Adjudication Order: CSR Reporting Penalty for PRABHU Spinning Mills

Background of CSR Reporting Penalty Case

M/S PRABHU SPINNING MILLS PRIVATE LIMITED (hereinafter referred to as “the Company”) is a company incorporated under the Companies Act, 1956, with its registered office at 207, Mangalam Road, Karuvampalayam, Tirupur – 641604, Tamil Nadu, India. During the period of offence from FY 2014-15 to FY 2016-17, the Company faced scrutiny for CSR non-compliance India, which led to potential CSR Reporting Penalty under the Companies Act 2013. Mr. Chennimalai Gounder Pallapalayam Veluswamy, the Managing Director at the time, was identified as the Officer in Default as per section 2(60)(ii) of the Companies Act 2013.

Facts of the Case and CSR Reporting Penalty

1. Background of Non-Compliance

In the Financial Year 2014-15, the Company, qualifying for CSR spending under Section 135 of the Companies Act 2013 due to a net profit exceeding INR 5,00,00,000 (Rupees Five Crores), did not allocate any funds to Companies Social Responsibility (hereinafter referred as “CSR”). It explained in its Board’s Report that it was “in the process of identifying appropriate eligible CSR projects” as required under Section 135(4)(a). The same explanation was provided in the Financial Year 2015-16 Board’s Report. By the Financial Year 2016-17, the Company had spent the full CSR amount and disclosed this in its Board’s Report. However, the disclosure did not follow the prescribed tabular format of the Companies (CSR) Rules 2014.

2. Legal Proceedings

Subsequently, prosecution was initiated (Spl CC. 39/2019) for these violations in the Court of Additional District and Sessions Judge I, Coimbatore after issuing necessary Show Cause Notice to the Company and the Officers in default, which were initially treated as criminal offences. However, the Companies Amendment Act, 2019 and Companies Amendment Act 2020 de-criminalized these offences, reclassifying them as civil non-compliances. The Madras High Court held that de-criminalized offences should be adjudicated civilly, which may result in a CSR Reporting Penalty if the disclosure requirements are not met., leading to the transfer of the cases to the Registrar of Companies, Coimbatore.

3. Adjudication Notices for CSR Reporting Penalty

On 05.08.2024, adjudication notices were issued to the Company seeking explanation for actions potentially leading to a CSR Reporting Penalty under Section 135(5).

• (a) Whether the Company has given proper explanation in Board’s Report for not spending the mandatory CSR amount as mandated under section 135(5).
• (b) Whether the Company has disclosed CSR related contents in the Board’s Report in the format as prescribed in Companies (CSR) Rules 2014.

4. Company’s Response

The Company has replied vide its letter dated 13/08/2024 that stating that it has provided appropriate explanations in the 2014-15 Board’s Report for not spending the eligible CSR amount and complied with disclosure requirements for FY 2016-17, as mandated by the Companies Act 2013.

Relevant MCA CSR Regulations and Section 135 Companies Act Provisions

Sub-Section (4) of Section 135: CSR Policy Approval and Disclosure

The Board of every company referred to in sub-section (1) shall-

• After taking into account the recommendations made by the CSR Committee, approve the CSR Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
• Ensure that the activities as are included in CSR Policy of the company are undertaken by the company.

Second Proviso to Sub-Section (5) of Section 135: Reporting Non-Spending of CSR Amount

“Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.”

Clause (o) of Sub-Section (3) of Section 134: CSR Initiatives Disclosure

Clause (o) of Sub-section (3) of Section 134 of the Act provides that the Board, in its Report shall disclose the details about the policy developed and implemented by the company on Corporate Social Responsibility initiatives taken during the year.

Section 134(8): Penalty for Non-Compliance

“If a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of INR 3,00,000 (Rupees Three Lakh) and every officer of the company who is in default shall be liable to a penalty of INR 50,000 (Rupees Fifty Thousand)”.

Section 450: Penalty for Contraventions Not Elsewhere Provided

If a company, any officer of a company, or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation, or restriction under which any approval, sanction, consent, confirmation, recognition, direction, or exemption has been accorded, given, or granted, and for which no penalty or punishment is provided elsewhere in this Act:

• The company and every officer of the company who is in default, or such other person, shall be liable to a penalty of INR 10,000 (Rupees Ten Thousand).
• In case of continuing contravention, a further penalty of INR 1,000 (Rupees One Thousand) shall be imposed for each day after the first during which the contravention continues.
• The maximum penalty is INR 2,00,000 (Rupees Two Lakh) for a company and INR 50,000 (Rupees Fifty Thousand) for an officer who is in default or any other person.

Penal Provisions During the Period of Default

Section 135(4) & (5) does not contain any penal provisions during the period during which the default is made. The amended law provides penal provisions for not transferring the eligible amount to a “separate account”, (which was not envisaged during the commission of the offence) but has no penal provisions for not disclosing the details in Board’s Report in the prescribed format.

Orders Passed by the Adjudicating Officer

1. Explanation for Non-Spending of CSR Amount (Section 135(5))

a. Reported Non-Compliance

The Company, with a net profit exceeding Rs. 5 Crores, did not spend the mandatory CSR amount (2% of average net profit for the preceding three years) for FY 2014-15 and failed to provide specific reasons in the Board’s Report, violating Section 135(5).

b. Company’s Averments

The Company’s representative provided financial statements and ledger accounts, asserting that the Company intended to spend the CSR amount but delayed due to project identification issues. The Board’s Report for FY 2014-15 stated, “the Company is in the process of identifying appropriate eligible CSR projects,” fulfilling the requirements of Section 135(5) and Section 134(3)(o).

c. Observations

Review of financial documents showed a provision for CSR spending was made, and amounts were eventually spent in FY 2016-17. This indicates a genuine intent to spend, validating the explanation in the Board’s Report for FY 2014-15. No non-compliance is found.

d. Orders

No penalty is imposed as the explanation provided satisfies Section 135(5).

2. Disclosure Format for CSR (Section 135(4)(a) and Rule 8)

a. Reported Non-Compliance

While the Company disclosed CSR spending details in the FY 2016-17 Board’s Report, the format did not follow the prescribed tabular format of Rule 8.

b. Company’s Averments

The Company claimed compliance with CSR laws, including proper disclosure of spending, although not in the prescribed tabular format.

c. Observations

The Board’s Report for FY 2016-17 included CSR details but failed to use the required tabular format. This procedural irregularity, while not substantial, constitutes non-compliance with Section 135(4)(a) and Rule 8.

d. Orders

A penalty of INR 10,000 (Rupees Ten thousand) is imposed on the Company and Mr. Chennimalai Gounder Pallapalayam Veluswamy, Managing Director, for the procedural non-compliance with Section 135(4)(a) read with Rule 8, as per Section 450 of the Companies Act 2013.

Source and Reference for CSR Reporting Penalty

Complete Order ROCCBE/ADJ/135/4480/2024: MCA Official Document