February 3, 2024
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Introduction.
The Companies Act, 2013 [“the Act”] requires companies falling within certain criterias to spend 2% of their net profits in every financial year as part of its Corporate Social Responsibility [CSR]. Over the years since the compliance with CSR provisions was made mandatory for applicable companies the corporate sector as a whole in India has witnessed a manifold increase in the level of spending vide the CSR obligations. The Ministry of Corporate Affair [MCA] showcases year on year data[1] about CSR spending and the latest updated figure for 2021-22 highlights that over Rs 25,932.79 crores has been spent by a total of 18,623 companies in India for the Financial Year 2021-22 ended.
This is large scale of funds being flown from the corporate sector towards the social needs of the society. To ensure that the spent funds are being actually utilised or are meeting the end purpose of the desired activity plays a much bigger role in CSR compliances on the part of the companies.
With the total amount of spending projected to grow upwards significantly in the coming years there is a greater responsibility on the corporates to adhere to the true purpose of CSR spending. Also, the Inhouse Adjudication Mechanism of the MCA is playing an active and crucial role in monitoring all such companies who are required to fulfil CSR obligations.
In one such ROC Delhi Adjudication order which we will understand in this article, it was highlighted that the responsibility of CSR spending is not the duty of an individual director but is the obligation of the Board as a whole.
Facts of the case.
Second proviso to sub section (5) of section 135 of the Act puts a mandate that if a company has not spent the entire CSR obligations of a particular financial year by the end of such financial year then such company is required to transfer the unspent CSR obligation amount to a fund specified in Schedule VII.
Further such companies are also required to specify the reasons for not spending by the end of financial year the obligated amount of CSR in the Board’s Report of the Company.
Section 135 (5) along with its second proviso can be read as follows:
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years 7[or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years], in pursuance of its Corporate Social Responsibility Policy.
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount [and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
In the said case, for the financial year 2019-20 the net profits of the subject company exceeded Rs 5 crores due to which the company was required to spend Rs 6,86,480/- as part of its CSR obligations during the financial year 2020-21.
The said amount of CSR obligation remained unspent on behalf of the company during the entire financial year 2020-21. Further such unspent amount was also not transferred to the Schedule VII funds as prescribed by the second proviso to sub section (5) of section 135 i.e. within 6 months from the end of the relevant financial year [ upto 30th September,2021 in the given case].
The same was eventually actually spent by the company by transferring the said amount to PM cares fund on 7th February 2023.
Further as per the 2nd proviso of sub section (5) of section 135 of the Act, there is a requirement that if the company fails to spend the obligation in the relevant financial year, the Board must specify the reasons for not spending in the Board’s report. This disclosure of reasons for not spending was missing in the case of the subject company.
The subject company in its defence submitted that the default for the period 2020-21 was made on account of lack of awareness as the CSR provisions became applicable to the company for the first time.
It was also pleaded on behalf of the subject company that only one of its executive director must be penalised as he is designated as the officer in default.
View taken by ROC.
The plea regarding officer in default is not in alignment with the CSR provisions as contained in section 135 of the Act as the statute casts a clear obligation on the Board to comply with the CSR.
Section 135 (5) of the Act uses the word “The Board of every company referred to in sub section (1) shall ensure that the company spends in every Financial year at least 2%………..”
Further the FAQs issued by MCA vide general circular dated 25.08.2021 provides answer to a question in point 2.3 as to “what are the responsibilities of the Board in relation to the CSR provisions?
It specifically specifies that CSR is a Board driven process and lists out that the Board shall be responsible to:
(iv)ensure that the company spends, in every financial year, at least two percent of the average net profits of the company made during the three immediately preceding financial years;
(v) satisfy itself regarding the utilisation of the disbursed CSR funds;
Thus, it is clear that section 135 of the Act and the rules made thereunder casts an onus on the Board to comply with the provisions. The responsibility inter alia includes that the Board shall not only ensure that the company spends, in every financial year, at least two percent of the average net profits of the company made during the three immediately preceding financial years but shall also satisfy itself regarding the utilisation of the disbursed CSR funds.
The Board here refers to all the directors of the company, whether executive or otherwise. It is a trite principle of law that in case the law casts an obligation upon any person/body, the liability in case of default in complying with such obligation would also squarely lie with such person/body. The FAQs issued by the ministry also unequivocally point out to the same direction that-CSR is a Board driven process.
As regards, the interpretation of section 2 (60) of the Act, which defines an officer in default is concerned, it may be noted that section 2 begins with the words, “unless the context requires otherwise”. Thus, the principle of ascertaining the officer in default on the basis of section 2 (60) would only hold good if the concerned provision does not identify the officer in default. Once such officer is identifiable under the relevant provision, the general definition of section 2 (60) would no longer hold the sway.
In view of the aforesaid reasons all the directors as on that relevant date would be liable on account of the failure to discharge an obligation cast upon them by the law.
Penalty imposed.
For the violation of sub section (5) of section 135 penalty was imposed by ROC Delhi on the company as well as all the directors of the board of the company consisting of both executive and non-executive directors as under.
| Penalty imposed on | Penalty imposed [in Rs] u/s 135 (7) |
| On Company | Rs 13,72,960.42/- |
| On 4 directors | Rs 68,648.02/- each |
For violation of clause [o] of sub section [3] of section 134 penalty was imposed by ROC Delhi on the company and the signatories of the Board’s Report as under.
| Penalty imposed on | Penalty imposed [in Rs] u/s 134 (8) |
| On Company | Rs 3,00,000/- |
| On 2 directors | Rs 50,000/- each |
Conclusion
The aforesaid case highlights that CSR is not just a financial obligation but also a significant corporate governance requirement, mandating transparency, and accountability from the Board of Directors. The decision made by ROC Delhi reinforces the principle that CSR responsibilities are collective and not limited to individual directors.
Also, the view taken by ROC Delhi underlines the seriousness with which the regulator wants corporates to adhere to its obligations. Also, it is a reminder to all the companies especially those who are new to CSR provisions to build a robust mechanism for monitoring and reporting CSR activities. The only way out to avoid such lapses is to provide the Board members with adequate training and awareness programs.
As CSR spending will continue to grow, effective planning and diligent approach shall be required on the part of the corporates to avoid making any non-compliance. Any slip up would mean that the corporates would have to face regulatory action from the regulator.
[1] https://www.csr.gov.in/content/csr/global/master/home/home.html
References: [Link of ROC orders]
https://www.mca.gov.in/bin/dms/getdocument?mds=jgXkJ%252F6SZHKjjnfc5Ox8qQ%253D%253D&type=open
https://www.mca.gov.in/bin/dms/getdocument?mds=N%252FksWn%252BpBryRRUYZVV18Ag%253D%253D&type=open
The article is published in Taxguru
https://taxguru.in/company-law/csr-compliance-lessons-roc-delhi-adjudication-insights.html