CSR Compliance and Impact Assessment under the Companies Act#
The Mandatory CSR Framework#
Under Section 135 of the Companies Act, 2013, Corporate Social Responsibility (CSR) is not philanthropy—it is a statutory obligation. Companies meeting certain thresholds (Net Worth > Rs. 500 Cr, OR Turnover > Rs. 1000 Cr, OR Net Profit > Rs. 5 Cr) must spend at least 2% of their average net profits of the preceding three years on CSR activities.
Recently, the Ministry of Corporate Affairs (MCA) has completely overhauled the CSR rules, shifting from a "comply or explain" approach to a strict penal regime.
Treatment of Unspent CSR Funds#
Previously, if a company failed to spend its 2% quota, it simply stated the reasons in the Board's Report. That is no longer allowed.
Now, at the end of the financial year, unspent CSR funds must be categorized:
- Ongoing Projects: If the unspent amount relates to an ongoing multi-year project, it must be transferred to a special bank account called the "Unspent CSR Account" within 30 days of the financial year-end. It must then be spent within the next three financial years.
- Other Unspent Funds: If there is no ongoing project, the unspent amount must be transferred to a government fund specified in Schedule VII (like the Prime Minister's National Relief Fund) within 6 months of the financial year-end.
The Rule of Impact Assessment#
To ensure that CSR funds are actually creating social value rather than just ticking a compliance box, the MCA introduced mandatory Impact Assessments.
Who needs it? Any company with an average CSR obligation of Rs. 10 Crore or more in the preceding three financial years must undertake an independent impact assessment.
Which projects? The assessment must be conducted for all CSR projects that have an outlay of Rs. 1 Crore or more, and which have completed one year.
Who conducts it? The assessment must be conducted by an independent agency, not by the company's internal team or the implementing NGO. The impact assessment report must be placed before the Board and annexed to the annual report.
Implementing Agencies and Form CSR-1#
Companies rarely execute CSR projects themselves; they use implementing agencies (NGOs, Trusts, Section 8 Companies). To weed out fraudulent NGOs, the government mandated that every implementing agency must register with the MCA by filing Form CSR-1.
Companies can only disburse CSR funds to agencies that hold a valid CSR Registration Number.
Penalties for Default#
The penalties for CSR defaults are severe. The company is liable for a penalty of twice the unspent amount (capped at Rs. 1 Crore). Additionally, every defaulting officer (including Directors) is liable for a penalty of 1/10th of the unspent amount (capped at Rs. 2 Lakhs).
Robust CSR governance—from selecting the right implementing agency to tracking utilization—is now a critical board-level responsibility.