CSR Under Companies Act 2013: Complete Legal Framework Explained

1. Introduction: The Evolution of CSR – From Profit to Shared Value

Corporate Social Responsibility (CSR) has evolved significantly over time. Historically, businesses viewed their primary obligation as profit maximization for shareholders. Social contributions, if any, were largely philanthropic, voluntary, and peripheral to core business operations. Over decades, societal expectations changed. Businesses began to be seen not merely as profit-generating entities but as integral participants in social and environmental ecosystems.

Globally, CSR evolved from charity-based models to strategic responsibility, where companies integrate social and environmental concerns into business strategy. Concepts such as sustainable development, stakeholder capitalism, and shared value emerged, emphasizing that long-term financial success is inseparable from societal well-being.

India took a pioneering step by transforming CSR from a largely voluntary practice into a statutory obligation through Section 135 of the Companies Act, 2013. This marked a global first—mandating qualifying companies to spend a minimum amount on social development. The intent was not merely compliance, but to embed social responsibility into corporate governance and decision-making.

2. Applicability of CSR under the Companies Act, 2013

2.1 Companies Covered

CSR provisions apply to any company, including:

• Public companies
• Private companies
• Section 8 companies
• Holding and subsidiary companies

A company becomes subject to CSR provisions if any one of the following thresholds is met during the immediately preceding financial year:

• Net worth of ₹500 crore or more, or
• Turnover of ₹1,000 crore or more, or
• Net profit of ₹5 crore or more

Once applicable, CSR obligations continue until the company no longer meets the criteria for three consecutive financial years.

2.2 Meaning of Net Profit

For CSR purposes, “net profit” is calculated as per Section 198 of the Act and excludes:

• Profits from overseas branches
• Dividends received from other CSR-compliant companies

This ensures CSR liability reflects domestic operational profitability.

3. CSR Governance Framework

3.1 CSR Committee

Every CSR-applicable company must constitute a CSR Committee of the Board, consisting of:

• At least three directors, including one independent director
• Certain private companies and unlisted companies are eligible for exemptions

Functions of the CSR Committee:

• Formulate and recommend a CSR Policy
• Recommend CSR expenditure
• Monitor CSR projects

In companies where CSR obligation does not exceed ₹50 lakh, the Board itself may discharge CSR Committee functions.

3.2 Role of the Board of Directors

The Board retains ultimate responsibility for CSR compliance. Its key duties include:

• Approving the CSR Policy
• Ensuring spending of at least 2% of average net profits
• Monitoring implementation
• Disclosing CSR details in the Board’s Report

 4. Minimum CSR Expenditure: The 2% Rule

Eligible companies must spend at least 2% of the average net profits of the three immediately preceding financial years on CSR activities.

CSR in India follows a “comply or explain” principle:

• If spending is achieved → compliance
• If not → reasons must be disclosed, and unspent amounts handled strictly as per law

Post-2021 amendments significantly tightened compliance, shifting CSR from disclosure-based to enforcement-driven.

5. Permissible CSR Activities – Schedule VII

CSR expenditure must be incurred only on activities listed in Schedule VII, including (illustrative):

• Eradicating hunger, poverty, and malnutrition
• Promoting education and vocational skills
• Gender equality and women empowerment
• Environmental sustainability and climate action
• Health care and sanitation
• Rural development
• Disaster management
• Contribution to approved government relief funds

The law adopts a liberal interpretation of Schedule VII, allowing innovation while maintaining intent.

6. What Is Excluded from CSR

Certain activities are explicitly excluded:

• Activities benefiting only employees and their families
• Political contributions
• Activities undertaken outside India (with limited exceptions)
• Normal business activities (except notified R&D during COVID period)

These exclusions ensure CSR remains public-oriented, not private welfare or political funding.

7. Implementing CSR: Who Can Execute Projects

7.1 Modes of Implementation

CSR activities may be undertaken:

• Directly by the company, or
• Through eligible implementing entities

7.2 Eligible Implementing Entities

• Section 8 companies
• Registered public trusts
• Registered societies
• Entities established by Central or State Government
• Statutory bodies established under law

If the entity is not established by the company or government, it must have:

• At least three years’ track record in similar activities

7.3 Meaning of “Established Track Record”

An established track record implies:

• Minimum three financial years of existence
• Proven experience in comparable CSR projects
• Demonstrable operational and governance capability

This ensures CSR funds are entrusted to competent and credible organizations.

8. Mandatory Registration of CSR Implementing Entities (CSR-1)

From 1 April 2021, every entity intending to implement CSR must register with the Central Government by filing eForm CSR-1.

Key features:

• Mandatory electronic filing
• Digital verification by practicing CA / CS / CMA
• Auto-generation of a unique CSR Registration Number

Without CSR-1 registration, entities are ineligible to receive CSR funds.

