Unspent CSR Money, Ineligible Spend and a Committee That Meets Once a Year
Vasudha Agri Ltd is a listed company. Its average net profit computed under Section 198 for the three preceding financial years is Rs 42.4 crore, so its CSR obligation for FY2024-25 is Rs 84.8 lakh. It spent Rs 61.8 lakh during the year. Of the Rs 23 lakh unspent, Rs 18 lakh belongs to a board-approved three-year watershed development project in twelve villages now in its second year, and Rs 5 lakh was budgeted for a one-time school renovation that could not start because the district administration did not grant permission. For FY2025-26 the CSR committee proposes to count Rs 6 lakh of monetised employee volunteering hours, Rs 10 lakh of sponsorship of a televised farmers' cricket league carrying the company's logo, and Rs 5 lakh contributed to the Chief Minister's Relief Fund. The committee has three members, one of them an independent director, and met once during FY2024-25. The CFO wants the Rs 23 lakh shown as spent in the annual report because the money is committed.
1. Classify the Rs 23 lakh and state precisely what must be done, by when, and what follows if it is not.
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Split it, because the two amounts are governed by different rules. The Rs 18 lakh relates to a board-approved multi-year project with a defined timeline, so it is an ongoing project within the meaning of Section 135(6). The Rs 5 lakh does not relate to an ongoing project, so the proviso to Section 135(5) applies.
The ongoing project tranche. Rs 18 lakh must be transferred to the Unspent Corporate Social Responsibility Account, opened with a scheduled bank, within 30 days of the end of the financial year, that is by 30 April 2025. It must then be spent on the project within three financial years from the date of transfer. If it is still unspent at the end of that period, it must be transferred to a fund specified in Schedule VII within 30 days thereafter.
The non-ongoing tranche. Rs 5 lakh must be transferred to a fund specified in Schedule VII within six months of the end of the financial year, that is by 30 September 2025. It cannot be held back awaiting the district administration's permission.
The CFO's proposal is wrong. Money committed or earmarked is not money spent. Showing Rs 23 lakh as spent misstates the CSR disclosure in the board's report and conceals the statutory transfer obligations from shareholders and the registrar.
Consequence of failure. Section 135(7) exposes the company to a penalty of up to Rs 1 crore and every officer in default to up to Rs 2 lakh. The independent director on the committee is an officer in default for this purpose if the committee and board approved the non-compliant treatment.
What the director should do: require the Rs 18 lakh transfer resolution and the Rs 5 lakh transfer resolution to be placed before the board separately, obtain the account opening confirmation and the transfer reference numbers, and have the board's report disclose the unspent amount and the transfers accurately.
2. Assess the three FY2025-26 proposals: monetised employee volunteering of Rs 6 lakh, cricket league sponsorship of Rs 10 lakh and Rs 5 lakh to the Chief Minister's Relief Fund.
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Employee volunteering - not countable. CSR expenditure must be money actually spent by the company on eligible activities. Employee time is not an outflow, and monetising volunteered hours against the 2% obligation converts an internal activity into a fictional expense. The company may report volunteering as an input in its CSR narrative, but it cannot be set off against the obligation. Direct out-of-pocket costs the company incurs for a volunteering programme, such as travel or materials for an eligible activity, stand on a different footing and may be counted.
Cricket league sponsorship - not countable as proposed. Schedule VII includes training to promote rural sports and nationally recognised sports, but the proposal is a sponsorship of a televised league in exchange for logo visibility the company is buying for marketing purposes. That is advertising and brand promotion, which is excluded, and it is in any event incurred for the company's commercial benefit. If the company wants to fund genuine rural sports training through a registered implementing agency with no branding benefit, that is a different and eligible transaction, and it must be structured that way from the outset rather than recharacterised afterwards.
Chief Minister's Relief Fund - generally eligible. Schedule VII permits contributions to funds set up by the Central Government or State Governments for socio-economic development and relief and for the welfare of specified groups. A State relief fund of this kind typically qualifies. The committee should still record the fund's notification and purpose so the eligibility is documented at the time, not reconstructed during audit.
The 5% administration cap. Administrative overheads cannot exceed 5% of total CSR expenditure for the year. The Rs 6 lakh volunteering and Rs 10 lakh sponsorship proposal have the practical effect of inflating 'spend' without corresponding activity, and would distort the overhead calculation.
Recommendation: approve only the relief fund contribution from the list; require the other two to be redesigned or rejected, and direct management to bring an annual action plan with project-wise budgets.
3. What governance changes should the independent director press for on the CSR committee, and what is her personal exposure if the current pattern continues?
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The composition is technically compliant but functionally weak. Section 135(3) requires a committee of three or more directors with at least one independent director, and the committee satisfies that on paper. With three members and one independent director, quorum is two, so the independent director can be outvoted on every question by the two management directors. A better structure is a committee of four or a committee chaired by the independent director, which is common practice for a reason.
Meeting frequency. One meeting a year is the bare minimum and is inadequate for a programme of this size with a live unspent balance. Quarterly review should be the norm: project progress, fund transfers, implementing agency compliance, and the unspent position should all be visible before the year end rather than discovered afterwards.
Documentation the committee must own: a written annual action plan with project-wise budgets and timelines; verification that each implementing agency is registered and has the required track record and separate books; a rule that no project is treated as ongoing without a board-approved multi-year timeline; and a rule that no expense is categorised as CSR without a Schedule VII mapping recorded at the time of approval.
Impact assessment. A company whose average CSR obligation is Rs 10 crore or more must have projects above the prescribed outlay assessed by an independent agency. Vasudha is far below that threshold today, but the board should monitor the obligation annually so that the requirement is not missed in the year the company crosses it.
Personal exposure. Approving a board's report that overstates CSR spend, or signing off on transfers that were never made, exposes the director both under the penal provisions for CSR non-compliance and under the general duty of care in Section 166. Her protection is not the committee majority; it is a recorded dissent and a paper trail showing what she asked for and when.