Summary
In this article, we delve into key considerations for Unutilised CSR funds Compliance for NGOs under the Companies Act, 2013 / CSR Rules. By covering compliance issues, spending definitions, fund transfer responsibilities, penalties, and proactive measures, we aim to provide a comprehensive guide on certain aspects relating to CSR. By understanding these nuances, NGOs can better manage their funds, maintain transparency, and strengthen their relationships with corporate donors.
Questions:
Whether “spend” includes accrued or incurred liability but not discharged (ie not paid) before 31st March?
Can an NGO carry forward the unutilized CSR funds at the financial year end to the next financial year?
In case of a single-year project, can the unutilized CSR funds be transferred by the NGO to a specified fund in Schedule VII at the financial year end or is the NGO required to refund the unutilised funds back to the CSR donor (who will then transfer to Schedule VII fund of the Companies Act, 2013?
In case of ongoing projects, can the unutilised funds be transferred by the NGO to the Unspent CSR Account or is the NGO required to refund the unutilised funds back to the CSR donor (who will then transfer to the Unspent CSR Account)?
Can single-year projects be converted into ongoing projects?
Are there penal implications on NGOs if there are unspent CSR donor funds?
What preventive measures can NGOs adopt to avoid having unspent CSR funds at financial year end?
Background - Unutilised CSR funds Compliance for NGOs
In recent years, NGOs have found themselves increasingly concerned about the compliance requirements tied to CSR donations. The evolving landscape of regulations has become a focal point, with significant amendments to the Companies (CSR Policy) Rules, 2014 and the publication of various FAQs by MCA. These changes have imposed stricter guidelines on Companies acting as CSR donors for fund utilization.
While the compliance burden falls squarely on the shoulders of such companies, its ripple effects extend deep into the financial planning of NGOs and their relationships with corporate partners. It's crucial to understand that although the compliance responsibility rests with the donors, NGOs are not immune to its impact.
As such, it's essential for NGOs to acquaint themselves with the implications, particularly concerning unutilized CSR funds at the close of the financial year. This understanding will not only ensure smoother operations but also foster stronger collaboration between NGOs and their corporate supporters.
Here are some critical considerations and actions NGOs should be mindful of:
What Constitutes 'Spending' of CSR Funds?
Every company covered by CSR provisions is required to “spend” at least 2% of the average net profits of the company made during the three immediately preceding financial years [section 135(5)]
The term 'spend' lacks an explicit definition within Section 135 of the Companies Act / CSR Rules. However, generally, it encompasses all outflows incurred, including expenses accrued for services availed, towards or incidental to CSR projects, whether incurred by the company directly or through the implementing NGO.
According to Q no. 7.4 of the FAQ released by the Ministry of Corporate Affairs (MCA) vide General Circular No. 14/2021 dated 25th August 2021, “The implementing agency acts on behalf of the company and mere disbursal of funds for implementation of a project does not amount to spending unless the implementing agency utilises the whole amount”.
This implies that the NGO is required to utilize the funds (relating to CSR projects) on/before 31st March for it to be considered as “spent” in the hands of the company in compliance with section 135(5).
2. Whether “spend” could include accrued or incurred liability but not discharged (ie not paid) before 31st March?
There is ambiguity regarding whether 'spend' could include accrued or incurred liabilities not yet discharged/paid before 31st March.
While some interpret 'spend' as strictly cash outflows, others argue that accrued liabilities should also be considered, given that goods or services have been availed and payment is due. The second view is also supported by the language that section 135 uses the word “spends" and not “actually paid” as used in section 11 of the Income-tax Act, 1961.
However, in the best interest of NGOs and to avoid differences with CSR companies, it's advisable to process payments, including statutory ones, before 31st March to ensure fund utilization. In case of accrued liabilities, if any, the same can be explained to the CSR donor along with proper reasoning through inclusion in the submitted report.
3. Can an NGO carry forward the un-utilized CSR funds as on financial year end to next financial year?
Whether an NGO can carry forward unutilized CSR funds to the next financial year depends on the nature of the project and the agreement with the CSR donor. The project can be either :
Single-year project: Agreements ending within the same financial year come under these categories.
In these projects, an NGO cannot carry forward the unutilized CSR funds at the financial year-end. The same is required to be transferred to specified Funds under Schedule VII within 6 months from the end of the financial year, that is, by 30th September.
