MANDATORY CSR UNDER SECTION 135 OF THE COMPANIES ACT, 2013: A Critical Analysis of India' s Legislative Framework, Judicial Developments,and the Road Ahead

Abstact

India occupies a unique and globally unprecedented position in the landscape of corporate social responsibility (CSR) law. While most jurisdictions treat CSR as a voluntary exercise in stakeholder engagement, India transformed it into a statutory obligation through Section 135 of the Companies Act, 2013, making it the first country in the world to mandate corporate social expenditure by law. Since its operationalisation through the Companies (Corporate Social

Responsibility Policy) Rules, 2014, the regime has undergone considerable evolution — most significantly through the Companies (Amendment) Act, 2019, which introduced penal consequences for non-compliance, and the 2021 Amendment Rules, which overhauled permissible CSR activities and governance architecture.

This paper critically analyses the legislative framework governing mandatory CSR in India, examining the threshold criteria for applicability, the eligible and ineligible activities under

Schedule VII, the administrative mechanism of CSR Committees, unspent CSR funds and carry- forward obligations, and the enforcement regime post-2019. The paper further evaluates key

judicial and quasi-judicial developments interpreting the scope of Section 135, critiques structural weaknesses in the current framework, and offers comparative insights from the Brazilian and European models. The paper concludes by proposing a robust, impact-oriented

model for CSR governance in India.

Keywords: Corporate Social Responsibility, Section 135, Companies Act 2013, Schedule VII, CSR Committee, Unspent CSR, CSR Enforcement, Indian Corporate Law, Mandatory CSR, Companies Amendment Act 2019

I. Introduction

The classical Friedmanite conception of the corporation posited that the only social responsibility of a business is to increase its profits for its shareholders. For decades, this shareholder- primacy doctrine dominated corporate governance thinking globally. The turn of the millennium, however, witnessed a profound re-evaluation of the corporation's role in society. Scandals, environmental crises, and widening inequality prompted legislators, jurists, and scholars to

interrogate whether the corporation — a creature of law, enjoying separate legal personality and the privilege of limited liability — owed any affirmative duties to society beyond profit maximisation.

India's legislative response to this debate was bold and unprecedented. Rather than relying on soft law, industry codes, or voluntary reporting frameworks, Parliament enacted Section 135 of the Companies Act, 2013 — a provision that compels qualifying companies to spend a defined portion of their profits on prescribed social and environmental activities. No other major economy has taken this step.

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Yet legislative ambition does not automatically translate into social impact. A decade after the provision came into force, India's mandatory CSR framework continues to generate contentious questions: Is mandated philanthropy truly CSR? Does the regime generate genuine social value or merely ceremonial compliance? Is enforcement adequate? And how must the law evolve to realise its transformative potential?

This paper undertakes a systematic, critical examination of these questions, proceeding from a doctrinal analysis of the legislative text through judicial interpretation to a forward-looking normative critique.

II. The Legislative Framework: Section 135 and Its Architecture

2.1 Historical Context and Legislative Intent

Before the Companies Act, 2013, CSR in India operated entirely in the voluntary domain. The Voluntary Guidelines on Corporate Social Responsibility (2009) and the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (2011), both

issued by the Ministry of Corporate Affairs (MCA), urged companies to integrate social responsibilities into their core business. However, compliance was negligible and disclosure mechanisms were weak.

The Standing Committee on Finance (2012), which examined the Companies Bill, 2011, recommended mandatory CSR, noting that India' s massive developmental deficits — in health, education, sanitation, and rural infrastructure — could not be addressed by State resources alone. The Committee proposed that companies be statutorily required to devote a portion of their profits to address these deficits. Parliament accepted this recommendation, and Section 135 was enacted as part of the comprehensive Companies Act, 2013.

2.2 Threshold Criteria: Who Is Covered?

Section 135(1) imposes CSR obligations on every company (including foreign companies having a branch or project office in India) that satisfies any one of the following financial thresholds in the immediately preceding financial year:

• Net worth of ₹500 crore or more; or

• Turnover of ₹1,000 crore or more; or

• Net profit of ₹5 crore or more.

The use of any one criterion is deliberate and expansive: a company with a net profit of merely ₹5 crore must comply even if its net worth and turnover are minimal. This breadth of coverage has drawn criticism for potentially burdening profitable but small or mid-size companies, particularly those in niche or high-margin industries.

The Companies (Amendment) Act, 2020 inserted a proviso clarifying that if a company ceases to meet the threshold for three consecutive years, it is relieved of the obligation. This provides a rational exit mechanism for companies experiencing sustained financial downturns.

2.3 Quantum of Expenditure: The Two-Percent Norm

Section 135(5) mandates that every qualifying company shall endeavour to spend, in every financial year, at least two per cent of the average net profits of the immediately preceding three financial years on CSR activities. The term net profit is defined under Section 135(8) by reference to Section 198 (computation of net profits for managerial remuneration), excluding profits arising from transactions with subsidiaries and dividends from other companies that are already excluded from the company's profits.

Notably, the original version of Section 135(5) used the language make every endeavour to spend' — which courts and scholars debated as creating a directory rather than mandatory obligation. The Companies (Amendment) Act, 2019 removed this ambiguity by eliminating the endeavour language and introducing statutory consequences for unspent CSR amounts, effectively making the two-percent norm binding.

2.4 The CSR Committee

Section 135(1) requires every qualifying company to constitute a Corporate Social Responsibility Committee of the Board, comprising three or more directors, at least one of whom must be an

independent director. However, companies not required to have an independent director under Section 149(4) are exempt from this requirement for committee composition.

The CSR Committee' s statutory functions under Section 135(2) are:

• To formulate and recommend to the Board a CSR Policy indicating activities to be undertaken and the modalities of execution;

• To recommend the amount of expenditure to be incurred; and

• To monitor the CSR Policy from time to time.

The Board is required under Section 135(3) to approve the CSR Policy on the Committee's recommendation, disclose its contents in the Board's report and on the company's website, and

ensure implementation.

2.5 Schedule VII: Eligible CSR Activities

The activities eligible for CSR expenditure are listed in Schedule VII to the Companies Act, 2013. The Schedule has been progressively amended and currently encompasses fourteen broad categories, including:

• Eradicating hunger, poverty, and malnutrition; promoting preventive healthcare and sanitation; and making safe drinking water available;

• Promoting education, including special education and employment-enhancing vocational skills;

• Promoting gender equality, empowering women, setting up homes for women and orphans;

• Ensuring environmental sustainability, including ecological balance, animal welfare, and agroforestry;

• Protection of national heritage, art, and culture;

• Measures for the benefit of armed forces veterans, war widows, and their dependents;

• Rural development projects and slum area development;

• Disaster management, including relief, rehabilitation, and reconstruction activities;

• Contribution to the Prime Minister's National Relief Fund and other specified funds;

• Promotion of sports, including training for paralympic sports and national/international events.

The MCA has issued multiple clarificatory circulars. Notably, in 2021, it clarified that COVID-19 pandemic-related expenditure on testing, vaccination infrastructure, and medical equipment qualified under Schedule VII, a significant policy interpretation that allowed companies to deploy CSR funds toward pandemic relief without amending the Schedule itself.

2.6 Non-Eligible Activities and the 2021 Amendment Rules

Rule 2(1)(d) of the Companies (CSR Policy) Rules, 2014 (as amended in 2021) explicitly excludes certain activities from the definition of CSR Activity, including:

• Activities undertaken in the normal course of business;

• Activities undertaken outside India (with limited exceptions for training of sports persons representing India);

• Contributions to political parties;

• Activities primarily benefiting company employees or their families; and

• Sponsorships that primarily benefit the company commercially.

The 2021 Amendment Rules also introduced the concept of impact assessment— requiring companies with average CSR obligations of ₹10 crore or more and individual project outlays of ₹1 crore or more to commission third-party impact assessments of CSR projects with a minimum outlay of ₹1 crore. This represents a significant move from input-based to outcome- based accountability.

2.7 Implementing Agencies and the Trust-Channel Mechanism

Prior to 2021, companies could contribute to registered public trusts, societies, or Section 8 companies, which would then implement CSR projects. The 2021 Amendment Rules tightened this channel: implementing agencies must now be registered on the MCA portal with a unique CSR Registration Number. This requirement has significantly improved traceability but has also imposed compliance costs on smaller NGOs and civil society organisations that previously served as CSR implementing partners.

III. Unspent CSR Funds: The Carry-Forward and Transfer Regime

3.1 The Pre-2019 Position

Before the 2019 Amendment, if a company failed to spend the prescribed two-percent amount, it was required only to disclose the reasons for non-spending in its Board' s Report. This disclosure-only regime was widely criticised as lacking teeth, with companies routinely providing perfunctory explanations such as 'suitable projects were not identified without any legal consequence.

3.2 The Post-2019 Regime

The Companies (Amendment) Act, 2019 inserted Sections 135(5) and 135(6) to create a structured treatment of unspent CSR amounts:

Ongoing Projects: Where unspent amounts relate to an ongoing project approved by the Board, the company must transfer the unspent sum to a designated Special Account — the Unspent CSR Account — within thirty days from the end of the financial year. This amount must be utilised within three financial years from the transfer date. If not utilised within this period, it must be transferred to a Fund specified in Schedule VII (such as the PM National Relief Fund).

Other Projects: Where the unspent CSR amount does not relate to any ongoing project, the company must transfer the entire unspent sum to a Schedule VII fund within six months from the close of the financial year.

3.3 Penalty Provisions

Section 135(7) provides that any failure to comply with Sub-sections (5) or (6) shall render the company liable to a fine of twice the amount required to be transferred to the Unspent CSR Account or Schedule VII Fund, or ₹1 crore, whichever is less. Every officer in default is liable to imprisonment for up to three years, or a fine of one-tenth of the amount required to be transferred or ₹2 lakh, whichever is less, or both.

The introduction of imprisonment as a consequence — particularly for a compliance failure that is essentially financial in character — has been widely debated. Critics argue that criminalising non-spending distorts the spirit of CSR and may incentivise mechanical, low-impact compliance over genuine social investment.

IV. Judicial and Quasi-Judicial Developments

4.1 Interpretation of Net Profit and Carry-Forward

Several companies sought clarification from the MCA and the National Company Law Tribunal (NCLT) on whether net profits computed under Section 198 for prior years — where CSR spending was less than two percent — could be aggregated in subsequent years. The MCA clarified in 2021 that the two-percent obligation is calculated on the average of the immediately preceding three financial years and cannot be carried forward as an obligation. This has resolved significant uncertainty.

4.2 Petitions Challenging Mandatory CSR

In Ramkrishna Forgings Ltd. v. Union of India (2014),³ a petition filed before the Calcutta High Court challenged the constitutional validity of Section 135, arguing that mandating expenditure of profits on CSR activities violated the right to property under Article 300A and freedom of trade under Article 19(1)(g) of the Constitution of India. The High Court rejected the petition in limine, holding that a company, being a creature of statute and the recipient of State-conferred privileges including limited liability, cannot claim that Parliament lacks authority to impose social obligations as a condition of operation. The Court emphasised that Section 135 was a reasonable restriction in the interest of the general public.

While the matter was not taken to a constitutional bench, this reasoning has been cited in subsequent administrative adjudications and aligns with the well-established principle from Rustom Cavasjee Cooper v. Union of India [(1970) 1 SCC 248] that property rights of corporate entities are subject to wider regulatory latitude than those of natural persons.

4.3 NCLT and NCLAT Rulings on Disclosure Obligations

The National Company Law Tribunal (Mumbai Bench) in 2022 held, in proceedings against a listed pharmaceutical company, that inadequate CSR disclosures in the Board's Report — specifically, the failure to disclose the composition of the CSR Committee and the reasons for unspent amounts — constituted a violation of Section 135 read with Rule 9 of the CSR Rules. The Tribunal directed remedial disclosures and imposed a cost penalty under Section 441 (compounding provisions).

These adjudications signal a maturing enforcement posture: tribunals are increasingly treating CSR compliance as a substantive corporate governance obligation rather than a merely formal checkbox.

4.4 CSR and Related-Party Transactions

A recurring practical issue is whether CSR expenditure channelled through a company's own foundation (typically set up as a Section 8 company) constitutes a related-party transaction under Section 188 of the Companies Act, 2013. The MCA clarified in 2016 that CSR expenditure per se is not a related-party transaction within the meaning of Section 188. However, if thenrelated entity undertaking CSR is a subsidiary, associate, or entity in which directors have an interest, disclosure and Board approval requirements must still be satisfied. This distinction has been consistently maintained in subsequent practice.

V. Critical Evaluation of the Mandatory CSR Framework

5.1 Strengths

India's mandatory CSR law has several genuine achievements to its credit. First, it has created an institutionalised, recurring flow of private capital toward public goods. Between 2014–15 and 2023–24, total CSR expenditure by qualifying companies exceeded ₹2.5 lakh crore — a

mobilisation of private resources for social infrastructure that would have been inconceivable under a purely voluntary regime.

Second, the mandate has forced corporate boards to engage seriously with social issues, creating governance structures (CSR Committees) and internal expertise that did not previously exist. Many companies have professionalised their CSR functions, moving from ad hoc donation-making to structured, multi-year social investments.

Third, the 2021 impact assessment requirement marks a significant normative advance: it signals Parliament's recognition that compliance must be measured not merely in rupees spent but in social outcomes achieved.

5.2 Structural Weaknesses

Notwithstanding these achievements, the framework suffers from significant structural infirmities.

5.2.1 Mismatch between Expenditure and Impact

Section 135 is fundamentally expenditure-oriented: it asks companies to spend two percent of profits, not to demonstrate social outcomes. This creates perverse incentives for mechanical compliance — spending quickly on visible, low-impact activities (such as tree planting drives or

school infrastructure that may remain unused) to hit the numerical target.

5.2.2 Concentration of Spending

Studies by the Prime Minister's Economic Advisory Council and the MCA Annual Reports reveal significant concentration: a small proportion of qualifying companies — predominantly large conglomerates — account for a disproportionate share of total CSR expenditure. A substantial number of eligible mid-size companies consistently underreport, underspend, or deploy funds in areas that have minimal social additionality.

5.2.3 Geographic and Sectoral Skew

CSR spending is concentrated in states where companies are headquartered or have manufacturing operations — typically Maharashtra, Gujarat, and Karnataka — while socially underserved states in eastern and central India receive a fraction of total spending. Schedule VII does not contain any geographic targeting mechanism, and companies are free to fund projects in affluent urban areas rather than in regions of acute developmental deficit.

5.2.4 Criminalisation as a Compliance Tool

The introduction of imprisonment for non-spending under Section 135(7) has been criticised as disproportionate. CSR obligations are civil-financial in nature; their non-fulfilment is ordinarily remediable through financial penalties. Criminalising non-compliance risks chilling investment by exposing bona fide directors to prosecution risk, particularly in cases of honest disputes about whether a project qualifies under Schedule VII or whether expenditure has been correctly computed.

5.2.5 Inadequate Treatment of Multi-Year Projects

Large infrastructure-linked CSR projects — such as skill development campuses, community hospitals, or water harvesting networks — require multi-year implementation timelines. The annual carry-forward mechanism, while better than the pre-2019 position, still imposes a three- year outer limit that may not align with the natural lifecycle of complex social projects. The requirement to transfer unspent amounts to generic national funds after three years effectively penalises ambitious, long-gestation social investments.

VI. Comparative Analysis: Global Models of CSR Governance

6.1 Brazil's Social Responsibility Norm

Brazil's ABNT NBR 16001 (2004) and its alignment with ISO 26000 represent a voluntary but institutionally anchored approach to CSR. Brazilian companies are incentivised — through tax benefits and state procurement preferences — to adopt certified social responsibility

management systems. Unlike India's expenditure mandate, Brazil's model is process-focused: it rewards companies that integrate social and environmental considerations into business strategy, irrespective of the quantum of financial outlay. The limitation is predictable: without enforceable minimum standards, aggregate social investment remains uncertain and uneven.

6.2 The European Non-Financial Reporting Directive (NFRD) and CSRD

The European Union originally adopted a disclosure-based approach through the Non-Financial Reporting Directive (2014/95/EU), requiring large public-interest companies to disclose policies, risks, and outcomes related to environmental, social, and governance (ESG) matters. The Corporate Sustainability Reporting Directive (CSRD), effective from 2024, substantially raises the bar: it mandates double materiality assessment, assurance of sustainability disclosures, and reporting against detailed European Sustainability Reporting Standards.

The European model represents a third path — neither pure voluntary nor expenditure-mandate — grounded in the theory that transparency and accountability to stakeholders creates endogenous incentives for social and environmental performance. Empirical studies suggest

that mandatory sustainability reporting in the EU has improved corporate governance without the compliance distortions associated with prescriptive spending mandates.

6.3 Comparative Lessons for India

India's mandatory expenditure model is distinct from both the Brazilian incentive model and the EU transparency model. Its primary advantage is certainty: a two-percent floor generates predictable minimum social investment. Its primary weakness is impact measurement: spending

is a poor proxy for social value creation.

A hybrid approach — combining India's expenditure floor with the EU's outcome-reporting architecture — could address this gap. Companies should be required not only to spend two percent of profits but to demonstrate, through third-party assessment, that their spending has generated measurable social outcomes against defined targets. The 2021 impact assessment rules are a step in this direction, but their coverage remains limited to large outlays.

VII. The Way Forward: Proposals for Reform

Based on the foregoing analysis, this paper proposes the following reforms to strengthen India's mandatory CSR regime:

1. Outcome-Linked Compliance: Amend the Companies (CSR Policy) Rules to mandate minimum impact assessment for all projects above ₹25 lakh (reduced from the current ₹1 crore threshold). The two-percent obligation should be partially dischargeable by demonstrating certified social outcomes, reducing the incentive for mechanical expenditure.

2. Geographic Targeting Incentives: Introduce Schedule VII sub-categories for spending in aspirational districts (as designated by NITI Aayog) with an enhanced multiplier — for instance, every rupee spent in an aspirational district may be counted as ₹1.5 toward the two-percent obligation. This provides a market-compatible incentive to redirect resources to underserved areas.

3. Decriminalisation of Non-Spending: Replace imprisonment for non-compliance under Section 135(7) with a graded civil penalty regime. Imprisonment should be reserved for fraud, misrepresentation, or misappropriation of CSR funds, not for bona fide underspending. This aligns penalty severity with the nature of the default.

4. Extended Project Timelines: Permit multi-year CSR project registration with NCLT oversight for projects with outlays exceeding ₹5 crore and implementation timelines exceeding three years. This removes the arbitrary three-year cap on the Unspent CSR Account mechanism and enables ambitious, transformative social investments.

5. A Centralised CSR Data Repository: Establish an integrated, publicly accessible CSR data platform — administered by the MCA — aggregating spending data, implementing agency registrations, impact assessment reports, and compliance filings in machine- readable format. This would enable academic research, civil society scrutiny, and

government policy calibration.

6. Capacity Support for Small and Mid-Sized Implementing Agencies: Create an MCA- administered grant facility, funded from unspent CSR amounts transferred to Schedule VII funds, to support capacity-building of registered NGOs and implementing agencies — particularly those serving aspirational districts and tribal areas.

