Corporate social responsibility (CSR) entails businesses regulating themselves to be socially accountable and positively impact society. Companies can embrace CSR through various means, such as promoting eco-friendly practices, fostering workplace diversity and inclusion, respecting employees, engaging in community philanthropy, and making ethical business decisions.
CSR has transitioned from a voluntary choice by individual companies to becoming subject to mandatory regional, national, and international regulations. However, many businesses opt to exceed legal requirements and integrate the concept of ‘doing good’ into their core business models.
There is no single approach to CSR adoption, but one thing is clear – for CSR to be genuinely perceived, it must be deeply ingrained in a company’s culture and day-to-day operations. In today’s socially aware environment, employees and consumers highly value businesses prioritising CSR and can readily identify corporate insincerity.
To ensure the authenticity of their CSR efforts, companies should align their values, business mission, and core concerns with initiatives that best match their goals and organisational culture. This assessment can be done internally or by hiring a third party to ensure a comprehensive evaluation.
Penalty for CSR Breaches u/s 135 of the Companies Act, 2013
If a company fails to adhere to the CSR spending provisions or transfer and utilise unspent amounts, it may face a penalty. The penalty for CSR breaches will be either Rs. 1 crore or twice the required amount to be transferred to the CSR fund as specified in Schedule VII of the Act or the balance remaining in the Unspent Corporate Social Responsibility Account, whichever is lower.
Furthermore, any officer of such a company who defaults on compliance will be held accountable and may be required to pay either Rs. 2 lakh or one-tenth of the amount specified for transfer to the CSR fund as per Schedule VII or the remaining balance in the Unspent Corporate Social Responsibility Account, whichever is lower.
- Permitted CSR Activities UNDER Schedule VII
- The focus extends to eradicating poverty, hunger, and malnutrition, emphasising healthcare improvements through sanitation and preventive measures. Active contributions are directed to the Swach Bharat Kosh, supporting the government’s drive for enhanced sanitation and access to safe drinking water.
- Emphasising education, efforts are geared toward improvement, encompassing special education and enhancing vocational skills among children, women, the elderly, and differently-abled individuals. Initiatives also include livelihood enhancement projects.
- Advancing gender equality is a crucial objective, reflected in establishing homes and hostels for women and orphans, empowerment programs for women, and setting facilities such as nursing homes and daycarecentres. Measures are in place to reduce inequalities that socially and economically backward groups face.
- The commitment to environmental sustainability includes safeguarding ecological balance, protecting flora and fauna, promoting animal welfare, engaging in agroforestry, and conserving natural resources. Active contributions are made to the rejuvenation of the river Ganga, ensuring the maintenance of soil, air, and water quality.
- Contributions are directed toward protecting national heritage, art, and culture, including restoring buildings and sites of historical importance, establishing public libraries, and promoting traditional arts and handicrafts.
- Support for armed forces veterans, war widows, and their dependents is prioritised, extending to Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, including widows.
- Active participation in training programs stimulates rural, nationally recognised, Paralympic, and Olympic sports, fostering a culture of physical activity and sportsmanship.
- Contributions include support for the Prime Minister’s National Relief Fund, PM CARES Fund, and other government-established funds dedicated to socio-economic development, relief, and welfare of marginalised groups, including Scheduled Castes, Scheduled and backward classes, other backward classes, minorities, and women.
- Contributions are made to incubators and research and development projects in science, technology, engineering, and medicine, funded by government bodies at the central and state levels, as well as public sector undertakings.
- The focus extends to contributing to public-funded universities, IITs, national laboratories, and autonomous bodies engaged in research in science, technology, engineering, and medicine, aligned with the objectives of promoting Sustainable Development Goals (SDGs).
- Active engagement in rural development projects centres on sustainable and inclusive growth.
- Initiatives include slum area development, targeting areas designated as such by competent authorities under prevailing laws.
