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:
M/S. Kony India Private Limited violated Section 135(6) of the Companies Act, 2013 by not transferring an unspent amount of Rs.42,09,263 to the Unspent Corporate Social Responsibility Account on time. Although the company has now made the transfer, it faces a penalty. The penalty is Rs.84,18,526 or Rs.1 crore, whichever is lower. Additionally, the company officers in default may face a penalty of Rs.2,00,000 each. The Registrar of Companies (ROC) has ordered that the penalties must be paid within 30 days, and an appeal can be filed within 60 days. If the order is not followed, further fines or imprisonment may occur. This order was issued on February 22, 2023, by the Registrar of Companies in Hyderabad. The case underscores the critical need for companies to comply with CSR obligations promptly while also addressing potential challenges that may hinder their compliance efforts.
Taking the submissions made by the company’s authorized representative, the Regional Director intervened to reduce the penalty significantly. 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
Taking into consideration the facts of the appeal and submissions made by the authorized representative, the penalty imposed by Registrar of Companies is reduced .
Violation of section |
Penalty imposed on company/ directors |
Revised penalty imposed by RD |
Sec. 135 of the Companies Act, 2013 |
Company |
15,00,000 |
|
Director |
40,000 |
|
Director |
40,000 |
|
Ex-Director |
40,000 |
|
Ex-Director |
40,000 |
|
Total |
16,60,000 |
Reduction in penalty
The ground stated for the reduction of penalty are as follows:
- Due to the unprecedented challenges posed by the second wave of Covid-19 pandemic.
- That the company is a small private company.
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 Kony 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.