In India, corporate social responsibility (CSR) has become an important part of business responsibility. It ensures that companies not only focus on profit but also contribute towards social development and community welfare. Every financial year, companies that adhere to specific rules are required to spend a part of their profits on CSR activities. But what happens if the CSR funds remain unspent by the end of the financial year, i.e., 31st March?
Let’s explore what this means for companies and what the consequences might be if they fail to comply with CSR rules.
Understanding CSR and the 31st March Deadline
As per Section 135 of the Companies Act, 2013, companies with a net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more are required to spend 2% of their average net profits (from the past 3 years) on CSR activities.
These activities can include education, healthcare, environmental sustainability, skill development, and other activities that improve community well-being. But the key point here is timely utilization of CSR funds.
Why is 31st March Important?
The 31st of March marks the end of the financial year in India. If a company fails to spend the prescribed CSR amount by this date, it cannot carry the unspent amount forward informally. There are legal consequences that follow.
Consequences of Not Spending CSR Funds by 31st March
Failing to spend CSR funds within the financial year can have serious implications. Let’s break them down:
1. Mandatory Transfer to a Specified Fund
If the CSR amount is not spent by 31st March and the funds are not related to an ongoing project, the company must transfer the unspent amount to a fund specified in Schedule VII of the Companies Act (like PM CARES, Clean Ganga Fund, etc.) within six months from the end of the financial year.
This means, by 30th September, unspent CSR funds (not tied to a project) must be legally transferred.
2. For Ongoing Projects – Special Treatment
If the CSR amount is assigned to a valid ongoing project, companies are allowed to transfer the unspent CSR amount to an “Unspent CSR Account” in a scheduled bank within 30 days from the end of the financial year (i.e., by 30th April). This amount must then be spent within three financial years.
If still not spent after 3 years, the remaining balance must be transferred to one of the specified funds in Schedule VII.
3. Penalty for Non-Compliance
According to the alterations made to the Companies Act:
- A company that fails to transfer the unspent CSR funds shall be liable to a penalty of twice the amount required to be transferred or ₹1 crore, whichever is less.
- Every officer in default shall also be liable to a penalty of 1/10th of the unspent amount or ₹2 lakh, whichever is less.
This makes CSR compliance not just a moral duty, but a legal responsibility as well.
Role of CSR Committees and Boards
Every qualifying company must form a CSR Committee, which plays a key role in planning and monitoring CSR activities. The Board of Directors is also responsible for ensuring that the funds are spent on approved CSR projects and within the prescribed time.
If the committee or board does not properly monitor the spending and reporting, it could lead to penalties and reputational loss.
Disclosure and Accuracy
Companies are required to disclose their CSR activities and spending in their annual report and on their websites. If funds remain unspent, the reasons must be clearly explained.
The Ministry of Corporate Affairs (MCA) has become more active in monitoring CSR disclosures, and improper reporting or hiding unspent amounts may attract further scrutiny or legal action.
Common Reasons Why CSR Funds Remain Unspent
Even with their best efforts, some companies are unable to spend their entire CSR budgets. Common reasons include:
- Problems in project approvals
- Difficulty in identifying trustworthy implementing partners
- Challenges in execution due to local conditions
- Sudden changes in company financial priorities
- Lack of CSR planning and strategy
Whatever the reason, non-utilization of CSR funds without a proper plan or explanation can lead to both financial and reputational damage.
How to Ensure CSR Compliance Before 31st March
To avoid any legal issues or penalties, companies should take the following steps:
1. Early Planning
Plan CSR activities well in advance. Avoid waiting until the last quarter of the year.
2. Choose the Right Projects
Identify eligible CSR projects as per Schedule VII and ensure they are relevant and impactful.
3. Work with Trusted Partners
Collaborate with NGOs, social enterprises, or government agencies that have experience in implementing CSR projects.
4. Proper Budget Allocation
Track fund allocation and usage carefully. Assign responsibilities to the CSR team and regularly monitor progress.
5. Timely Transfer for Ongoing Projects
If a project is not completed by 31st March, make sure to transfer the unspent amount to the “Unspent CSR Account” within 30 days.
The Importance of Using CSR Funds Wisely
CSR is not just about following rules. It’s about building trust, supporting communities, and making a difference. When companies fail to use their CSR funds, it sends a wrong message to the public and stakeholders. But when they use it wisely and in time, it builds a strong brand image and trust.
CSR helps companies do good things for people and the planet. But to make this work, companies must use the money on time. They should spend their CSR funds before 31st March or follow the correct rules if they can’t.
If they don’t do this, they might have to pay fines, face legal problems, and people may stop trusting them. But with early planning and a good heart, companies can follow the rules and help many people.
So, don’t wait for the last day. Plan early, follow the rules, and use the money for good things that help others.
