CSR Under Indian Law: Who Must Comply and How Much to Spend

Summary: Corporate Social Responsibility (CSR) under Section 135 of the Companies Act, 2013 mandates that certain companies in India contribute a portion of their profits to socially beneficial activities. Applicable to companies exceeding ₹5 crore net profit, ₹500 crore turnover, or ₹1000 crore net worth, CSR requires spending 2% of the average net profits of the past three years on approved activities listed in Schedule VII, including education, health, women and child welfare, environmental sustainability, heritage protection, rural development, disaster relief, and contributions to government-approved funds. Companies must form a CSR Committee of at least three directors, including an independent director for listed companies, to formulate policies, select projects, monitor implementation, and report annually. Boards must approve policies, ensure expenditure, disclose activities, and manage unspent funds. Non-compliance carries fines up to ₹25 lakh and imprisonment for defaulting officers. CSR thus legally integrates corporate growth with social welfare, promoting inclusive and sustainable development.

Introduction:

The Indian business sector is regulated and controlled by a variety of laws for its specific needs, and one of these laws, which is the basis for business in India by creating a company, is the Companies Act, 2013. There is a concept enumerated in this statute termed Corporate Social Responsibility in Section 135.

So what is this concept of Corporate Social Responsibility (CSR)? Simply put, CSR is a responsibility that is laid upon the company or corporation by the state to perform certain actions through spending a portion of their profit. There are certain areas as mentioned by the statute as to where the spending is to be made. Non-compliance by the companies which are eligible to meet the CSR requirements are dealt with fine and punishment accordingly.

Objective:

The primary objective for bringing the concept is rooted in the nation’s ideological structure: as India is a socialist democracy, it aims for collective building and development of its people. So its policy is to distribute the wealth to the poor, taking from people who make more. But unlike the Marxism or Communism, the state doesn’t take the money itself, but it asks the corporation or companies to utilize that set standard of spending among the areas identified by the statute.

Who are to comply with CSR:

The Companies Act, 2013, through Section 135, asks a company or corporation situated in India to follow CSR in case its net profit, net worth, or turnover in the previous financial year exceeds ₹5 Cr, ₹500 Cr, or ₹1000 Cr, respectively. So any business head who exceeds any of the given criteria, and not necessarily all three together, is to comply with CSR guidelines in the given manner by law.

Exercise of CSR:

CSR is exercised simply by spending 2% of the average net profit of the past three financial years that the company has made. But if the company has not been eligible for CSR for the past 3 financial years, then under the Amendment Act of 2019, it will have to take the average of past years since it has been eligible.

Example: A company XYZ Pvt. Ltd. has made a net profit of 10Cr, 15Cr and 15Cr in the past three financial years 2022-2023, 2023-2024, and 2024-2025 respectively. Since it has exceeded the cap of 5Cr net profit, it shall need to take the average of the profits and extract the 2% into the CSR in the following way:

Profits: 10 crore, 15 crore, 15 crore Total Profit = 10 + 15 + 15 = 40 crore Number of Years = 3 Average Profit = Total Profit ÷ Number of Years = 40 ÷ 3 Average Profit = 13.33 crore 2% of Average Profit = 13.33 × 2% = 13.33 × 0.02 = 0.2666 crore So the company is to invest ₹26.66 lakh in the CSR activity.

The spending must be done in the territory of India under the specified heads as mentioned in the statute. The areas where the CSR needs to be exercised are mentioned in Schedule VII of the Act, which mentions the use of CSR for:

1. Eradicating hunger, poverty, and malnutrition; promoting health care and sanitation.

2. Promoting education, including special education and employment-enhancing vocational skills.

3. Promoting gender equality, women empowerment, and support for homes and hostels for women and orphans.

4. Reducing child mortality and improving maternal health.

5. Ensuring environmental sustainability, ecological balance, biodiversity conservation, and protection of natural resources.