9. Tax Registration Requirements for CSR Entities

To qualify, non-government implementing entities must satisfy one of the following:

• Registration under Section 12A and approval under Section 80G, or
• Exemption under Section 10(23C) (specified clauses)

This ensures CSR funds flow only to tax-compliant, non-profit organizations.

10. Collaboration and Joint CSR Projects

Companies may:

• Collaborate with other companies for CSR projects
• Pool resources for larger social impact

Key condition:
Each company’s CSR Committee must be able to separately report its share of expenditure and outcomes.

Joint implementation enhances scale while preserving accountability.

11. Role of International Organizations

International organizations may be engaged only for:

• Designing CSR projects
• Monitoring and evaluation
• Capacity building of CSR personnel

They cannot directly implement CSR activities in India.

12. Capacity Building Expenditure

Companies may incur CSR expenditure on training their CSR teams or implementing agencies.

Limitations:

• Maximum 5% of total CSR expenditure in a financial year
• Training institutions must have three years’ track record

This ensures administrative efficiency without diluting social impact.

13. Financial Oversight and CFO Certification

A critical compliance requirement is certification of CSR fund utilization.

The Chief Financial Officer (CFO) or person responsible for financial management must certify that:

• CSR funds have been utilized
• Exactly for purposes approved by the Board

This certification strengthens internal financial control and accountability.

14. Ongoing Projects and Multi-Year CSR

14.1 What Is an Ongoing Project

An “ongoing project” is:

• A multi-year CSR project
• Approved by the Board
• With defined timelines not exceeding three years (excluding year of commencement)

14.2 Board’s Role

The Board must:

• Monitor progress
• Track year-wise allocations
• Modify implementation if required

15. Treatment of Unspent CSR Amounts

15.1 Unspent Amount – Ongoing Projects

• Transfer to Unspent CSR Account within 30 days from financial year-end
• Utilise within three succeeding financial years
• If still unspent → transfer to Schedule VII Fund within 30 days

15.2 Unspent Amount – Other than Ongoing Projects

• Transfer entire amount to Schedule VII Fund within 6 months
• No interim CSR spending permitted

16. Excess CSR Expenditure – Can It Be Carried Forward?

Yes. If a company spends more than the mandatory 2%, it may:

• Set off excess expenditure against CSR obligations
• For up to three immediately succeeding financial years

Conditions:

• Board resolution is mandatory
• Excess cannot include surplus arising from CSR activities

If not set off within three years, the excess lapses.

17. Treatment of Surplus from CSR Activities

Any surplus generated from CSR projects:

• Cannot form part of business profits
• Must be:
  • Reinvested in the same project, or
  • Transferred to Unspent CSR Account, or
  • Transferred to Schedule VII Fund within six months

18. Penalties for Non-Compliance

CSR non-compliance is treated as a civil default with strict penalties.

18.1 Failure to Transfer Unspent CSR Amount

• Company:
  • Twice the unspent amount or ₹1 crore, whichever is less
• Every officer in default:
  • 1/10th of unspent amount or ₹2 lakh, whichever is less

18.2 Other CSR Defaults

General penalties under:

• Section 134(8), or
• Section 450 (including continuing penalties)

19. Practical Example: CSR in Action

Example:
ABC Ltd has:

• Average net profit (3 years): ₹100 crore
• Mandatory CSR: ₹2 crore

Scenario 1 – Exact Spend

ABC Ltd spends ₹2 crore on education and healthcare → Fully compliant.

Scenario 2 – Unspent ₹50 lakh (Ongoing Project)

• Transfer ₹50 lakh to Unspent CSR Account
• Utilise within next 3 years

Scenario 3 – Excess Spend ₹30 lakh

• Total spend: ₹2.30 crore
• ₹30 lakh can be set off in next 3 years via Board resolution

20. Strategic and Ethical Significance of CSR

Beyond compliance, CSR:

• Enhances brand reputation
• Builds stakeholder trust
• Improves employee engagement
• Supports sustainable development

Critics argue CSR risks becoming a “box-ticking” exercise, but strong governance and outcome-based monitoring can transform CSR into a strategic asset.

21. Conclusion

CSR in India has matured into a robust legal and governance framework, balancing flexibility with accountability. The Companies Act, 2013 and CSR Rules, 2014 ensure that corporate wealth contributes meaningfully to national development while enforcing transparency, discipline, and ethical responsibility.

For companies, CSR is no longer optional philanthropy—it is a statutory, strategic, and moral obligation. When implemented thoughtfully, CSR creates shared value, aligning corporate growth with societal progress and sustainable development.

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Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal or professional advice. While every effort has been made to ensure the accuracy of the information, laws and regulations are subject to change. Therefore, readers are advised to consult with qualified professionals or legal advisors for specific advice regarding their individual circumstances. The authors and publishers of this article are not responsible for any errors or omissions or for any actions taken based on the information contained herein.