Corporate social responsibility

Company Law · Unit III · Topic 14 of 22 · 5 min read

The mandatory CSR regime in section 135 and Schedule VII of the Companies Act, 2013: the thresholds, the CSR Committee, the two per cent spend, ongoing projects and the Unspent CSR Account, set-off, and the civil penalty that replaced imprisonment in 2020.

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On this page

1. Concept
2. Which companies: section 135(1)
3. The CSR Committee
4. The Board's duties and the two per cent spend
5. Unspent amounts
6. Schedule VII activities
7. Enforcement
8. Assessment
How this is examined

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The examinable core. India is one of the few countries that makes corporate social responsibility a statutory obligation. Section 135 applies to companies above three thresholds, requires a committee, a policy and a spend of two per cent of average net profits on activities in Schedule VII, and since 2021 requires unspent money to be transferred rather than merely explained. Learn the figures exactly; they are the marks.

1. Concept

CSR is the idea that a company owes obligations not only to its shareholders but to the community in which it operates: employees, consumers, the local population and the environment. For most of the twentieth century it was voluntary philanthropy. The 2013 Act moved from voluntary guidelines (the 2009 and 2011 guidelines of the Ministry of Corporate Affairs) to a statutory requirement. The directors' duty in section 166(2) to act in the best interests of the company, its employees, the community and the environment states the same philosophy in general terms.

The original 2013 model was “comply or explain”: a company that did not spend had to give reasons in the Board's report. The 2019 Amendment, brought into force in January 2021, converted it into “comply or transfer”: unspent amounts must go to a fund or a special account.

2. Which companies: section 135(1)

Every company having, during the immediately preceding financial year:

net worth of five hundred crore rupees or more; or
turnover of one thousand crore rupees or more; or
net profit of five crore rupees or more.

Any one threshold is enough. The words “immediately preceding financial year” were substituted by the 2017 Amendment for “any financial year”. The section applies to private as well as public companies, and to foreign companies with a branch or project office in India.

3. The CSR Committee

A CSR Committee of the Board of three or more directors, at least one of them independent (section 135(1)); where the company is not required to have an independent director, two or more directors suffice.
Its composition is disclosed in the Board's report (section 135(2)).
It formulates and recommends to the Board a CSR Policy indicating activities in the areas specified in Schedule VII, recommends the amount of expenditure, and monitors the policy (section 135(3)).
Where the amount to be spent does not exceed fifty lakh rupees, no committee is required and the Board performs its functions (section 135(9), inserted by the 2020 Amendment).

4. The Board's duties and the two per cent spend

The Board must approve the CSR Policy, disclose its contents in its report and on the company's website, and ensure the activities are undertaken (section 135(4)). It must ensure that the company spends in every financial year at least two per cent of the average net profits made during the three immediately preceding financial years (or the years since incorporation, if fewer) (section 135(5)). Net profit is computed under section 198, excluding sums prescribed. Preference is to be given to the local area where the company operates.

If the company spends more than required, it may set off the excess against the requirement in succeeding financial years as prescribed (section 135(5), third proviso).

5. Unspent amounts

Not an ongoing project: the Board must state the reasons in its report and transfer the unspent amount to a Fund specified in Schedule VII (such as the PM's National Relief Fund) within six months of the end of the financial year (section 135(5), second proviso).
Ongoing project: the unspent amount must be transferred within thirty days of the end of the financial year to a special account in a scheduled bank called the Unspent Corporate Social Responsibility Account, and spent within three financial years; anything still unspent goes to a Schedule VII Fund within thirty days of the end of the third year (section 135(6)).

6. Schedule VII activities

The activities include: eradicating hunger, poverty and malnutrition, promoting health care and sanitation, and safe drinking water; promoting education and vocational skills; gender equality and empowerment of women, homes for women, orphans and the elderly; environmental sustainability, ecological balance and animal welfare; protection of national heritage, art and culture; measures for armed forces veterans, war widows and their dependants; training to promote rural, Paralympic and Olympic sports; contribution to the Prime Minister's National Relief Fund and other notified funds; contributions to incubators and research in science and technology; rural development; slum area development; and disaster management. Activities in the normal course of business, benefits only for employees, and political contributions do not count (under the CSR Rules).

7. Enforcement

The original section 135 had no penalty. The 2019 Amendment provided for fine and imprisonment; the 2020 Amendment (decriminalisation) substituted a civil penalty, and it is that version which came into force on 22 January 2021, together with the set-off proviso and section 135(9). Under section 135(7), a company that defaults in complying with sub-section (5) or (6) is liable to a penalty of twice the amount required to be transferred to the Fund or the Unspent CSR Account, or one crore rupees, whichever is less; every officer in default is liable to one-tenth of that amount or two lakh rupees, whichever is less. The Central Government may give general or special directions to ensure compliance (section 135(8)).

8. Assessment

For an essay that asks you to evaluate the regime, a few points in each direction are enough. In favour: it channels private resources into public goods, ties companies to their local communities, and the comply-or-transfer model ensures money is not simply retained. Against: it operates as a tax by another name; companies may favour visible or convenient projects over need; the Schedule VII list is broad enough to allow activities of doubtful social value; and monitoring by the State is thin.

How this is examined

January 2026 set a short note on “Corporate Social Responsibility”. Give the three thresholds, the committee, the two per cent rule with its three-year average, the two routes for unspent money with their time limits, Schedule VII briefly, and the penalty under section 135(7). Mention that the syllabus lists CSR under management and control because it is a Board obligation: the Board, not the members, approves the policy and is answerable for the spend.

Now try the real questions: Company Law past question papers.