Corporate Social Responsibility (CSR) means a company’s voluntary commitment to conduct its business operations in an ethical, responsible, and sustainable manner, while also contributing to the development of society. CSR goes beyond the company’s core mission of profit generation and involves actively addressing the needs of various stakeholders, including employees, customers, communities, and the environment by contributing a part of its earnings towards the development of society at large.
Section 135 of the Companies Act, 2013 (“Act”) read along with Companies (Corporate Social Responsibility Policy) Rules, 2014, lays down the provisions of Corporate Social Responsibility. The broad provisions are highlighted herein below:-
As per Section 135(1) of the Act, every company having
- net worth of INR 500 crore or more; or
- turnover of INR 1000 crore or more; or
- net profit of INR 5 crore or more;
during the immediately preceding financial year, is mandatorily required to comply with CSR provisions as prescribed under the Act and rules made thereunder including but not limited to the constitution of Corporate Social Responsibility Committee (CSR Committee), comprising three or more directors, out of which one shall be an independent director. However, where the company is not required to appoint independent directors under Section 149(4), such a company may have its CSR Committee with two or more directors. Every such company shall have in place a CSR Policy stating therein the activities that can be undertaken as a part of the CSR initiative.
As per Section 135(5) of the Act, every company falling under the above-mentioned threshold, is required to spend at least 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance to its CSR policy. However, where the company has not completed three years from the date of its incorporation and has reached the prescribed threshold, then average net profits during such immediately preceding financial years as applicable, are to be considered.
Consequential effects for not spending the CSR amount
As per the provisions of Section 134(3)(o) of the Act, if the company fails to spend the amount earmarked for the purpose of CSR, it shall make an appropriate disclosure of the unspent amount along with the reasons thereto in the directors’ report of the company, failing which the company shall be liable to a penalty of INR 3 Lakh and every officer of the company who is in default shall be liable to a penalty of INR 50 Thousand.
Further, the treatment for the unspent amount of CSR expenditure shall be as follows:-
In case the unspent amount does not relate to any ongoing project
If the unspent amount does not relate to any ongoing project, it shall be transferred to a Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) as specified in Schedule VII of the Act, within a period of six months of the expiry of the financial year.
- In case the unspent amount is related to any ongoing project,If the unspent amount relates to any ongoing project, it shall be transferred to a special account (CSR account) to be opened by the company in that behalf for that financial year with any scheduled bank, within thirty days from the end of the financial year and be spent by the company in pursuance of its CSR policy within a period three financial years from the date of such transfer. Furthermore, if the company fails to spend such an amount even after the expiry of three financial years, then the company shall transfer such unspent amount to PM CARES Fund within thirty days from the date of completion of the third financial year.
Consequential effects for not transferring the unspent amount to PM CARES Fund or unspent CSR account.
As per Section 135(7) of the Act, if the company fails to transfer the unspent CSR amount to PM CARES Fund or unspent CSR account, as the case may be, within such time period as mentioned hereinabove, the penalty shall be as follows:-
For company: twice the amount required to be transferred by the company to the PM CARES Fund or unspent CSR account, as the case may be, or INR 1 crore whichever is less;
For officer in default: one-tenth of the amount required to be transferred or INR 2 Lakh, whichever is less.
Order of Penalty for Non-Compliance of CSR Provisions in the Matter of Adjudication of Smith n Smith Chemicals Limited
Facts: Recently, the Ministry of Corporate Affairs (MCA) has released an adjudication order pursuant to non-compliance of CSR provisions of the Act read along with applicable rules in the matter of Smith N Smith Chemicals Limited (the Company), having CIN: U24100DL2013PLC252186 and registered office at 4th & 5th Floor, Block-A, NDM-1, Netaji Subhash Place, North West, Delhi-110034, wherein the CSR provisions were applicable to the Company for the financial year 2020-21, and hence the Company was required to spend an amount of INR 6,86,480.21/-as a part of CSR obligation. However, the Company failed to realize the applicability of CSR provisions for the said financial year and thereby inadvertently reported in the directors’ report that it does not fall within the purview of Section 135(1) of the Act during the year and hence it is not required to formulate policy on corporate social responsibility.
The Company realized the above-stated default in the financial year 2022-23 and immediately transferred an amount of INR 6,86,500/- to PM CARES Fund and also subsequently submitted an application to the ROC admitting the non-compliance of the provisions of Section 134(3)(o) and Section 135(5) of the Act.
Representations made by the Company: The Company, upon being adjudicated, represented several grounds for such non-compliance including lack of awareness among the directors regarding CSR provisions as the provisions became applicable for the first time, disturbances in functioning due to covid outbreak, etc., and requested for relaxation in penal provisions.
Adjudication Order: Imparting due consideration to the fact that the Company admitted the default on its own and applied for adjudication, the Honorable ROC invoked the penal provisions for the non-compliance of Section 134(3)(o) and imposed a penalty of INR 3 Lakhs on the Company and INR 50 Thousand each on the two directors of the Company, who signed the directors’ report for the financial year 2020-21.
Conclusion: In view of the above, it can be said that it is essential for companies to strictly adhere to the provisions of CSR for the sustainable development of the business as well as to safeguard themselves from the hefty penalties that can adversely affect the company’s goodwill and financial health