Clairvoyant India Penalized for Failing to Constitute CSR Committee as Required by Companies Act, 2013

PUNE (India CSR): The Registrar of Companies (RoC), Pune, has imposed a penalty of Rs. 5.03 lakh on Clairvoyant India Private Limited and its directors for failing to constitute a Corporate Social Responsibility (CSR) Committee, despite the company’s net profit exceeding the threshold specified under Section 135 of the Companies Act, 2013. The penalty was imposed following a detailed investigation that revealed the company’s non-compliance with the mandatory provisions of the Act related to CSR obligations.

Background of the Case

According to Section 135 of the Companies Act, 2013, any company with a net profit exceeding Rs. 5 crore in the preceding financial year is required to establish a CSR Committee consisting of at least three directors, including at least one independent director.

This committee is responsible for overseeing the company’s CSR activities and ensuring compliance with the CSR spending obligations. Clairvoyant India Private Limited, a registered entity under the Companies Act, 2013, was found to have breached these provisions during the financial year 2020-21.

Failure to Constitute CSR Committee and Spend CSR Funds

The company admitted its non-compliance by filing a suo-moto application, acknowledging its failure to constitute a CSR Committee despite having a net profit exceeding the threshold set by Section 135(1) for the financial year ending March 31, 2020.

Furthermore, the company failed to spend the required CSR amount by March 31, 2021, and did not transfer the unspent amount to one of the specified funds by September 30, 2021, as mandated by Section 135(5) of the Companies Act.

The Company’s Defense and Arguments

In its defense, Clairvoyant India Private Limited contended that the non-compliance was due to inadvertence and a misinterpretation of the Companies Act’s provisions.

The company argued that according to Section 135(9), if the CSR obligation does not exceed ₹50 lakh, the constitution of a CSR Committee is not mandatory.

The company calculated its CSR obligation for the financial year 2020-21 to be ₹8,93,311, which, based on the notification dated January 22, 2021, meant that the requirement for a CSR Committee was optional for that period.

The company also pointed out the severe disruption caused by the COVID-19 pandemic during the financial years 2020-21 and 2021-22, which led to significant challenges in coordinating and accessing necessary information, further contributing to the non-compliance.

RoC’s Observations and Penalty Imposition

The RoC, after reviewing the company’s submissions, observed that the arguments regarding an exemption from constituting the CSR Committee were invalid for the financial year 2020-21.

The RoC noted that the company was obligated to spend Rs. 8,93,311 on CSR activities for that financial year but failed to do so within the prescribed timeline. Instead, the company transferred the unspent amount to the Prime Minister’s National Relief Fund on September 14, 2022, well beyond the deadline.

Furthermore, the RoC highlighted that a change in management on December 16, 2021, did not rectify the earlier non-compliance, and the responsibility was placed on the previous management for the lapses.

Despite the RoC issuing notices to both the current and former management, there were no replies from the old directors, and the company did not confirm the receipt of notices by the former management.

As a result, the RoC imposed penalties for violations under Section 135(1) and Section 135(5) of the Companies Act. The penalties were calculated based on the number of days of default and the applicable provisions, leading to a total penalty of ₹5,03,244 on the directors of Clairvoyant India Private Limited.

Key Facts Table

Company	Clairvoyant India Private Limited
Issue	Failure to constitute a CSR Committee
Relevant Sections of Companies Act, 2013	Section 135(1), Section 135(5)
Net Profit Threshold Exceeded	Yes (for FY ending March 31, 2020)
CSR Obligation for FY 2020-21	₹8,93,311
CSR Spending Requirement Not Met	Yes
Unspent CSR Amount Transfer Deadline	Missed (Transference done on September 14, 2022)
Total Penalty Imposed	₹5,03,244
Directors Penalized	Shantanu Prakash Mirajkar, Amita Mirajkar Shantanu, Chandra Sekhar Ambadipudi, Shekhar Sastry Vemuri
Penalties for CSR Committee Non-Constitution	₹1,46,000 (₹42,000 for first two directors, ₹31,000 for last two)
Penalties for CSR Spending Non-Compliance	₹3,57,244 (₹89,311 each for all four directors)
Company’s Defense	Inadvertence, misinterpretation, COVID-19 disruption
RoC’s Stance	Arguments invalid; previous management responsible

Detailed Observations by the Registrar of Companies (RoC)

Non-Compliance with CSR Provisions under the Companies Act, 2013

The Registrar of Companies (RoC), Pune, meticulously reviewed the case of Clairvoyant India Private Limited and found significant lapses in the company’s adherence to the Corporate Social Responsibility (CSR) provisions as mandated under Section 135 of the Companies Act, 2013. This section is critical as it outlines the obligations of companies that meet certain financial thresholds to engage in CSR activities, ensuring that businesses contribute to societal development.