Ongoing/Multi-year project: Ongoing projects are the ones that stretch over multiple financial years, not exceeding 4 years (including the year of commencement).
In case of these projects, NGOs can carry forward the unutilised funds to the next financial year with the condition that the unspent funds are transferred to a separate bank account called Unspent Corporate Social Responsibility A/c (“Unspent CSR A/c”) within 30 days from the end of the financial year, that is, by 30th April.
4. In case of a single-year project, can the unutilized CSR funds be transferred by the NGO to a specified fund in Schedule VII at the financial year end or is the NGO required to refund the unutilised funds back to the CSR donor (who will then transfer to Schedule VII fund of the Companies Act, 2013?
This would depend upon the interpretation adopted by the CSR donors and the NGO regarding whether transferring unutilized funds to Schedule VII funds by the NGO is sufficient for compliance with section 135(5).
The interpretation of this obligation varies depending on the view taken by CSR donors and NGOs. Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 states that a CSR board can either undertake an activity through itself or through various other entities with prescribed conditions (also referred to as ‘Implementing agency’). The word ‘through’ connotes “on behalf of’. Hence, it could be said that the implementing agency acts on behalf of the company and if it performs on behalf of the company, then all the restrictions applied to the company should also equally apply to the implementing agency i.e. NGO.
Accordingly, it can be construed that if the agency carries out the responsibility of transferring unutilised funds to Schedule VII funds, it may suffice.
Accordingly, some argue that it implies an obligation to be addressed by the company, while others suggest that it also includes actions done on behalf of the company by the NGO as its agent, as interpreted in judicial judgments.
To ensure transparency and adherence to CSR obligations, it's advisable that the second view of responsibility lying with NGOs to transfer the unspent funds to the specified fund in Schedule VII should be considered only under certain conditions:
if appropriate resolutions are passed by the CSR donor and Implementing Agency/NGO
Necessary correspondence is exchanged between the two to prove that the amount is held to be transferred by the NGO in pursuance of the CSR’s donor obligation.
Appropriate disclosure is made in the financial statements of the CSR donor and Implementing agency/NGO.
In other cases, the responsibility of transferring unspent funds to the specified fund in Schedule VII of the Companies Act, 2013 lies with the CSR donor.
5. In case of ongoing projects, can the unutilised funds be transferred by the NGO to the Unspent CSR Account or is the NGO required to refund the unutilised funds back to the CSR donor (who will then transfer it to the Unspent CSR Account)?
This would also depend upon the interpretation adopted by CSR donors and the NGO regarding whether the maintenance of such a bank account by the NGO is sufficient for compliance with section 135(6).
The interpretation of this obligation varies depending on the view taken by CSR donors and NGOs. Section 135(6) of the Companies Act, 2013, outlines that unspent amounts must be transferred "by" the company, thereby leading to different interpretations.
Some argue that it implies an obligation to be addressed by the company, while others suggest that it also includes actions done on behalf of the company by the NGO as its agent, as interpreted in judicial judgments. As a result, there can be two main views:
CSR Donor Responsibility: Some argue that the responsibility for transferring unspent funds to specified funds in Schedule VII lies with the CSR donor. Under this view, the unutilised funds will have to be transferred back to the CSR donor, which will in turn transfer it to a Schedule VII Fund.
NGO Responsibility: Others suggest that it would suffice if the implementing agency i.e. NGO carries out the responsibility.
If the interpretation adopted is that it is the responsibility of the NGO to transfer the unspent funds to Unspent CSR A/c, then the following should be ensured:
Appropriate resolutions passed by the CSR donor and Implementing Agency/NGO
Necessary correspondence is exchanged between the two to prove that the bank account opened by the agency is in pursuance of the CSR’s donor obligation
Appropriate disclosure is made in the financial statements of the CSR donor and Implementing agency/NGO.
The bank account should be designated as “Unspent CSR Account” in various disclosures. Appropriate disclosure should also be done by the CSR donor in Board Report / Form CSR - 2.
Moreover, it's important to note that fulfilling this obligation should not trigger penal implications on the CSR donors. A precedent set by the judicial ruling in Hightension Switchgears Private Limited v. CIT (2016) 385 ITR 575 (Cal) supports this stance, highlighting:
“When the agent has complied with a particular provision, the principal cannot be visited with penal consequences … When a person acts through another, in law, he acts himself”
In other cases i.e. CSR donor taking the responsibility of handling the unspent CSR funds, NGO is required to refund the unutilized funds back to CSR donor. The CSR donor will then transfer it to its Unspent CSR Account and release it back to the NGO for spending purposes.
