The Companies Act, 2013 introduced a significant development in the field of corporate governance by making Corporate Social Responsibility (CSR) mandatory. As of April 1, 2014, India became the first country to legally mandate CSR spending for companies meeting certain criteria. The relevant provisions for CSR are laid out under Section 135 of the Companies Act, 2013, requiring companies to spend 2% of their average net profits over the last three years on CSR activities.
1. CSR Obligations under Section 135 of the Companies Act, 2013
The CSR provisions under Section 135 mandate that:
- Companies meeting the threshold criteria of net worth, turnover, or profitability must spend on CSR.
- The 2% spend must be directed towards activities listed under Schedule VII of the Companies Act, which includes areas like poverty alleviation, education, healthcare, environmental sustainability, and others.
If a company fails to meet this obligation, the reasons must be disclosed in the Board's report, with an explanation provided for the shortfall.
2. Unspent CSR Amounts for Ongoing Projects
Under the provisions of sub-section (5) of Section 135, if there are any unspent CSR amounts related to an ongoing project at the end of the financial year, the company is required to transfer these funds to a special bank account called the Unspent Corporate Social Responsibility Account.
- Time frame: The unspent amount must be deposited within 30 days from the end of the financial year.
- The account should be in a scheduled bank, and it will be designated specifically for the unspent CSR amount.
3. Provisions for Ongoing CSR Projects (Section 135(6))
Section 135(6) stipulates that:
- Any unspent CSR amount relating to an ongoing project must be transferred to the special account.
- The transferred amount must be utilized within three financial years from the date of the transfer for the same CSR project.
- If the amount is not spent within three years, it must be transferred to a Fund specified in Schedule VII within 30 days from the end of the third financial year.
Key Points:
- Ongoing projects: These are projects that are intended to be completed over more than one financial year.
- The CSR amounts that remain unspent in relation to these projects are to be kept in the special CSR account until utilized.
4. Penalty for Non-Compliance (Section 135(7))
If a company fails to comply with the provisions of CSR, particularly concerning the transfer of unspent amounts, the following penalties apply:
- Company penalty: The company is liable to a fine equal to twice the amount required to be transferred to the CSR account or the Schedule VII Fund, whichever is less, or a fine of up to one crore rupees, whichever is less.
- Officer penalty: Every officer of the company in default is liable to a fine of one-tenth of the amount required to be transferred to the CSR account or the Fund, or a fine of two lakh rupees, whichever is less.
5. Case Law: Impact of Default on CSR Obligations
In a notable case decided by the Registrar of Companies (RoC), Hyderabad, on February 22, 2023, non-compliance with CSR obligations was reviewed, focusing on the delayed transfer of unspent CSR funds to the Unspent CSR Account.
Case Summary:
- The company failed to deposit the unspent CSR funds into the required special account within the prescribed time frame of 30 days.
- As a result, the company faced penalties as outlined in Section 135(7).
- The company was directed to transfer the unspent funds immediately to the special CSR account and pay the required fines.
Consequences of Default:
- Reputational damage: Non-compliance with CSR obligations can harm a company’s reputation.
- Legal and financial penalties: The penalties imposed on the company and its officers highlight the importance of adhering to CSR regulations.
- Mandatory corrective action: Companies must act promptly to rectify the delay in CSR fund transfer to avoid further penalties.
6. Solution for Unspent CSR Amount
To ensure compliance with CSR regulations and avoid penalties, companies must adopt the following steps:
- Transfer of unspent amount: Any unspent CSR funds related to ongoing projects must be transferred to the Unspent CSR Account within 30 days from the end of the financial year.
- Utilization within three years: The amount should be utilized within the next three years for the same CSR activities, as per the company's CSR policy.
- Compliance with Schedule VII: If unspent funds are not utilized within the three-year period, they should be transferred to a Fund specified under Schedule VII of the Companies Act.
- Proper Documentation and Reporting: Maintain thorough records and disclose the reasons for any unspent CSR amount in the Board’s report.
In conclusion, CSR compliance is crucial not only for the reputation of a company but also to avoid legal repercussions. Timely and accurate transfer of unspent CSR funds is essential for maintaining regulatory compliance and promoting the company's commitment to social causes