Mandatory CSR Committee Constitution

Under Section 135(1) of the Companies Act, 2013, companies that meet specific financial thresholds are required to establish a CSR Committee. This Committee must be composed of at least three directors, with at least one of them being an independent director. The role of this Committee is to guide and monitor the company’s CSR activities, ensuring compliance with the legal requirements. Additionally, companies are mandated to allocate a specified percentage of their net profits toward CSR activities. Any unspent CSR funds must be transferred to a fund specified in Schedule VII within six months after the end of the financial year.

Failure to Comply with CSR Obligations

In the case of Clairvoyant India Private Limited, the RoC observed that the company failed to comply with these fundamental requirements. For the financial year 2020-2021, Clairvoyant India was obligated to spend ₹8,93,311 on CSR activities, as per the provisions of Section 135. Despite this clear obligation, the company neither constituted a CSR Committee nor spent the required amount on CSR activities within the stipulated timeframe.

The company’s non-compliance extended further as it failed to transfer the unspent CSR amount to a designated fund within the prescribed period. Instead, the company belatedly transferred the amount to the Prime Minister’s National Relief Fund on September 14, 2022, well beyond the legally mandated timeline. This delay in compliance highlights a significant lapse in the company’s adherence to the CSR provisions.

Impact of Management Change and Invalid Exemption Argument

The RoC also noted that the company underwent a change in management on December 16, 2021. However, this change did not lead to the rectification of the earlier non-compliance issues. The new management failed to address the CSR obligations that had been neglected by the previous management. This continued non-compliance raised serious concerns about the governance practices within Clairvoyant India.

Moreover, the company attempted to argue that an exemption from constituting the CSR Committee was applicable from January 22, 2021, as per the notification issued. This argument was predicated on the provision that if the CSR obligation did not exceed ₹50 lakh, the requirement to form a CSR Committee was not mandatory. However, the RoC dismissed this argument as invalid, emphasizing that this exemption could not be anticipated during the financial year 2020-2021. The RoC, therefore, held the previous management responsible for the non-compliance, as the obligation to constitute the CSR Committee and spend the CSR funds existed prior to the issuance of the notification.

Issuance of Notices and Lack of Response

In response to the observed non-compliance, the RoC issued notices under Section 454(4) of the Companies Act, 2013, to both the current and former management of Clairvoyant India Private Limited. These notices were intended to elicit a response from the company and its directors regarding the lapses in compliance. However, despite repeated efforts, there were no replies from the old directors, and the company failed to confirm the receipt of these notices by the former management. This lack of communication and accountability further compounded the company’s non-compliance issues.

Calculation of Penalties for Non-Compliance

Given the severity of the non-compliance, the RoC proceeded to impose penalties on the directors of Clairvoyant India Private Limited for violations under Section 135(1) and Section 135(5) of the Companies Act. The penalties were calculated based on the number of days of default and the applicable provisions of the Act.

Penalties for Failure to Constitute CSR Committee (Section 135(1)):

Shantanu Prakash Mirajkar: Default for 32 days, resulting in a total penalty of ₹42,000.
Amita Mirajkar Shantanu: Default for 32 days, resulting in a total penalty of ₹42,000.
Chandra Sekhar Ambadipudi: Default for 21 days, resulting in a total penalty of ₹31,000.
Shekhar Sastry Vemuri: Default for 21 days, resulting in a total penalty of ₹31,000.

Penalties for Failure to Spend CSR Funds (Section 135(5)):

For the violation of Section 135(5), which requires companies to spend a specific percentage of their net profits on CSR activities, the penalty was calculated as 10% of the unspent CSR amount. The following penalties were imposed:

Shantanu Prakash Mirajkar: Penalty of ₹89,311.
Amita Mirajkar Shantanu: Penalty of ₹89,311.
Chandra Sekhar Ambadipudi: Penalty of ₹89,311.
Shekhar Sastry Vemuri: Penalty of ₹89,311.

Total Penalty Imposed: As a result, the RoC imposed a cumulative penalty of ₹5,03,244 on the directors of Clairvoyant India Private Limited. This penalty serves as a reminder of the importance of strict compliance with CSR obligations and the consequences of neglecting these legal responsibilities. The case underscores the critical role of management in ensuring that companies adhere to the CSR provisions of the Companies Act, 2013, and the significant repercussions of failing to do so.

(India CSR)