CSR Compliance Advisory

What is CSR compliance?

Under Section 135 of the Companies Act, 2013, companies above certain size or profit thresholds must spend at least 2% of their average net profit on Corporate Social Responsibility — activities like education, health, and environmental sustainability listed in Schedule VII of the Act.

CSR compliance covers the whole cycle: working out whether CSR applies and how much, setting up the committee and policy, choosing projects and partners, handling unspent money, and reporting it all correctly.

The key rules

A handful of rules decide who has to spend, how much, and how:

Applicability

CSR applies to a company that, in the preceding financial year, had a net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more.

The 2% obligation

The company must spend at least 2% of its average net profit for the three preceding financial years on CSR activities, calculated as the Act prescribes.

CSR committee

A board committee that frames the CSR policy and recommends spending. It isn't needed if the obligation is ₹50 lakh or less — the board does the job then.

Schedule VII activities

CSR spend must go to activities listed in Schedule VII: health, education, poverty, environment, rural development, sports, heritage, disaster relief, and similar areas.

Implementing agencies

A company can spend directly, or through a Section 8 company, trust, or society registered with the MCA for CSR, with a CSR registration number.

Unspent amounts

Money not spent by year end must be moved to an Unspent CSR Account for ongoing projects, or to a Schedule VII fund like PM CARES, within fixed deadlines.

Reporting

The board's report includes an annual report on CSR, and the company files Form CSR-2 with the MCA along with its financial statements.

Why getting CSR right matters

CSR is now a legal obligation with real consequences, not just a line in the annual report:

It's mandatory, not voluntary

Since the 2021 amendments, CSR spending is a legal obligation for companies that cross the thresholds, not a 'comply or explain' disclosure.

Unspent amounts must move

Money not spent can't simply be carried forward. It has to be transferred to the right account or fund within strict deadlines.

Heavy penalties

Failing to transfer unspent CSR amounts can lead to a penalty on the company of up to twice the amount, capped at ₹1 crore, and penalties on officers in default.

Not everything counts

Spending on employees only, in the normal course of business, for marketing, or on political contributions doesn't count as CSR.

Partner risk

Funds given to an agency that isn't registered for CSR, or doesn't use them properly, may not count towards the obligation.

Not a tax deduction

CSR expenditure generally isn't deductible as a business expense for income tax, so it has to be planned as a cost.

Public disclosure

The CSR policy, committee, and projects are disclosed on the company's website and in its annual report, so shortfalls are visible.

Who is this for?

• Companies whose net profit, turnover, or net worth has just crossed a CSR threshold
• Companies setting up a CSR committee, policy, and annual action plan
• Companies choosing and vetting NGOs or implementing agencies
• Companies with unspent CSR money at year end
• Companies preparing the CSR annual report and Form CSR-2
• Section 8 companies, trusts, and societies wanting to receive CSR funds

The ₹5 crore net profit test catches many mid-sized private companies, not just large corporates. It's worth checking each year once profits start growing. NGOs looking to receive CSR funds can start with our Section 8 Company service.

Ways to spend your CSR

A company can deliver its CSR in several ways, and many combine them:

What we'll need from you

Financial statements

Audited accounts for the last three financial years, to confirm applicability and calculate the average net profit.

Board composition

Current directors, including any independent directors, to constitute the CSR committee where one is needed.

Focus areas

Causes, communities, and locations the company wants to support, which shape the CSR policy.

Partner details

For each implementing agency, its CSR-1 registration number, registration certificates, and track record.

Spending records

Agreements, fund transfers, utilisation certificates, and progress reports for each project.

Previous CSR history

Earlier years' CSR reports, any unspent balances, and any excess spent that may be set off.

Net profit for CSR is calculated under Section 198 of the Act, which isn't the same as the profit in your accounts. We'll work it out from your audited statements.

The annual CSR cycle

CSR runs on the financial year. Here's how a typical year goes:

1. 1

   Check applicability

   We test last year's net worth, turnover, and net profit against the thresholds, and calculate the 2% obligation.

2. 2

   Committee and policy

   The CSR committee is formed where needed, and the board adopts a CSR policy setting out focus areas and how projects are chosen.

3. 3

   Annual action plan

   The committee recommends an action plan listing projects, budgets, timelines, and implementing agencies, and the board approves it.

4. 4

   Vet implementing agencies

   We check each agency's CSR-1 registration, legal status, and track record, and prepare the funding agreement.

5. 5

   Spend and monitor

   Funds are released against milestones, with utilisation certificates and progress reports collected along the way.

6. 6

   Report and file

   The annual CSR report goes into the board's report, CSR-2 is filed with the MCA, and the details go on the company's website.

Unspent amounts and other rules

What happens at year end depends on whether the money was spent, and on what:

Ongoing projects

Unspent amounts on an ongoing multi-year project go to a special Unspent CSR Account within 30 days of the year end, and must be spent within the next three years.

If still unspent after three years

Anything left in the Unspent CSR Account after three years is transferred to a Schedule VII fund within 30 days of the end of the third year.

Other unspent amounts

Unspent money not tied to an ongoing project is transferred to a Schedule VII fund within six months of the year end.

Excess spending

If the company spends more than its obligation, the excess can be set off against the obligation for up to three following years, with a board resolution.

Administrative overheads

Overheads for running CSR can't exceed 5% of the year's total CSR expenditure.

Impact assessment

Companies with an average CSR obligation of ₹10 crore or more need independent impact assessments of larger completed projects.

Benefits and responsibilities