- Disaster management efforts encompass relief, rehabilitation, and reconstruction activities to support communities in times of crisis.
|CSR Applicability in India
|Companies subject to CSR regulations are those meeting any of the following criteria in the preceding financial year: a net worth of more than Rs. 500 crore, turnover exceeding Rs. 1000 crore, or a net profit surpassing Rs. 5 crore.
|The Board of Directors of such companies is responsible for ensuring compliance with CSR obligations. They must guarantee that the company expends at least 2% of its average net profits from the immediately preceding three financial years in accordance with its CSR policy. When a company has not completed three financial years since its incorporation, the stipulation is to allocate 2% of its average net profits from the immediately preceding financial years as outlined in its CSR policy.
|Corporate Social Responsibility Committee and Mandates:
|As per Section 135(1) of the Act, companies meeting specified financial criteria are obligated to form a Corporate Social Responsibility Committee. This committee must comprise at least three directors, with at least one as an independent director.
|CSR Spending Requirements:
|Section 135(5) of the Act mandates that companies allocate at least two per cent of their average net profits from the three immediately preceding financial years for CSR activities, as detailed in the Corporate Social Responsibility Policy.
|Unutilised CSR Funds and Transfers:
|Section 135(6) of the Act specifies that any unutilised CSR funds from ongoing projects meeting specified criteria must be transferred to a dedicated account known as the Unspent Corporate Social Responsibility Account within 30 days of the end of the financial year. These funds should then be utilised within three financial years or transferred to a Fund as specified in Schedule VII.
|Appointment and Jurisdiction:
|The Adjudicating Officer, appointed by the Ministry of Corporate Affairs under Section 454 of the Companies Act 2013, adjudicates penalties. Section 454 of the Companies Act 2013 deals with the adjudication of penalties. According to this section, officers of the Central Government can be appointed as adjudicating officers, provided they hold a rank not below that of a Registrar. These adjudicating officers have the authority to issue orders and are required to grant the parties involved a fair opportunity to be heard. If a company fails to pay the imposed penalty for CSR breaches within 90 days of receiving the order, the company becomes punishable with a fine. This provision underscores the importance of timely compliance with adjudication outcomes, emphasising financial consequences for non-compliance after the stipulated period. The case at hand concerns Saankhya Labs Private Limited, a company established in 2006 and falls under the jurisdiction of the Registrar of Companies in Karnataka.
Saankhya Labs Private Limited Case
Facts of the Case:
Saankhya Labs Private Limited, in an adjudication application, acknowledged its violation of Section 135 of the Companies Act, admitting a shortfall in fulfilling its CSR spending obligations for the financial years 2020-21 and 2021-22. In the fiscal year 2020-21, the company was obligated to allocate INR 18,63,032 for CSR activities but contributed only Rs. 3,00,000, with a delayed transfer of the unspent amount. In 2021-22, the company failed to spend any amount on CSR activities and delayed transferring unspent CSR funds. The company does not qualify as a small company under Section 2(85) of the Companies Act, 2013.
- CSR Spending Violations: Saankhya Labs Private Limited admitted violating CSR spending obligations for two consecutive financial years.
- Timely Transfer of Funds: The company acknowledged delays in transferring unspent CSR funds, indicating non-compliance with regulatory timelines.
- Non-Qualification as a Small Company: The company’s status as not qualifying as a small company under Section 2(85) excludes it from the provisions allowing for lesser penalties under Section 446B.
Following the adjudication application, a hearing was conducted with Mr Dwarakanath, a practising company secretary, presenting the company’s case. Considering distinct violations for each financial year, the Adjudicating Officer imposed separate penalties for the company and officers in default.
For the Financial Year 2020-21:
Company: INR 31,26,064
Mr. Parag Naik Balwant: INR 1,56,304
For the Financial Year 2021-22:
Company: INR 31,21,624
Mr. Parag Naik Balwant: INR 1,56,082
Ms. Anusha: INR 1,56,082
The company and its directors/key managerial personnel were instructed to remit the penalty amounts within 90 days from the date of the Order and complete the necessary form filings. An appeal option lies with the Regional Director within a 60-day timeframe.
The substantial penalty for CSR breaches of INR 66,16,156 emphasises the significance of adhering to CSR spending requirements and timely fund transfers, underlining the consequences of non-compliance with CSR regulations and the importance of upholding corporate governance standards.
What is the Adjudication of Penalties?
