Indirectly, or together with any direct holdings, holds not less than 10% of the voting rights in the shares.
• Has right to receive or participate in not less than 10% of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings.
• Has right to exercise, or actually exercises, significant influence or control, in any manner other than through direct holdings alone.

Who is NOT an SBO

Direct holdings alone do not make a person an SBO — the concept is fundamentally about indirect ownership through layered structures or significant influence/control. A direct registered shareholder is identified through ordinary register-of-members provisions (Section 88). The SBO regime targets the hidden controller, not the visible owner.

V. The SBO Reporting Architecture

A. Declaration by SBO — Section 90(1) and Form BEN-1

An individual who becomes an SBO must file Form BEN-1 with the company within 30 days of becoming an SBO or upon any change. The form requires identification details, the nature and extent of the beneficial interest, the chain of indirect holding, the date of acquisition. The individual is responsible for filing — not the company.

B. Reporting by Company — Section 90(4) and Forms BEN-2 and BEN-3

• On receiving a Form BEN-1 declaration, the company must file Form BEN-2 with the ROC within 30 days, recording the SBO declaration.
• The company must maintain a Register of SBOs in Form BEN-3 — the public record.
• If the company has reason to believe that an individual is an SBO and has not declared, the company must serve a notice in Form BEN-4 calling for information; failure to respond entitles the company to apply to the Tribunal under Section 90(7).

C. Tribunal's Power — Section 90(7) and (8)

D. Penalty Architecture — Section 90(10) and (11)

• SBO failing to declare: penalty of ₹50,000 + ₹1,000 per day continuing default (max ₹2 lakh — individual; max ₹5 lakh — company default).
• Wilful concealment under Section 90(10): imprisonment up to 1 year + fine ₹1 lakh to ₹10 lakh + continuing default fine ₹1,000 per day.
• If concealment involves fraud: Section 447 attracts (10 years' imprisonment, 3× fine).

VI. Significant Influence or Control — A Doctrinal Note

'Significant influence' is defined in Section 2(6) — control of at least 20% of the total voting power, or control of or participation in business decisions. 'Control' is defined in Section 2(27) — right to appoint majority of directors, or to control the management/policy decisions through shareholding/management rights/shareholders' agreements/voting agreements. Both concepts feed into the SBO Rule 2(1)(h)(D) — a person exercising significant influence or control may be an SBO even without crossing the 10% indirect-shareholding test.

VII. Other Post-2021 Reforms — A Compendium

A. Companies (Amendment) Act, 2020 — Decriminalisation

The 2020 amendment decriminalised 48 offences under the Companies Act — converting them from criminal offences to civil penalties recoverable through Section 454 adjudication. Notable retentions: Section 447 (fraud), Section 140(5) (auditor fraud), Section 213 (Tribunal investigation), and Section 339 (fraudulent conduct). The pivot was deliberate — minor procedural breaches no longer attract prosecution; serious frauds remain criminal.

B. Section 23 — Direct Listing on Foreign Stock Exchanges

Section 23, amended by the 2020 Act, now empowers the Central Government to permit Indian public companies to issue securities for listing on permitted foreign stock exchanges. Operationalised by MCA Notification of 30 October 2023, Indian companies may now list directly on IFSCA-permitted foreign stock exchanges (initially GIFT City IFSC) without an Indian listing first. This is a watershed reform for capital-raising flexibility.

C. Section 248 — Strike-Off by Registrar

The 2020 Amendment Act expanded the Registrar's strike-off powers under Section 248 — now covering companies that have failed to commence business within 1 year of incorporation, or that have not been carrying on business for 2 financial years. Combined with the simplified online process introduced in 2017, strike-off has become the predominant exit route for inactive companies.

D. Producer Companies — Reintroduced under Chapter XXIA

The 2020 Act reintroduced producer-company provisions (originally in the 1956 Act) into the 2013 Act through Chapter XXIA (Sections 378A–378ZU). Producer companies are special-purpose entities for primary producers (farmers, fishermen, weavers) that combine cooperative-society features with company-law flexibility.

E. Companies (Amendment) Act, 2019 — Dematerialisation

Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (notified September 2018, effective October 2018) requires every unlisted public company to issue its securities only in dematerialised form, and to facilitate dematerialisation of all existing securities. Companies (Amendment) Act, 2020 has further extended this to certain prescribed classes of unlisted private companies (notification of 27 October 2023 covers companies above prescribed thresholds).

VIII. Companies (Amendment) Act, 2017 — Selected Reforms

• Section 184 — disclosure of interest by directors; ratification regime tightened; non-disclosure leads to vacation of office under Section 167.
• Section 167 — vacation of office expanded; missed Board meetings for 12 months lead to automatic vacation.
• Section 188 — special resolution requirement reduced to ordinary resolution for shareholder approval.
• Section 197 — managerial remuneration cap of 11% net profit retained but procedural simplification; Section 197(10)–(13) introduced for refund and disclosure.
• Section 100 — EGM requisition mechanics streamlined.
• Section 173 — board meetings via video conferencing extended to ALL matters (earlier excluded matters now allowed).
• Section 161 — alternate director rules tightened.

IX. Coaching Analogy — Two Mirrors and a Magnifying Glass

Imagine the company as a glass house. The CSR regime under Section 135 is the first window — it shows what social wealth the company generated for the public. The 2021 Impact Assessment is a magnifying glass placed against this window for large-CSR companies — checking not just whether the rupees were spent but whether they actually built schools, planted trees, or healed children. The SBO regime under Section 90 is a second mirror — it flips the company's facade and shows the real human face hidden behind the layered shareholders. The 2018 SBO Rules and 2020 amendments together make this mirror impossible to hide. The Companies Act, 2013, in its post-2021 form, is no longer the static building of 2014 — it is a living architecture that updates itself with each amendment, each circular, each NCLT decision. To pass exams and to advise clients, one must check not just the bare Act but the latest Rules, MCA circulars, and Tribunal precedents.