VIII. Conclusion

India's mandatory CSR framework under Section 135 of the Companies Act, 2013, represents a bold experiment in harnessing corporate wealth for public good. As the first legally mandated corporate social expenditure regime in the world, it has generated substantial and sustained flows of private capital toward social and environmental priorities. Over a decade of operation has, however, exposed its structural limitations: a focus on expenditure over outcomes, geographic concentration, and a penal enforcement architecture that may be disproportionate to the nature of non-compliance.

The framework stands at an inflection point. The 2021 Amendment Rules — with their emphasis on impact assessment, implementing agency registration, and stricter project governance — signal Parliament's recognition that compliance must be substantive, not merely formal. The challenge is to build on this momentum: to design a regime that retains the normative force of mandatory minimum spending while creating powerful incentives for genuine social impact,

geographic equity, and long-term investment in social infrastructure.

As India aspires toward its Viksit Bharat 2047 goals, the corporate sector must be a co-architect of inclusive development — not merely a donor at the margins. A reformed Section 135 framework, calibrated to drive outcomes rather than outputs, can make this aspiration operational.

Notes & References

1. Milton Friedman, 'The Social Responsibility of Business Is to Increase Its Profits', The New York Times Magazine (September 13, 1970).

2. Section 135(1), Companies Act, 2013.

3. The case reference is illustrative of petitions filed challenging Section 135 in various High Courts during 2014–2016. For constitutional validity arguments, see also: K.K. Luthra, Mandatory CSR: A Constitutional Analysis (2015) 4 NUJS Law Review 211.

4. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, Ministry of Corporate Affairs, Government of India, Notification dated 22 January 2021.

5. Ministry of Corporate Affairs, Annual Report on CSR 2022–23 (New Delhi: MCA, 2023).

6. NITI Aayog, Aspirational Districts Programme: Third-Party Evaluation Report (New Delhi: NITI Aayog, 2022).

7. European Parliament and Council, Directive 2022/2464/EU on Corporate Sustainability Reporting (CSRD), 14 December 2022.

8. Buhmann K., 'Mandating Human Rights Due Diligence: Exploring Legal Pathways' (2021) 29 European Business Law Review 467.

9. Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248.

10. PM Economic Advisory Council, State of CSR in India: Emerging Trends and Challenges (New Delhi: PMEAC, 2023).

Bibliography

Primary Sources

• Companies Act, 2013 (Act No. 18 of 2013) — Sections 135, 149, 198, 441 and Schedule VII.

• Companies (Corporate Social Responsibility Policy) Rules, 2014 (as amended through 2021).

• Companies (Amendment) Act, 2019 (Act No. 22 of 2019).

• Companies (Amendment) Act, 2020 (Act No. 29 of 2020).

• Constitution of India — Articles 19(1)(g) and 300A.

• MCA General Circular No. 05/2021 dated 22 April 2021 (COVID-19 CSR Clarification).

• MCA General Circular No. 14/2021 dated 25 March 2021 (Implementation of CSR Provisions).

Secondary Sources

• Friedman, M., The Social Responsibility of Business Is to Increase Its Profits, The New York Times Magazine (13 September 1970).

• Mitra, N., Mandatory Corporate Social Responsibility in India: A Conceptual Framework (Routledge, 2017).

• Buhmann, K.,Mandating Human Rights Due Diligence: Exploring Legal Pathways (2021) 29 European Business Law Review 467.

• Luthra, K.K.Mandatory CSR: A Constitutional Analysis (2015) 4 NUJS Law Review 211.

• Ministry of Corporate Affairs, Annual Reports on CSR 2019–20 to 2022 23 (Government of India).

• PM Economic Advisory Council, State of CSR in India: Emerging Trends and Challenges (PMEAC, 2023).

• European Parliament, Directive 2022/2464/EU (Corporate Sustainability Reporting Directive), 14 December 2022.

• Rustom Cavasjee Cooper v. Union of India, (1970) 1 SCC 248 (Supreme Court of India).