Adjudication is a legal procedure courts employ to resolve disputes between two parties, resulting in a legally binding judgment and court opinion.
In the context of the Companies Act, the adjudication of penalties is the process through which an authority imposes fines for non-compliance. This authority reviews the data and information they submit and allows the involved party to present their case. Following this, the authority decides regarding the appropriate penalty.
When determining the penalty, the adjudicating officer takes into account various factors, such as, the extent of disproportionate gain or unfair advantage resulting from the non-compliance.
In cases where an individual fails to respond or declines to appear before the adjudicating officer, the officer has the authority to issue a penalty for CSR breaches in the person’s absence. However, the officer is required to provide a documented rationale for this decision.
Key Considerations in Penalty for CSR Breaches
It is crucial to recognise the following points:
- Adjudication, by its nature, involves a judicious assessment of penalties. This means that penalties should not be indiscriminate, with a fixed 2X factor, regardless of the nature of the breach, whether it’s a timing issue or a complete failure to spend or transfer funds to CG (Corporate Governance) funds.
- Rule 3(9) of the Adjudication of Penalties Rules outlines the principles of adjudication and the relevant factors. However, these principles become redundant if penalties are consistently set at 2X.
- Equating the penalty for failing to segregate unspent funds with the penalty for not spending at all or not transferring the funds to CG funds creates an imbalance. Companies genuinely adhering to the CSR spirit end up spending three times their obligation, while those failing to meet their CSR commitments bear only a 2X penalty. This situation implies that mere delays should not be treated on par with substantive, irreparable failures.
- The breach is effectively remedied if a company spends the required funds. Therefore, even if a penalty for CSR breaches is imposed, it should be symbolic, as the commingling of funds and failure to segregate did not hinder the essential Act of spending.
- Penalties should be proportional to the nature and implications of the breach. Treating all breaches equally indicates a lack of proportionality and fairness, which can be detrimental in the long run.
Thus, a fair and balanced adjudication process should consider the specifics of each breach, ensuring that penalties reflect the seriousness of the violation and maintain a sense of proportionality.
Challenges in Penalty for CSR Breaches: A Need for Fair and Proportional Adjudication
The lessons on corporate social responsibility are being imparted in an excessively severe and indiscriminate manner, often resulting in penalties equal to twice the amount involved in CSR breaches. This occurs even when the breach is simply a timing issue, as opposed to a failure to spend the required funds. For example, in certain adjudication cases, it’s evident that a company did indeed spend the intended amount of Rs 14.50 lakhs for ongoing projects. However, they failed to segregate this money into a separate bank account within the prescribed 30-day timeframe, which is a requirement for ring-fencing the funds.
Several key points emerge from this situation:
- Segregation of funds for ongoing projects primarily serves as a means to ensure transparency and earmarking of funds, preventing their commingling with a company’s own resources.
- The failure to segregate, in this context, does not result in a substantive failure since the funds were ultimately used for their intended purpose.
- This failure is often temporary and related to timing rather than a fundamental breach of the CSR obligation.
Therefore, even if a penalty for CSR breaches is warranted, it should not necessarily be the maximum amount stipulated by the law. The adjudicating officers appear to strictly interpret the law’s language, which prescribes a “penalty of twice the amount,” as opposed to the more flexible language commonly found in other laws that often state “penalty up to” or “a penalty not exceeding.”
Proportionality and Intent of Penalty for CSR Breaches
The authority to impose a penalty for CSR breaches should not be equated with an obligation to do so. Penalties, in the context of civil proceedings, primarily serve as a deterrent and should not be confused with punitive measures for a criminal offence, such as fines or imprisonment. Penalty for CSR breaches are monetary in nature, and their financial implications must be proportionate to the wrongdoing.
Courts have issued various rulings reinforcing this principle, for instance, in the case of Superintendent and Legal Remembrancer of Legal Affairs Vs. Abani Maity, the Supreme Court clarified that even when the law uses the phrase “shall be liable,” it does not mandate the imposition of a penalty. In a landmark judgment in the matter of Adjudicating Officer vs Bhavesh Pabari, the Supreme Court examined the scope of Section 15J of the SEBI Act, which outlines the factors to be considered by the adjudicating officer (AO) when determining the amount of penalty for CSR breaches. The Court emphasised that the AO possesses the authority to determine the penalty, not restricted solely to the factors outlined in Section 15J.
