For not using its Unspent Corporate Social Responsibility (CSR) funds, a private limited firm faces a penalty of Rs. 1.08 crore from the Ministry of Corporate Affairs (MCA). The question to be resolved was whether the board of each company covered by sub-section (1) of the Companies Act was required to make sure that the company invested at least two percent of its average net profits from the three previous financial years in Corporate Social Responsibility (CSR) initiatives. This was stipulated in Section 135(5) of the Companies Act.
On October 8, 2023, Quest Global Engineering Services Private Limited Company filed an adjudication application, claiming that Section 135 of the Act had been violated. The company’s Corporate Social Responsibility (CSR) initiatives for the fiscal year 2021–2022 were then highlighted. After conducting a thorough examination, it was discovered that Quest Global Engineering Services Private Limited was required to set aside Rs. 3, 50, 42,538.39 for corporate social responsibility endeavors within the designated fiscal year. The fact that only Rs. 2, 29, 34,000.39 was really donated highlights a substantial gap.
Businesses subject to section 135 of the Act were required to set aside, for Corporate Social Responsibility (CSR) purposes, no less than 2% of their average net profits for the preceding three fiscal years. According to section 135(5), this yearly expense was applicable to enterprises that had completed three fiscal years after their establishment, or to the most recent fiscal year for those in the initial years.
Companies were instructed under Section 135(6) to transfer any unused CSR monies, provided they met the requirements, to an Unspent Corporate Social Responsibility Account at a scheduled bank no later than thirty days following the end of the fiscal year. Within three fiscal years after the transfer date, this remaining sum had to be used for CSR initiatives. If this was not done, the money had to be transferred to one of the designated funds in Schedule VII.
Penalties applied for failure to comply with section 135(5) or section 135(6). Failure to meet the spending criteria might result in fines for companies equal to twice the mandatory transfer amount, up to a maximum of one crore rupees. According to section 135(7) of the Act, officers who failed to comply would be fined one-tenth of the required transfer amount or two lakh rupees, whichever was less.
In accordance with the adjudication application that the business filed on August 10, 2023, a notice of hearing was sent on September 18, 2023, and a physical hearing was held on September 27, 2023, with Mr. Kunjithapadham Jayachandran, a practicing company secretary, in attendance. Jayachandran made submissions that were consistent with those made in the application. The corporation on May 10, 2023, submitted the utilization information of the unspent amount to the authorized representative upon request.
A penalty was therefore imposed on the officers Praveen Hegde, Company Secretary, Kishore Rao, Director, Raman Subramanian, Director, and Mr. Shrikant Durga Naik, Director, after taking into account the case’s facts and circumstances and the submissions made by the company, director, and key managerial personnel through their authorized representative. This was done in light of the aforementioned violation under the provisions of section 135 of the Act. The powers vested under Section 454(3) of the Companies Act 2013 were exercised in this manner.
Within ninety days of receiving the order, the corporation and its directors/key managerial staff were instructed to file Form INC-28, attach payment challans and a copy of the order, and pay the penalty sum as listed above. Directors were obligated to pay this penalty amount out of their personal funds.
In the event of non-compliance with this Order, Section 454(8) of the Companies Act, 2013 would be triggered, and the Company and its directors/key managerial persons would be subject to necessary punitive action under 454(8)(i) and (ii) of the Companies Act, 2013 without any further notice.
