**5.2 Carry forward of unspent CSR funds**

There have been instances wherein a company might have found that in course of a given financial year, it has not succeeded in spending all the funds earmarked for an ongoing CSR project. While the 2019 Act does not clarify all the possible contours of such ongoing projects, there has been a subsequent attempt on the legislature's part to define the same in the draft Companies (CSR) Amendment Rules, 2020, as a multi-year project that has been undertaken by a company in order to fulfil its CSR obligations, with the project being supposed to span a maximum range of four years including the year on which it has commenced [22]. Questions can and have been raised as to whether projects that might be started in the month of February of a financial year and intended to be continued up to say, June of the next financial year can be included in this category; further, in the light of the COVID-19 pandemic, the gestation period of four years might also need to be reexamined [23]. There may also be additional arguments made about whether ongoing projects might include those for which the company has already disbursed funds, but not commenced the project within the same financial years, or those for which the company has made budgetary provisions but not disbursed the funds within the same financial year. According to the 2019 Act, if there is any unspent fund originally dedicated to such a project by the end of any financial year, then the same needs to be transferred to a specific escrow account called the Unspent CSR Account that the company would have to open with a scheduled commercial bank. In case the company fails to spend the proceeds from such account towards its CSR projects within 3 years from the date of such transfer, then the leftover proceeds from that account would have to be transferred to a fund specified under Schedule VII of the Companies Act, 2013 within 30 days from the end of the third financial year [21]. Some of the funds mentioned under Schedule VII are the Prime Minister's National Relief Fund, the Prime Minister's Citizen Assistance and Relief in Emergency Situations Fund, the Clean Ganga Fund, as well as other funds established by the Central or State governments for the socio-economic development or relief or welfare of the scheduled castes and tribes, other backward classes, minority, and women. In the light of this development, it seems quite clear that existing and future CSR policies of companies would have to make year-wise budget allocation for all

CSR projects and develop strategic plans accordingly. However, the present legal position about projects which would otherwise have gone on for more than four years, seems uncertain, as is the position about whether the companies are required to form separate escrow accounts for each ongoing project, or a consolidated one for all projects combined.

Another important concern regarding this escrow fund is one that may arise involving companies that route their CSR expenditure through trusts or specific agencies that professionally engage in project implementation. Especially in case of group companies, lump-sum CSR funds may be diverted as a practice by each company to such trusts or agencies, and given that such diversion might not be considered as actual CSR expenditure in itself, unspent amounts remaining with the trusts might also be required to be transferred to the escrow account. Moreover, the companies themselves might not have control over the day-today spending by the agencies, some of which might be established and reputed non-governmental organisations –this practice may also potentially get affected because of such legislative amendments.

In the event of the company retaining any surplus fund from a project that does not qualify as an ongoing project, the company even earlier could not have claimed such funds as part of its profits; however, the 2019 Act clearly requires such surplus fund to either be used for the same project within the same financial year, or otherwise transfer the entirety of the surplus to one of the funds mentioned above under Schedule VII within six months from the end of the financial year concerned. Therefore, the government would in effect gain control of such surplus corporate fund to use in a centralised manner. As has been discussed in subsequent parts of this paper, such a stance on the part of the legislature has effectively rendered the CSR spending by the companies in every financial year mandatory, unlike the earlier position, wherein the companies were still left with an option of providing reasonable justification for their inability to spend such amount in any given financial year, thus providing new rigour to the CSR regime.

#### **5.3 Compliance monitoring**

The 2019 amendment has given the Central Government the power to 'give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions' [21]. This provision is vague as it does not specify when such directions will be given to companies and in what context. It also has the power to be potentially dangerous since it could open up a pandora's box whereby, it could end up allowing the Central Government 'to issue general or special directions to a company or class of companies (PSUs for example) to contribute towards a specific government programme or project' [24]. Such a move would be disastrous not only from the view point of the voluntariness that CSR is supposed to uphold but also may open up significant abuse to amongst other things, democracy.

#### **5.4 Penalty**

One of the biggest frailties of Section 135 has been that in its original form it was largely unenforceable. The 2019 amendment of the Companies Act altered that by creating both a criminal and a civil liability for breaching the CSR requirements. Such liability is to be imposed on both the company, which is subject to a 'fine which shall not be less than fifty thousand rupees, but which may extend to twenty-five lakh rupees' [21] and on every officer of the company who is in default [25], who

'shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both' [21].

Not unsurprisingly, the penalty provision, especially the criminal liability, met strong resistance from Indian Companies [26]. It was labelled by industry specialists and academics as harsh [26], retrograde [27], reminiscent of socialism [28] and forcing the hand [29] of companies, similar to taxation. It was also criticised heavily in the general context of the problems attached to criminalising economic offences [30]. In 2018, a High Level Committee on Corporate Social Responsibility had been set up by the Ministry of Corporate Affairs under the chairmanship of Injeti Srinivas. This Committee presented its report in August 2019. Amidst a series of recommendations, the Committee also recommended that the offence within Section 135 be de-criminalised and made a civil offence, although it recommended that penalties be imposed, it highlighted that there should not be any imprisonment [18]. It did so stating that 'CSR is a means to partner corporates for social development and such penal provisions are not in harmony with the spirit of CSR' [18].

On the basis of this report, the finance minister, Nirmala Sitharaman made an announcement at a meeting of the Confederation of Indian Industries that the provision would be reviewed once again [31]. On 23rd August 2019, she announced in a press conference that that the government had no intention to go through the prosecution route, making Section 135 only a civil offence and that the Ministry of Corporate Affairs would once again review the section which would remain unnotified for the time being [32].