The Supreme Court elaborated that a minimum penalty requirement should not constrain the AO and can impose a penalty for CSR breaches that align with the gravity of the offence. This means that the AO can impose a lesser penalty than the minimum specified in the section or even choose to waive it entirely based on a comprehensive understanding of the nature of the offence. This ruling highlights that there is no concept of a minimum penalty, as any such minimum penalty for CSR breaches would not consider the seriousness of the wrongdoing, thus violating fundamental principles of justice.
It’s crucial to understand that imposing a penalty for CSR breaches is not a revenue-generating exercise. Penalties should never be automatic; they should reflect the specifics of the case. This is different from time-based fines, such as those imposed for delays, which are calculated on a daily basis. However, an absolute penalty cannot be mechanical or uniform for all cases.
The evolution of CSR provisions from a voluntary “comply or explain” approach to mandatory spending has resulted in companies investing significant time and resources not necessarily to be socially responsible but to comply strictly with the legal language. This shift does not align with the original intent of the law, and the conduct of adjudicating officers often appears inconsistent with the provisions of the section.
The topic at hand delves into the complexities surrounding the imposition of penalties in the context of corporate social responsibility (CSR). The key takeaway from this discussion is the importance of maintaining a sense of proportionality when applying penalty for CSR breaches.
Penalty for CSR breaches are not obligatory but should be judiciously imposed as a means of deterrence. They are inherently monetary in nature, and their severity must be commensurate with the gravity of the wrongdoing. Courts have emphasised that there is no concept of a minimum penalty, and the penalty amount should reflect the specific circumstances of each case.
In this light, the consistent imposition of a 2X penalty for CSR breaches, regardless of whether they result from timing issues or substantive failures, raises questions about fairness and proportionality. The intent of CSR regulations is to encourage responsible conduct, and the enforcement of penalties should align with this intent. Ultimately, the adjudication process should balance the need for compliance with the spirit of CSR while ensuring that penalties are not excessive or unfairly burdensome. This approach promotes a corporate culture that is truly committed to social responsibility rather than one focused solely on avoiding legal consequences.
Frequently Asked Questions (FAQs)
Corporate social responsibility (CSR) is a concept that encourages businesses to take responsibility for their impact on society. Its primary aim is to promote ethical behaviour and contribute to the well-being of communities and the environment beyond profit generation.
Under the Companies Act, specific obligations include the establishment of a CSR Committee, spending a minimum percentage of profits on CSR activities, and timely transfer of unspent funds to designated accounts.
Penalties for CSR non-compliance are not mandatory but should be judiciously imposed. They serve as a deterrent, and the amount should be proportionate to the nature and gravity of the breach.
Yes, penalties can be less than the prescribed minimum, depending on the circumstances of the violation and the discretion of the adjudicating officer. The courts have emphasised the importance of proportionality in penalty imposition.
To ensure compliance, companies should establish a robust CSR policy, monitor their CSR spending, and maintain transparency in reporting. They should also proactively engage with the community and implement CSR activities with the intent to make a positive impact.
The shift from a voluntary “comply or explain” approach to mandatory CSR spending has led companies to focus on legal compliance rather than genuine social responsibility. This change in focus may not align with the original intent of promoting CSR.
Adjudicating CSR penalties should consider factors such as the violation’s nature, the law’s intent, and the concept of proportionality in penalty imposition.
Companies can balance their CSR obligations with legal compliance by comprehensively understanding the law, implementing effective CSR programs, and proactively engaging with the community. It’s important to prioritise genuine social responsibility alongside compliance.
CSR regulations and penalty imposition aim to encourage companies to take responsibility for their impact on society and the environment while promoting ethical conduct. Penalties should serve as a deterrent without being excessively burdensome.
Yes, companies and individuals subject to CSR penalties have the option to appeal the decisions within a specified timeframe, as per the relevant regulations and laws. The appeals process allows for a review of the penalty imposition.
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