In this article, we will take you through the mandatory provisions under Section 135 of the Companies Act, 2013. Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year] shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more Directors, out of which at least one director shall be an independent director.
Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of 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 obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
Failure to comply with these requirements may result in penalties for both the company and the officers in default, as specified under Companies Act, 2013. Therefore, it is essential to adhere to these provisions to avoid any legal consequences.
Applicable Provisions:-
As per section 135(1) of the Act, every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
As per section 135(5) of the Act, 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 year. 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.
As per section 135(6) of the Act any amount remaining unspent under sub-section (5), pursuant to any ongoing project fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of tis Corporate Social Responsibility Policy, shall be transferred by the company with a period of 30 days from the end of 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 obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
As per section 135(7) of the Act if a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in the Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.
Facts of the case:
The Regional Director (RD) of the South East Region, Ministry of Corporate Affairs, Hyderabad, upheld a penalty of Rs. 61,31,744 against FMC Technologies India Private Limited and its directors for failing to comply with Section 135(5) of the Companies Act, 2013. The case arose from an appeal filed by the company and its directors—David Macfarlane, Housila Prasad Tiwari, Narendra Kumar Dharmavarapu, and Niranjan Desai—against an earlier adjudication order from the Registrar of Companies, Telangana. This order had imposed the penalty due to the company’s failure to transfer an unspent Corporate Social Responsibility (CSR) amount of Rs. 26,65,872 to designated funds within the mandated timeframe following the financial year 2020-21, specifically by September 30, 2021.
The company later transferred the unspent CSR amount to the PM CARES Fund on November 10, 2022. During the hearing on November 20, 2023, the appellants’ representative argued that the default was unintentional and that the company acted swiftly to rectify the situation upon realization of the lapse. However, the RD noted that both parent companies, FMC Technologies Singapore and FMC Tech. Inc, USA, are large and profitable entities. Given this context, the RD decided to uphold the penalty imposed by the Registrar of Companies, finding no grounds to interfere with the decision.
The decision took into account the company’s commitment to CSR, the absence of malafide intentions, and the lack of prejudice to stakeholders’ interests.
Penalty Imposed by Registrar of Companies on Company and Officers in Default
After considering the submissions from the appellants, the RD noted that the entire shareholding of FMC Technologies India Private Limited is held by FMC Technologies Singapore and FMC Tech. Inc, USA, both of which are large and profitable entities. Considering the size and profits of the company, the RD chose not to interfere with the penalty imposed by the Registrar of Companies.
Violation of section |
Penalty imposed on company/ directors |
Penalty imposed by ROC |
Sec. 135 of the Companies Act, 2013 |
Company |
53,31 ,744 |
|
Director |
2,00,000 |
|
Director |
2,00,000 |
|
Director |
2,00,000 |
|
Director |
2,00,000 |
|
Total |
61,31,744 |
Reduction in penalty
There is no reduction in penalty by the RD noted that the entire shareholding of FMC Technologies India Private Limited is held by FMC Technologies Singapore and FMC Tech. Inc, USA, both of which are large and profitable entities. Considering the size and profits of the company, the RD chose not to interfere with the penalty imposed by the Registrar of Companies.
Exemption to Startup/ Small Company/OPC under section 446B:
As per sec. 446B of the Companies Act, 2013, if penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.
In this case, Section 446B does not apply, as the company does not meet the criteria.
Conclusion
The case of FMC Technologies India Pvt. Ltd. shows how tricky it can be for companies to follow CSR rules and meet their legal responsibilities. The Ministry of Corporate Affairs stepped in to lower the penalty, which highlights a fair approach to regulation, taking into account various circumstances. This decision stresses the need for understanding the context and being lenient when imposing penalties, helping to create a better environment for good corporate governance and social responsibility.