Corporate Social Responsibility (CSR) Laws, Rules and Key Schemes in India

India became the first country in the world to mandate Corporate Social Responsibility through a statutory framework under Section 135 of the Companies Act, 2013. The provisions require eligible companies to allocate a designated portion of their net profits toward social, environmental, and economic development activities. The legislative framework moved corporate philanthropy into a structured corporate governance mandate monitored by the Ministry of Corporate Affairs.

Statutory Provisions and Applicability Criteria

Section 135(1) of the Companies Act, 2013 lays down specific financial thresholds to determine corporate eligibility. Any company operating in India, including its holding or subsidiary companies and foreign branches, must comply if it meets any of the criteria during the immediately preceding financial year.

• Net Worth Threshold: Net worth of ₹500 crore or more.
• Turnover Threshold: Annual turnover of ₹1,000 crore or more.
• Net Profit Threshold: Net profit of ₹5 crore or more.
• Mandatory Spending Quantum: Eligible companies must spend at least 2% of their average net profits calculated over the three immediately preceding financial years.
• CSR Committee Setup: Companies meeting the threshold must constitute a CSR Committee of the Board comprising three or more directors, including at least one independent director.
• Exemption Rule: If the mandatory CSR obligation does not exceed ₹50 lakh, the requirement to form a CSR Committee is waived, and the Board of Directors discharges the committee functions directly.

Permissible Activities under Schedule VII

The scope of eligible CSR expenditure is governed by Schedule VII of the Companies Act, 2013. Activities must align strictly with the broad thematic areas specified by the government.

• Poverty and Health: Eradicating hunger, poverty, and malnutrition; promoting preventive healthcare and sanitation; supporting the Swachh Bharat Kosh.
• Education and Skill Development: Promoting education, special education, and employment-enhancing vocational skills, especially among children, women, and the elderly.
• Gender Equality: Promoting gender equality, setting up homes and hostels for women and orphans, establishing old age homes, and reducing inequalities faced by socially backward groups.
• Environmental Sustainability: Ensuring ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources, and contributions to the Clean Ganga Fund.
• Heritage and Sports: Protecting national heritage, art, and culture; training to promote rural sports, nationally recognized sports, Paralympic sports, and Olympic sports.
• Relief Funds and Technology: Contributions to the Prime Minister’s National Relief Fund (PMNRF), PM CARES Fund, or any other fund set up by the Central Government for socio-economic development; funding technology incubators located within academic institutions approved by the Central Government.
• Rural and Disaster Management: Rural development projects, slum area development, and disaster management activities including relief, rehabilitation, and reconstruction.

Treatment of Unspent Funds and Penalty Architecture

Amendments made through the Companies (Amendment) Act, 2019 and 2020 introduced strict timelines for unspent funds and converted non-compliance into a civil wrong with monetary penalties.

Ongoing vs Non-Ongoing Projects

• Ongoing Projects: Unspent funds earmarked for an ongoing project must be transferred to a special bank account titled the “Unspent Corporate Social Responsibility Account” within 30 days from the end of the financial year. The company must spend this money within three financial years.
• Non-Ongoing Projects: Unspent funds not linked to an ongoing project must be transferred to a fund specified under Schedule VII (such as PMNRF or PM CARES) within six months from the end of the financial year.
• Transfer of Unspent Balance: If funds in an Unspent CSR Account remain unutilized after three financial years, the company must transfer the amount to a Schedule VII fund within 30 days of completing the third year.

Statutory Penalty Structure

• Financial Penalty on Company: Defaulting companies face a penalty of twice the amount required to be transferred to the designated Schedule VII fund or Unspent CSR Account, or ₹1 crore, whichever is lower.
• Penalty on Officers in Default: Every officer of the company who is in default is liable to a penalty of one-tenth of the amount required to be transferred to the fund or Unspent CSR Account, or ₹2 lakh, whichever is lower.

Impact Assessment and Governance Rules

The Companies (CSR Policy) Amendment Rules, 2021 introduced mandatory impact assessments and registration requirements for implementation partners.

• Impact Assessment Requirement: Companies with an average CSR obligation of ₹10 crore or more in the three preceding financial years must conduct an impact assessment for projects with outlays of ₹1 crore or more.
• Independent Agency: Impact assessments must be undertaken through an independent external agency.
• Expense Cap: A company can book impact assessment expenditure toward CSR up to 2% of total CSR expenditure for that financial year, or ₹50 lakh, whichever is lower.
• Form CSR-1 Registration: All implementing agencies (NGOs, Section 8 companies, trusts, societies) must register on the Ministry of Corporate Affairs portal by filing Form CSR-1 to receive funding.
• National CSR Exchange Portal: An online portal developed by the Ministry of Corporate Affairs that connects corporate donors directly with registered implementing agencies for project funding.

CSR Compliance Metrics and Requirements

Key Facts for Quick Revision

• India implemented statutory CSR mandates on April 1, 2014, under Section 135 of the Companies Act, 2013.
• The financial criteria apply to companies with net worth of ₹500 crore+, turnover of ₹1,000 crore+, or net profit of ₹5 crore+.
• CSR spending calculations rely on “net profits” computed under Section 198 of the Companies Act, excluding profits from overseas branches.
• Excess CSR spend in any year can be carried forward and set off against spending requirements for the next three consecutive financial years.
• Unspent funds for non-ongoing projects must move to a Schedule VII fund within six months of the financial year’s end.
• Unspent funds for ongoing projects must move to an Unspent CSR Account within 30 days and be spent within three years.
• Form CSR-1 registration generates a unique CSR Registration Number for eligible non-governmental organizations.
• Political contributions do not qualify as eligible CSR activities under Schedule VII rules.
• Expenditure incurred exclusively for the benefit of the company’s own employees or their families cannot be counted toward mandatory CSR spend.