6. Can the unspent funds be transferred to existing bank accounts of the company/implementing agency ie NGO?
The unspent funds cannot be transferred to existing bank accounts of the company/implementing agency i.e. NGO.
A company/NGO is required to open a separate ’Unspent CSR Account’ for each financial year but not for each ongoing project. (Refer to Q. 7.5 in General Circular No. 14/2021 dated 25th August 2021, issued by MCA).
7. Can Single-year projects be converted into Ongoing projects?
It can be converted subject to mutual agreement with the CSR donor and the project being commenced in the given financial year. This is supported by language used in the definition of an Ongoing project which states ongoing project also includes a project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the Board based on reasonable justification. (Refer to Q. 6.1 in General Circular No. 14/2021 dated 25th August 2021, issued by MCA)
Though it is not explicitly stated if the project can be converted after 31st March, it would be prudent to take a view of it being extended before 31st March to comply.
Further, an ongoing project will be considered to be ‘commenced’ when the CSR donor has either issued the work order pertaining to the project or awarded the contract for execution of the project. (Refer to Q. 6.2 in General Circular No. 14/2021 dated 25th August 2021, issued by MCA)
For instance, if the NGO received funds from a CSR donor in the Financial Year 2023-24 but the project has not commenced in the same year, it cannot be converted into a multi-year project.
8. Are there penal implications for NGOs if there are unspent CSR donor funds?
There is no direct penalty for NGOs who have unspent CSR donor funds.
The burden of compliance and hence the penalty provisions are for the CSR donors and the officers in default of the CSR donor. The table below captures the summary of such offences:
Particulars | Penalty Amount |
Company | Twice the unspent amount required to be transferred to any fund included in Schedule VII of the Act (case of a single-year project) or Unspent CSR Account (case of ongoing project), as the case may be, OR one crore rupees, whichever is less. |
Every Officer in Default of the CSR Company | 1/10th of the unspent amount required to be transferred to any fund included in Schedule VII of the Act (case of single project) or Unspent CSR Account (case of ongoing project), OR two lakh rupees whichever is less. |
The same has been stated in Q no. 8.1 of the FAQ released by the Ministry of Corporate Affairs (MCA) vide General Circular No. 14/2021 dated 25th August 2021.
Furthermore, it may also lead to strained relationships with donors and hinder future funding opportunities.
Given the potential penalties and reputational risks associated with unspent funds, it's highly probable that CSR donors will request NGOs to return the unspent funds.
Following are some of the points that NGOs can consider to avoid the situation of unspent funds at financial year-end:
Encourage Early Project Initiation:
NGOs can advocate for CSR donors to commence projects early in the financial year and release funding within the first quarter. Starting projects promptly allows ample time for planning and execution, increasing the likelihood of efficient fund utilization.
Strategic Planning:
NGOs should engage in comprehensive planning to allocate funds strategically across various initiatives. By forecasting project expenses and prioritizing funding areas, NGOs can optimize resource allocation and minimize the risk of unspent funds.
Regular Utilization Reviews:
Conducting periodic reviews of fund utilization on a monthly or quarterly basis enables NGOs to assess spending against the planned budget. By monitoring expenditure trends, NGOs can identify deviations from the plan and take corrective actions promptly.
Proactive Communication with Donors:
In cases of underutilization or overutilization of funds, NGOs should maintain proactive communication with CSR donors. By updating donors on project progress and discussing budget revisions based on realistic projections, NGOs can ensure alignment between funding and project needs.
Tranche Forecasting
Throughout the engagement term, NGOs should regularly reevaluate tranche inflows from CSR donors. In instances of underutilization or unforeseen expenses, NGOs can request adjustments to tranche allocations based on updated projections, facilitating effective fund management.
By implementing these proactive measures, NGOs can mitigate the risk of unspent CSR funds, maximize the impact of their initiatives, and strengthen their partnerships with CSR donors.
Conclusion
Navigating CSR compliance requires diligence and proactive engagement from NGOs. By understanding regulatory nuances and taking preventive measures, NGOs can optimize the utilization of CSR funds while maintaining transparency and fostering stronger partnerships with corporate donors.