CSR Policy Amendment Rules

CSR Policy Amendment Rules

Corporate Social Responsibility under Section 135 of the Companies Act, 2013 is no longer a brand exercise — it is a fully audited statutory obligation with defined timelines, penalty triggers and independent verification requirements. The Companies (CSR Policy) Rules, 2014 have been materially amended through 2021 and 2022, with MCA clarifications continuing through 2026. This article walks you through every compliance layer — applicability, committee governance, annual action plan, implementing agencies, unspent fund handling, impact assessment and CSR-2 filing — with exact deadlines, worked Rs. figures and a map of the mistakes that generate the largest penalties.

Who Must Comply: Section 135 Applicability for FY 2026-27

A company is covered under Section 135 if, in the immediately preceding financial year, it meets any one of three financial thresholds:

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

"Net profit" here means net profit computed under Section 198 of the Companies Act — not the profit after tax figure on your P&L. Section 198 excludes, for example, capital gains arising from sale of fixed assets and certain prior-period items. If your finance team is pulling the CSR obligation from PAT without adjusting for Section 198, the base figure may be wrong before you even begin.

For FY 2026-27, the trigger test is applied to FY 2025-26 numbers. Once covered, the company spends at least 2% of the average net profits (again, Section 198 profits) of the immediately preceding three financial years — i.e., FY 2023-24, FY 2024-25 and FY 2025-26.

What "Immediately Preceding Three Financial Years" Means in Practice

If FY 2025-26 is the company's first year of existence, you average what is available — even a single year's profit. The rules do not require exactly three years to exist before the obligation attaches.

A company that crosses a threshold in one year but falls below in the next still has to comply for the year in which it was triggered; it exits the obligation only when it fails the threshold for three consecutive years (a specific carve-out exists for companies registered under Section 8 and small producers' companies with a CSR obligation below ₹50 lakh in a financial year).

Setting Up the CSR Committee — and When You Don't Need One

Every covered company must constitute a CSR Committee of the Board comprising:

• At least three directors
• At least one independent director

Exception: Where a company is not required to appoint an independent director under Section 149(4), the committee need not include one.

Critical dispensation: If the company's CSR obligation for the financial year is below ₹50 lakh, it is not required to form a separate committee — the full Board discharges the committee's functions directly. This reduces board compliance overhead for smaller-obligation companies but does not reduce the substantive duties: the Board must still formulate the CSR policy, approve the annual action plan and monitor execution.

Committee Functions That Cannot Be Delegated

The CSR Committee (or full Board, where dispensed) must:

1. Formulate and recommend a CSR policy to the Board
2. Recommend the annual CSR expenditure amount
3. Monitor the CSR policy
4. Approve the annual action plan in the prescribed format
5. Recommend any mid-year alteration to the annual action plan (the Board cannot alter the plan on its own motion)

The CFO must certify, under his or her signature, that the funds released were actually utilized for the approved CSR activities. This CFO certification is a hard compliance requirement introduced by the 2021 amendment — omitting it is an independent default, separate from any actual spend shortfall.

The Annual Action Plan: What the Board Must Formally Approve

Before the start of each financial year (or at the start, if the obligation arises mid-year), the CSR Committee recommends, and the Board formally approves, an annual action plan that must contain:

1. The list of CSR projects or programmes to be undertaken during the year
2. The manner of execution — direct implementation or through implementing agency
3. Modalities of fund utilisation, including a project-wise budget breakdown
4. The monitoring and reporting mechanism (including who tracks milestones)
5. The impact assessment plan — for companies that meet the impact assessment threshold (see below)

During the year, the Board may alter the plan, but only on the basis of a reasoned recommendation from the CSR Committee. Boards that approve plan changes through a simple resolution without a CSR Committee recommendation are creating a documentary gap. In any ROC inspection or audit, the first three documents requested are the CSR policy, the approved annual action plan and the CSR Committee meeting minutes recommending changes. If these three are not aligned, the entire CSR spend faces scrutiny.

Schedule VII Activities — and What Definitively Does Not Count

CSR spend must be directed at activities listed in Schedule VII of the Companies Act, 2013. The Schedule covers:

• Eradicating hunger, poverty and malnutrition; promoting health care
• Promoting education, vocational skills and livelihood enhancement
• Promoting gender equality and women's empowerment
• Ensuring environmental sustainability, ecological balance and animal welfare
• Protection of national heritage, art and culture
• Measures for the benefit of armed forces veterans and war widows
• Promoting sports at grassroots level
• Contributions to the Prime Minister's National Relief Fund, PM CARES Fund, and other specified national/state funds
• Slum area development and affordable housing
• Disaster management, including relief, rehabilitation and reconstruction
• Technology incubators located within academic institutions approved by the Central Government
• Rural development projects

These activities do not count as CSR, regardless of how they are structured:

• Activities that form part of the company's normal course of business (e.g., a pharmaceutical company cannot count medicine distributed to employees as CSR)
• Contributions to political parties
• Activities that benefit only employees or their families
• One-off events — a single corporate dinner for beneficiaries, a sponsored sports event without a structured programme
• Activities undertaken outside India, unless they specifically serve Indian nationals or are otherwise permitted by MCA
• Spending on administrative overheads above 5% of total CSR expenditure for the year — this excess does not count toward the CSR obligation

Implementing Agencies: CSR-1 Registration Is Non-Negotiable

A company may implement CSR activities:

1. Directly — through its own personnel and infrastructure
2. Through a Section 8 company, registered trust or registered society established by the company itself or by its holding, subsidiary or associate company
3. Through any other Section 8 company, trust or society not related to the company
4. Through a company established under an Act of Parliament or a State legislature

Mandatory rule: Every implementing agency falling in categories 2 and 3 must register itself with the MCA by filing Form CSR-1 before any company engages it for CSR activities. This registration generates a unique CSR Registration Number, which must be quoted in:

• The annual action plan
• CSR-2 form
• Board's Report annex on CSR
• Utilization certificates submitted to the company

Before releasing funds to any implementing agency, obtain and independently verify the CSR Registration Number on the MCA V3 portal. Agencies that appear legitimate but have not filed CSR-1 will void your CSR spend — the expenditure will not count toward your obligation.

Handling Unspent CSR Funds: Two Routes, Two Hard Deadlines

This is the area generating the most penalties in recent ROC inspections. The rules create two entirely separate tracks depending on why the funds were unspent:

Track 1 — Unspent Amounts Earmarked to Ongoing Projects

Transfer to a separate Unspent CSR Account (opened in a scheduled commercial bank in the company's name) within 30 days of the end of the financial year — i.e., by 30 April for companies with a 31 March year-end.

The funds in this account must be utilised toward the same ongoing project within three years of the transfer. If still unspent after three years, the balance is transferred to a Schedule VII-specified fund.

Track 2 — General Unspent CSR Amounts (Not Linked to Any Ongoing Project)

Transfer to any fund specified in Schedule VII — e.g., PM National Relief Fund, Swachh Bharat Kosh, Clean Ganga Fund — within six months of the end of the financial year, i.e., by 30 September for March year-end companies.

There is no "carry forward" option here. The funds must move.

Penalty for Non-Transfer

Section 135(7) provides:

• Company: Penalty equal to twice the unspent amount required to be transferred, or ₹1 crore, whichever is less
• Officer in default: Penalty equal to one-tenth of the unspent amount, or ₹2 lakh, whichever is less — applicable to each officer

Note the structure: the cap works in the government's favour at low unspent amounts (the 2× figure applies) but protects companies with very large unspent balances (the ₹1 crore cap kicks in). For officers, the ₹2 lakh cap is often the binding constraint.

Impact Assessment: Trigger Threshold, Cost Cap and Process

Who must commission an impact assessment: A company whose average CSR obligation over the preceding three financial years is ₹10 crore or more, for every CSR project with an outlay of ₹1 crore or more that has been completed in the preceding financial year.

The assessment must be conducted by an independent agency — not the implementing agency, not the company's internal team. The independent agency's report must be placed before the Board and annexed to the Annual Report.

Cost treatment: Expenditure on impact assessment is counted as CSR spend, but is capped at:

• 5% of total CSR expenditure for the financial year, or
• ₹50 lakh, whichever is less

Any amount above this cap is the company's own expenditure and does not reduce the CSR obligation.

Practical steps:

1. At the time of approving the annual action plan, identify which prior-year projects cross the ₹1 crore threshold
2. Include the impact assessment in the action plan with budget and timeline
3. Issue a formal brief/RFP to independent assessment agencies — document this process
4. Receive and review the draft report before Board placement
5. Ensure the final report is annexed to the Board's Report for the relevant year

CSR-2 Filing and Annual Disclosure Requirements

Every covered company must make CSR disclosures in three places:

1. Board's Report Annex (Annual Report)

The prescribed format CSR disclosure in the Board's Report must include: CSR obligation for the year, amount spent, amount unspent, project-wise breakup, implementing agency details with CSR Registration Numbers, and — where applicable — the impact assessment report.

2. Form CSR-2 (MCA V3 Portal)

Form CSR-2 is filed separately on the MCA V3 portal as a standalone e-form (previously filed as an addendum to AOC-4). It captures: company details, CSR obligation, spend, implementing agency CSR Registration Numbers, project-wise spend, and unspent fund transfer details. File it within the deadline as notified by MCA for the relevant year — MCA has historically granted extensions, but plan for the standard AOC-4 timeline (within 30 days of AGM) to avoid last-minute scrambles.

3. Form AOC-4 Disclosure

The balance sheet and P&L annexures under AOC-4 must also reflect the CSR amount spent and unspent for the year.

Worked Example: Obligation Calculation, Unspent Handling and Penalty Exposure

Company: Meridian Industries Ltd., 31 March year-end, covered under Section 135 (turnover > ₹1,000 crore)

Step 1 — Calculate average net profit (Section 198 basis):

CSR obligation for FY 2026-27: 2% × ₹20 crore = ₹40 lakh

Since ₹40 lakh < ₹50 lakh, Meridian's Board can discharge CSR Committee functions directly without constituting a separate committee.

Step 2 — Year-end position (31 March 2027):

• Spent on an ongoing skill-development project: ₹25 lakh
• Unspent but earmarked to this ongoing project: ₹8 lakh
• General unspent (no ongoing project): ₹7 lakh

Step 3 — Unspent fund actions and deadlines:

• ₹8 lakh (ongoing project): Must be transferred to Unspent CSR Account by 30 April 2027. Utilise within three years (by 31 March 2030) or transfer to Schedule VII fund.
• ₹7 lakh (general unspent): Must be transferred to a Schedule VII fund (e.g., PM National Relief Fund) by 30 September 2027.

Step 4 — Penalty scenario if Meridian misses the 30 September 2027 deadline for the ₹7 lakh:

• 2 × ₹7 lakh = ₹14 lakh or ₹1 crore → ₹14 lakh on the company
• Per officer: 1/10 × ₹7 lakh = ₹70,000 or ₹2 lakh → ₹70,000 per officer in default
• Assume 3 officers in default (MD, CFO, Company Secretary): 3 × ₹70,000 = ₹2.1 lakh
• Total exposure: ₹16.1 lakh — for failing to write a single NEFT transfer before 30 September

Step 5 — Impact assessment check: Meridian's average CSR obligation over three years is ₹35–40 lakh — well below the ₹10 crore threshold. Impact assessment is not mandatory for Meridian.

Step 6 — Set-off of excess (if applicable): Had Meridian spent ₹45 lakh (₹5 lakh excess over the ₹40 lakh obligation), it could set off this excess against its CSR obligation for FY 2027-28, 2028-29 or 2029-30 — provided it discloses this in the Board's Report and the Board passes a resolution recording the set-off.

Common Mistakes That Create Maximum Compliance Risk

1. Using PAT Instead of Section 198 Net Profit

Boards routinely approve the CSR obligation on the basis of PAT. Section 198 requires specific additions and deductions. Engage your statutory auditor to confirm the Section 198 figure before the Board resolution is passed.

2. Missing the 30 April Deadline for the CSR Unspent Account

The 30-day deadline for ongoing project unspent funds runs from 31 March, not from the Board meeting date or the AGM. Companies that wait for the AGM to decide on unspent amounts are already in default.

3. Engaging Implementing Agencies Without Verifying CSR-1 Registration

A signed MoU with a well-known NGO is not enough. Verify the CSR Registration Number live on MCA V3 before the first fund release. If the agency's registration is suspended or never filed, every rupee paid through them is non-compliant spend.

4. Counting Administrative Overheads Above 5%

Salary allocations for the "CSR team," travel for site visits, and event management fees together often exceed 5% in the first year of structured CSR. Any excess is ordinary company expenditure and inflates the apparent shortfall.

5. No CFO Certification on Utilization

The CFO's written certification is required under the rules. Boards that rely only on implementing agency utilization certificates — without a separate CFO sign-off — are exposed to a process default even where the money was properly spent.

6. Omitting the CSR Registration Number from CSR-2

Form CSR-2 has a mandatory field for each implementing agency's CSR Registration Number. Leaving it blank or entering a placeholder will cause the form to be flagged on the MCA V3 portal. Collect all CSR-1 numbers before you begin the filing, not during it.

7. Treating Surplus from CSR Activities as Income

Interest earned on an idle Unspent CSR Account balance, or any surplus from a fee-based CSR programme (e.g., a training centre that charges nominal fees), is not company income. It must be ploughed back into the same CSR project or transferred to the Unspent CSR Account. Booking it as "other income" in the P&L is a common error that shows up in audits.

Key Takeaways

• Three thresholds, one trigger: Section 135 applies if any one of net worth (₹500 crore+), turnover (₹1,000 crore+) or net profit (₹5 crore+) is met in the preceding year — check all three, not just the most obvious one.
• Two unspent deadlines, zero flexibility: Ongoing project unspent funds → CSR Unspent Account by 30 April; general unspent funds → Schedule VII fund by 30 September. Missing either triggers a penalty up to twice the unspent amount.
• CSR-1 before funds: Every implementing agency must hold an MCA CSR Registration Number, verified on the live MCA V3 portal, before you transfer any money.
• Impact assessment is mandatory above the ₹10 crore average obligation threshold for projects ≥ ₹1 crore — budget for it in the annual action plan and cost it within the 5%/₹50 lakh cap.
• Administrative overheads are capped at 5% of total CSR expenditure — amounts above this cap do not count toward the obligation.
• The CFO certification and the annual action plan are the two most scrutinised documents in any ROC inquiry; maintain both with the same rigour as your financial statements.
• Excess spend creates a set-off right against the next three years' obligations — document it in the Board's Report to activate this benefit.