6. Protection of national heritage, art, and culture; renovation of heritage sites.

7. Measures for the benefit of armed forces veterans, war widows, and their families.

8. Training to promote rural sports, nationally recognized sports, Paralympic sports, and Olympic sports.

9. Contributions to government funds such as:

• • Prime Minister’s National Relief Fund (PMNRF)

  • PM CARES Fund

  • Other central government-approved funds.

10. Rural development projects.

11. Slum area development.

12. Disaster management, including relief, rehabilitation, and reconstruction.

CSR is a yearly obligation, meaning the companies must exercise the CSR every year and try to spend the 2% of the average net profit of the past 3 years into the exercise. But if that company fails to spend the money, it is given extra time for spending that remaining money, depending upon the nature of the project it has undertaken for the exercise of CSR. For an ongoing project, it needs to spend the remaining money within the next 3 financial years; and if the project is not ongoing, it is needed to transfer the remaining amount into the government CSR fund within the next six months from the end of the financial year. Although the liability is laid upon the company, it’s not mandatory that the company itself exercises the CSR, but it can assign the task to a registered trust of its own or of a third party or through a registered society.

CSR Committee:

The company is obliged to create a Corporate Social Responsibility Committee consisting of 3 or more directors, wherein one director (at least) shall be independent. The independent director shall be one who has: No material or financial relation with the company No pecuniary interest in the company Not a promoter of the company Has no relation with the directors of the company Has no role in the decision making of the company And at last is an impartial and independent person. But this rule only applies to public companies which are listed, meaning that companies which are exempted under Section 149 of the statute from having no independent director are not obliged to consist of an independent director in their CSR committee. Those companies which are exempted are:

1. Private companies.

2. Unlisted public companies that do not meet the Section 149 thresholds

Role of the CSR committee:

1. Formulate and recommend the CSR Policy to the Board.

2. Recommend the amount of expenditure to be incurred on CSR activities.

3. Identify, plan, and select CSR projects in line with Schedule VII.

4. Monitor CSR activities from time to time, including progress of ongoing projects.

5. Review and recommend any changes or updates to the CSR Policy.

6. Prepare and recommend the Annual CSR Report for inclusion in the Board’s Report.

7. Oversee proper utilization of CSR funds and ensure they are used for approved projects only.

Along with the role of the committee, there are certain obligations on the Board of Directors towards the CSR and CSR Committee, which are:

1. Approve the CSR Policy as recommended by the CSR Committee.

2. Ensure the company spends at least 2% of the average net profits of the last 3 financial years on CSR activities.

3. Disclose the CSR policy and CSR spending in the Board’s Report and on the company website.

4. Specify reasons in the Board’s Report if the company fails to spend the prescribed CSR amount.

5. Ensure unspent CSR amounts are transferred to:

• “Unspent CSR Account” for ongoing projects within 30 days from year-end, OR

• A Government fund (e.g., PMNRF/PM CARES) within 6 months for non-ongoing projects.

6. Oversee the implementation and monitoring of CSR projects.

7. Ensure compliance with CSR Rules, Schedule VII activities, and reporting requirements.

Penalty for Non Compliance:

The provision highlighting the penalty for non-compliance with the CSR guideline is Section 135(7), inserted through the Companies (Amendment) Act, 2019. If a company contravenes the provisions of sub-section (5) or sub-section (6), the company shall be punishable with a fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees, and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with a fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

Conclusion:

To conclude, Corporate Social Responsibility under Section 135 of the Companies Act, 2013, represents a structured effort by the Indian legal system to ensure that companies contribute meaningfully toward social and national development. By mandating a minimum expenditure, identifying specific areas for CSR activities, and creating an oversight mechanism through the CSR Committee and the Board of Directors, the law establishes a balanced framework of responsibility and accountability. The objective is not to burden companies but to integrate social welfare into the functioning of the corporate sector in a way that aligns with India’s broader constitutional vision of social justice and equitable growth. Non-compliance is treated seriously under Section 135(7), reinforcing that CSR is not a voluntary charity but a statutory obligation for eligible companies. Overall, CSR serves as a bridge between corporate success and societal well-being, ensuring that economic progress is shared, sustainable, and inclusive.