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THEIR FAILINGS, OUR LEARNINGS

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IN SOCIETY’S NAME

Context:

CSR is the effort that corporates make to contribute to the interests of society as a stakeholder. How can CSR funds be applied to business expenditure?

  • As per a media report on June 19, 2019, Ministry of Corporate Affairs (MCA) had served a notice on May 31, 2019, under Section 206 of the Companies Act, 2013, on May 31, 2019 to a large listed Company for allegedly diverting funds, amounting to INR 1,740 crores, which were earmarked for mandatory CSR activities, to its own existing businesses. This had allegedly resulted in the Company violating CSR norms.
  • Section 206 of the Companies Act, 2013 relates to the Registrar’s power to call for Information, inspect books and conduct inquiries relating to a company.
  • According to the media report, a complaint was made by a whistle blower to the Department of Economic Affairs of the Ministry of Finance. As a result, there were 3 projects reported under the CSR activities of the company, 2 hospitals and 1 university, which came under the scanner.
  • MCA had asked the Company to furnish details about funding, operations and revenues for each of the three CSR projects for all financial years, starting 2014-15 till the date of the notice.
  • As per the media report, the Company had reported an expenditure of INR 2,816 crore (INR 2726 crores as per the annual reports of the company for the relevant time period), against the prescribed amount of INR 2,414 crores between 2014 to 2018. Of this, the company spent a total of INR 1,141 crores, INR 590 crores, and INR 8 crores (INR 9.69 crores as per annual reports of the company) on the 3 projects in the years which were being investigated.
  • MCA had asked Company’s top officials to appear before it in person.
  • MCA had stated that “Prima facie, you appear to be in violation of provisions of Companies Act, 2013 as use of CSR as a source of funding an existing business is not permissible. A final opportunity is being accorded to you to explain your compliance of CSR provisions… You are requested to appear for a hearing on the matter, in person, to demonstrate through legal documents how the prescribed CSR amount has been spent and CSR compliance has been made. In case compliance of CSR provisions can’t be demonstrated, formal inspection under Companies Act shall follow”. Also, MCA had found the company’s reply to its earlier letter “not satisfactory”.
  • It was also reported that the 3 projects/ companies too will be under scanner.
  • On June 19, 2019, Stock Exchanges sought clarification from the Company on the media report published.
  • On June 24, 2019, the Company clarified that MCA had been seeking information from the Company from time to time about its CSR activities. It had been providing information in response to the requirements of MCA. MCA had sought additional information on CSR projects and the Company was in the process of providing the same to MCA. Further, the company stated that it had carried out its CSR activities on PAN India basis through its implementation agency, which was its own Foundation, and also in co-operation with certain other reputed agencies. The Company was proud to be the largest corporate contributor to CSR in India.
  • The Company also mentioned that it was in compliance with CSR requirements under the Companies Act, 2013 and detailed disclosure was made in the Annual Report of the Company each year, which was duly certified by the Company’s Statutory Auditors.
  • The 3 projects were reported under the CSR Report (in the annual report) of the Company. But none of them explicitly stated that it was not-for-profit project. The two hospitals were founded in 1990s, and and the university was work-in-progress.
  • The Statutory Auditors’ report or Secretarial Auditors’ Report for FY 2019-20 mention nothing in relation to the MCA notice. The Annual Report of FY 2018-19 and 2019-20 does not mention anything in relation to the whistle blower complaint.

 

Points to ponder

  • Were the projects not-for-profit entities? If so, could compliance with CSR provisions not have been established?
  • What do you make of the non-mention by the Auditors, of the notice received from MCA?