Companies must utilize the full 2% on CSR

Ministry of Corporate Affairs (MCA), Government of India (GOI) is on the brink of changing its earlier gentle stand on CSR to now ensuring full compliance.

1) It is proposed that if CSR funds cannot be spent fully during any given financial year, provisions will have to be made by the company to expend the unspent amount within three years.

2) It is also proposed that companies which have not completed three financial years should be drawn into the CSR compliance net.

The CSR clause

Section 135 (the CSR clause) was initially introduced under the Indian Companies Act 2013 as a rather benign clause aimed at encouraging companies to formulate a CSR Policy, a CSR Committee and Report on the CSR activities undertaken by the company as per the company’s CSR policy.

While under sub-section (5) of Section 135, the Board of every company (having net worth of Rs. 500/- crore or more, or turnover of Rs. 1,000/- crore or more, or net profit of Rs. 5 crore or more, during the immediately preceding financial year) is required to 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, in pursuance of its CSR Policy, if the company fails to spend such amount, the Board, in its report made under Section 134(3)(o) is required to specify the reasons for not spending the amount. In other words, such a company may not spend any amount on CSR or just a fraction of the amount and get away with it by providing a reason for not spending the amount. MCA now proposes to plug this loop-hole under law.

Ensuring full utilization of CSR funds

Four years since the law has come into effect (from 1st April 2014), the Ministry of Corporate Affairs is now keen to ensure that every company which is required to comply under the provisions of Section 135 of Indian Companies Act 2013 does so without any compromise.

From the earlier policy of “Show or Shame” (show what and how much your company did or ‘spent’ in terms of corporate social responsibility, or stand shamed in your company’s Annual Report and website as to how little you contributed by way of your corporate social responsibility) the GOI is shifting its policy to “Spend, or you shall not be Spared”!

Treatment of utilized CSR funds

MCA has proposed that any amount remaining unspent u/s 135(5) shall be transferred by the company within thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the “Unspent Corporate Social Responsibility Account”, and such amount shall be spent by the company in pursuance of its Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer.

New Companies must also comply

Companies which have not completed three financial years are also being drawn into the CSR compliance net with a proposal to add a provision under sub-section (5) of Section 135 that where the company has not completed the period of three financial years since its incorporation, the company having net worth of Rs. 500/- crore or more, or turnover of Rs. 1,000/- crore or more, or net profit of Rs. 5 crore or more, during the immediately preceding financial year shall be required to ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made “during such period”.

This means that if a company in the very first year of its existence has net worth of Rs. 500/- crore or more or turnover of Rs. 1,000/- crore or more or net profit of Rs. 5 crore or more, during the immediately preceding financial year, it shall be required to ensure that the company spends, at least two per cent of the average net profits of the company made during the first preceding financial year in pursuance of its CSR Policy.

Suggestions/comments before 20^th November

Suggestion/Comments on the proposed amendments along with justification in brief may be sent latest by 20^th November, 2018 through email at comments_rbcao@mca.gov.in

It is requested that the name, contact number, email address and postal address of the sender may be indicated clearly at the time of sending suggestions/comments in the following format:

Format for sending suggestions/comments

1. Name, contact number, email address and postal address of stakeholder.
2. Suggestions/comments as under: