August 31, 2023

Unspent CSR obligations met, but is the company still non-compliant?

Unspent CSR obligations met, but is the company still non-compliant?

Applicable Provisions for Spending of CSR & Responsibility casted:

Sub section (5) of section 135 of the Companies Act, 2013 [“Act”] casts a duty on the Board of Directors of every company who is required to constitute a CSR Committee in terms of section 135 (1) which states:

That the company must spend in every financial year at least 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of its CSR policy.
In case the company has not completed three financial years since its incorporation, average of profits of such number of financial years shall be considered.

To clear the ambiguity regarding what shall be considered as a fund specified in schedule VII to which such unspent CSR amount shall be transferred in pursuance of second proviso of section 135 (5) of the “Act”; MCA vide its General circular no 14/2021 dated 25th August 2021 has clarified the meaning of Fund.

Point no 3.15 & 3.16 of the aforesaid circular has specified. The same is:

3.15 Contributions to the following funds shall be admissible CSR expenditure. They are: –

Swachh Bharat Kosh.
Clean Ganga Fund
Prime Minister’s National Relief Fund [PMNRF]
Prime Minister’s Citizen Assistance and Relief Emergency Situations Fund [PM Cares fund]
Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio economic development and the relief and welfare of the schedule castes, the Schedule Tribes, other backward classes, minorities, and women.

Further point 3.16 clearly does not recognize contribution made to any other fund for carrying out activities mentioned in Schedule VII. The same is quoted as follows:

3.16 The Act does not recognize any contribution to any other fund, which is not specifically mentioned in Schedule VII, as an admissible CSR expenditure.

Second Proviso of section 135 (5) provides a way to the company that even where such amount has not been spent completely and the company has any unspent CSR obligations as on 31^st march then they can still be compliant w.r.t their CSR spending obligation provided:

Such unspent amount is transferred to a fund specified in Schedule VII within a period of six months from the expiry of the financial year.
The Board report of the company shall specify the reason for not spending such an amount up to 31^st March.

However, there may be situations where the company is not able to spend the entire obligation upto the end of the financial year i.e., upto 31^st March of the relevant financial year except other than instances where the company is pursuing an ongoing project. The reasons for the same could be: –

Budget constraints: Companies may face budget constraints due to economic downturns or other unforeseen circumstances that may impact their ability to spend the entire CSR obligation.
Technical Errors: Certainly, companies may transfer some part of obligation to a schedule VII fund but sometimes due to tech breakdown the money may get bounced back and it may go unnoticed.
Unconsciously the amount may fall short due to unforeseen circumstances beyond the control of the company.

Having stated the above, there have been precedents where wrong spending, incorrect transfer has occurred, and ROC calls it noncompliant, and the offence falls under the umbrella of adjudication.

Below is the gist of cases where Adjudication orders passed by ROC.

Serial No	Name of the Company	ROC	Source of finding violation	Penalty Levied
	Temenos India Private limited	ROC Chennai	Company had an unspent amount of Rs 39,83,030/- as on 31^st March,2021. On 19.08.2021 the company transferred an amount of Rs 42,00,000/- to ‘Center for University-Industry Collaboration Anna University, Chennai under the head “Contribution to Public Funded Universities” pursuant to clauseix (b) of Schedule VII. During the Audit of 2021-22 it came to the knowledge of the company that such transfer of unspent CSR amount was not in tune with the MCA circular dated 25^th August,2021 which clarified the meaning of fund. On 27.09.2022 the company made the transfer of the unspent amount to PM Cares Fund amounting to Rs 39,83,030/- in terms of the meaning of fund.	ROC observed that penalizing the company for non-compliance of the provision relating to the transfer of Unspent CSR amount i.e., 2^nd proviso to section 135 (5) may lead to double jeopardy as the company has already paid twice the amount required to be transferred, as the penal provisions u/s 135 (7) states that the penalty to be imposed on company shall be twice the unspent amount or Rs 1 Crore [whichever is less]. A penalty of Rs 2 lakhs each was imposed on Four Officers in default of the company which is the maximum limit set out by section 135 (7).
2.	RHI Magnesita India limited	ROC Mumbai	The subject company had an unspent CSR amount of Rs 1,35,40,799/- as on 31^st March,2021. It was able to deposit only Rs 32,00,000/- before 30^th September,2021 to PM Cares Fund. The secretarial Audit report for the F.Y 2020-21 pointed out the shortfall in CSR expenditure to the tune of Rs 1,03,40,799/- The same was acknowledged in the director’s report 2020-21 stating that the company was affected due to covid pandemic. The default was rectified by the company on 18.05.2022 by transferring the unspent amount to PM Cares Fund.	Penalty imposed by ROC Mumbai in terms of section 135 (7): On Company: Rs 1 Crore On four officers in default: Rs 2 lakhs each.
	Comviva Technologies Limited	ROC Delhi	The company had an unspent CSR obligation of Rs 5,50,122/- as on 31^st March,2021. It transferred such unspent amount to PM relief fund which is a specified schedule VII fund on 22^nd April,2021. Due to technical error, the said amount bounced back into the applicant company’s Bank Account on the same day, and it remained unnoticed to the officers of the company. The said default was made good by the company by transferring the unspent CSR amount on 30^th March,2022 to PM relief Fund.	Penalty imposed by ROC Delhi in terms of section 135 (7): On company: Rs 11,00,244/- On Eight officers in default: Rs 55,012/- each.

Due to these challenges faced by the company and lack of information they were penalized by ROCs. This therefore leads us to ponder and deliberate upon what could be viable solutions for the same.

One solution that can notably be done is systematic preparation of an annual action plan. Parallelly, there should be provisions made well in advance and noted in the annual action plan for transfer of unspent CSR amount in right quantum and right fund which shall be specifically stated.

Various companies recently had to bear the brunt of ROC and heavy penalties were levied on them for non-compliance despite meeting the spending obligation.

The second proviso of section 135 (5) of the Act, which embarks a precedent for all such companies who are required to transfer their unpent CSR amounts as clarified at the start of the article for the Financial Year 2022-23.

Conclusion

Hence, it is significant and crucial that companies which have unspent CSR obligations pending as on 31^st March must transfer such unspent amounts only to specified schedule VII funds and ensure that such transaction is completed before 30^th September, and it is not rendered ineffective on account of any technical discrepancies.

Further it is also advisable that companies must include a statement in their annual action plan specifically stating the schedule VII funds within the meaning of fund to rule out any default as seen from aforesaid orders. Does your CSR annual action plan have this?