May 22, 2024
- Quick Contact: +91 22 2167 8100
Introduction:
Post evolution of concepts of sustainable development and Environmental Social & Governance [ESG] reporting, the concept of corporate social responsibility (CSR) evolved into something more than just local buzz; it is a widespread fascination. Everyone in the corporate world is curious about and is willing to comply with the CSR provisions under the Companies Act 2013. Companies are undertaking CSR as a social obligation more than a legal obligation. In this article we shall try to deliberate upon one legal aspect of CSR called ongoing project, which would help the companies to better undertake their legal as well as social obligation.
Meaning of ongoing project:
Rule 2 clause (i) of Companies [Corporate Social Responsibility] rules 2014 defines the ongoing project as, “Ongoing Project” means a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the board based on reasonable justification;”.
Broadly speaking, ongoing project is that CSR activity which continues over the period of one year. For any project to be called as an ongoing project, it is necessary that, it should be commenced in one financial year and should end within conclusion of 4 financial years from its commencement including the year of its commencement.
Also, if in case any project was supposed to end in current financial year and therefore it was not originally considered as ongoing project, but it could not be so completed within prescribed time and hence the company now wants to designate the same as ongoing project, then the company can do so as per the definition of ongoing project. The only condition is that the board should record in writing, the reason for treating any project as ongoing. It is also advisable that the CSR committee should recommend to the board about designation of any project as ongoing by passing a resolution at a CSR committee meeting.
Spending CSR amount on ongoing project:
Ongoing project is said to be commenced in that financial year, in which the money is actually spent on that project. Ones such spending is started, then the project has to be completed within 4 financial years, that is, the year in which the project has commenced plus 3 more years. At this point it is worth mentioning that mere transfer of fund to the implementing agency or any work contractor does not constitute spending. The company has to ensure that the funds are utilized by the receiver of funds.
When any amount earmarked for any ongoing project remains unspent in that year, that is, only the part of amount earmarked could be spent, then in that case, the amount remaining unspent should be transferred to a separate bank account called unspent CSR account. Within 30 days from the end of financial year. Thereafter, the said amount has to be spent within 3 financial years from the date of transfer. For example, if the unspent amount relates to year 2022-23, then it has to be transferred to unspent account by 30th April 2023 and has to be usedbefore 31st March 2026. This is a serious legal compliance and has to be done within prescribed time. It has been observed in multiple ROC adjudication orders that if the company fails to transfer the unspent amount to unspent CSR account or transfers the amount with a delay, then the ROC imposes heavy penalty.
Investment of unspent amount:
As discussed above, once the unspent amount is transferred to unspent CSR account, the company has a period of 3 financial years to spend the said amount. Therefore, at times it so happens that, the amount lies unutilised in the bank account for a period exceeding 6months. In such a case, the companies may be tempted to invest such money in short-term investment opportunities. However there arises a question that whether such investment is allowed or not as the said amount in question is marked for ongoing project of CSR.
As far as the legal provisions are concerned, they do not prohibit investment of unspent amount. What they mandate is just that, any profit earned from such amount should be invested back in CSR only and should not be treated as company’s profit. Therefore, the company can invest the unspent amount in short term investment before being used for ongoing project, however it should be mindful of the fact that the profit earned from such investment should be spent on CSR activity only. Further it should also be kept in mind that the expenses incurred in making such investments have to be borne by company separately and it cannot be debited from unspent amount. Also, while selecting investment option, the company should be careful that the investment should not be such that amount invested gets reduced, for example, shares. If so happens, the company will have to bear the additional cost and transfer the reduced amount to unspent CSR account.
Modification of ongoing project:
As discussed above, any ongoing project continues for 4 years that is, year of commencement plus 3 financial years. This is a long time and social situations may undergo changes which may warrant changes in ongoing project. For example, a project may lose its relevance before it is completed. In such a situation the company will have to modify or altogether change its ongoing project.in such a scenario, there arises a question that whether such change or modification is legally possible?
As per the FAQ No. 6.6 from MCA FAQs dated 21st August 2021[1], the board can abandon or modify any ongoing CSR project under extraordinary circumstances and on recommendation from CSR committee. However, while making such modification or changes the timelines for ongoing project should be adhered to. That means, company can change or modify its ongoing project only for a valid reason and that too only after the CSR committee recommends such change through a resolution passed at the CSR committee meeting.
Deadlines for ongoing project:
As mentioned in the definition of ongoing project, each project should end within 3 years excluding the year of its commencement. This amendment in section 135 relating to ongoing project had come in January 2021. Therefore, the first year in which ongoing project must have commenced will be financial year 2020-21. So as per the prescribe timelines the projects commenced in FY 2020-21 has to conclude before 31st March 2024 (year of commencement + 3 financial years). Therefore, the current ongoing financial year 2023-24 is the last year forcompletion of the project started in FY 2020-21. the amounts marked for such projects have to be spent before 31st March 2024 and if could not be spent, then the amount remaining unspent as on 31st March 2024 will have to be transferred to Schedule VII funds within 30 days from end of financial year, that is, by 30th April 2024. Also, it is advisable for the companies to include in their CSR policy for FY 2023-24 about spending such earlier unspent amount before the end of this year.
Conclusion:
In conclusion, understanding and effectively managing ongoing CSR projects is not only a legal obligation but also a crucial aspect of corporate social responsibility. As we navigate the evolving landscape of corporate social responsibility, companies must be proactive in meeting their obligations, ensuring that ongoing projects contribute meaningfully to societal well-being. By embracing these responsibilities with dedication, companies can not only comply with legal requirements but also make a lasting positive impact on the communities they serve.
[1] https://www.mca.gov.in/Ministry/pdf/FAQ_CSR.pdf