Understanding the Mandate: Quantum of CSR Spending and Unspent Amounts in India

Corporate Social Responsibility (CSR) in India stands as a pioneering example of a statutory mandate for businesses to contribute to societal well-being. Unlike many other nations where CSR remains largely voluntary, India’s Companies Act, 2013, under Section 135, made it obligatory for certain classes of profitable companies to earmark and spend a portion of their profits on specified social and environmental activities. This legislative framework, complemented by the Companies (CSR Policy) Rules, 2014, and subsequent amendments, particularly those in 2021, has established comprehensive guidelines concerning the quantum of CSR spending, the types of activities permissible, and critically, the treatment of any unspent amounts from a particular financial year. The underlying philosophy is to integrate social and environmental considerations into corporate strategy, thereby fostering sustainable development and equitable growth.

The policy guidelines are meticulously designed to ensure not only that companies fulfill their financial obligations but also that these funds are effectively deployed for their intended purposes. The emphasis is on transparency, accountability, and the efficient utilization of resources dedicated to CSR initiatives. The rules address the potential for companies to merely set aside funds without concrete projects, or to delay their deployment indefinitely. By stipulating clear mechanisms for handling unspent amounts, the regulations aim to prevent the accumulation of idle funds and channel them towards legitimate social development projects, either directly by the company or through specified government funds, thereby reinforcing the statutory commitment to CSR.

The Legal Framework and Applicability Thresholds

The cornerstone of CSR policy in India is Section 135 of the Companies Act, 2013, which makes CSR spending mandatory for certain companies. This obligation is triggered if, during the immediately preceding financial year, the company meets any of the following criteria:

  • A net worth of Rupees five hundred crore (INR 500 crores) or more.
  • A Turnover of Rupees one thousand crore (INR 1,000 crores) or more.
  • A net profit of Rupees five crore (INR 5 crores) or more.

Once a company falls under this threshold, it must constitute a Corporate Social Responsibility Committee of the Board, which includes independent directors. This Committee is tasked with formulating and recommending a CSR Policy to the Board, outlining the activities to be undertaken as per Schedule VII of the Act, and monitoring the implementation of the CSR projects. The Board, in turn, is responsible for approving the CSR policy, disclosing its contents in the Board’s report, and ensuring that the company spends the prescribed amount.

Quantum of Corporate Social Responsibility (CSR) Spending

The primary guideline concerning the quantum of CSR spending is enshrined in Section 135(5) of the Companies Act, 2013. It mandates that every company meeting the applicability thresholds “shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years.” This “2% rule” forms the bedrock of India’s CSR expenditure requirement.

Calculation of “Average Net Profits”

The term “net profit” for CSR calculation purposes is specifically defined in the Companies (CSR Policy) Rules, 2014, and clarified by subsequent amendments. It refers to the profit before tax as per the company’s financial statements, prepared in accordance with the provisions of Section 198 of the Companies Act, 2013. However, certain adjustments are prescribed to arrive at the “net profit” for CSR purposes:

  1. Exclusions: Net profit for CSR computation does not include:

    • Profits arising from any overseas branch of the company, whether operated as a separate company or otherwise.
    • Any dividend received from other companies in India, which are themselves covered under and complying with the provisions of Section 135 of the Act. The rationale here is to avoid double-counting CSR expenditure within the corporate group.

  2. Inclusions/General Principles: For all other purposes, the “net profit” calculation broadly follows the principles laid down in Section 198 of the Act, which primarily focuses on profit derived from the company’s ordinary business activities. The average is taken over the three immediately preceding financial years. If a company has not completed three financial years since its incorporation, the average net profits for the financial years completed since its incorporation will be considered.

  3. Impact of Losses: If a company incurs losses in one or more of the three preceding financial years, those losses are factored into the average net profit calculation. For instance, if the average net profit across the three years is negative or zero, the CSR spending obligation for that year would effectively be zero, though companies are encouraged to spend voluntarily.

The “average net profits” mechanism provides a stable base for CSR expenditure, preventing drastic fluctuations year-on-year based on short-term profit volatility. It ensures a sustained commitment to social causes, irrespective of minor business cycles.

Transfer of Unspent CSR Amount in a Particular Year

One of the most significant aspects of India’s CSR regulations, especially after the Companies (CSR Policy) Amendment Rules, 2021, pertains to the handling of unspent CSR amounts. The rules draw a crucial distinction based on whether the unspent amount relates to an “ongoing project” or “other than an ongoing project,” and stipulate specific timelines and destinations for these funds. The objective is to ensure that CSR funds are not merely provisioned but are actually spent and utilized for designated purposes.

1. Unspent Amount for “Ongoing Projects”

An “ongoing project” is defined as a multi-year project, not exceeding three financial years excluding the financial year in which it was commenced, and which is undertaken by a company in fulfilment of its CSR obligation. This also includes a project whose duration has been extended beyond three years with proper justification and Board approval.

If a company has committed CSR funds to an ongoing project but is unable to spend the entire allocated amount within the financial year, the unspent portion is subject to specific transfer requirements:

  • Transfer Timeline: The unspent amount relating to an ongoing project must be transferred by the company to a “Special Account” within 30 days from the end of the financial year. This Special Account must be opened by the company in any Scheduled Bank and is designated as the “Unspent Corporate Social Responsibility Account.”
  • Utilization Period: The funds transferred to this Unspent CSR Account must be utilized by the company towards the ongoing project within a period of three financial years from the date of such transfer. This allows companies flexibility to manage multi-year projects without immediate pressure to spend within a single fiscal year.
  • Consequences of Non-Utilization: If the company fails to utilize the funds kept in the Unspent CSR Account within the stipulated three financial years, any remaining unspent amount must then be transferred to a fund specified in Schedule VII of the Act. This transfer must occur within 30 days from the completion of the third financial year. Examples of such funds include the Prime Minister’s National Relief Fund, the Prime Minister’s Citizens Assistance and Relief in Emergency Situations Fund (PM CARES Fund), the Swachh Bharat Kosh, the Clean Ganga Fund, or any other fund set up by the Central Government for socio-economic development and relief.

This mechanism ensures that funds allocated for multi-year projects remain earmarked and are eventually spent on those projects. If the project cannot absorb the funds, they are then channeled to broader national development initiatives.

2. Unspent Amount for “Other than Ongoing Projects”

If the unspent CSR amount does not relate to an ongoing project – meaning it was not allocated to a specific multi-year project or was simply not spent on single-year activities – the regulations mandate a different course of action:

  • Transfer Timeline: The unspent amount must be transferred by the company to a fund specified in Schedule VII of the Act within six months from the end of the financial year.
  • Designated Funds: As mentioned above, these Schedule VII funds typically include national relief funds or government-established socio-economic development funds. This ensures that unspent funds, not tied to specific projects, are still directed towards public welfare at a broader level.

The distinction between “ongoing projects” and “other projects” highlights the legislature’s intent to provide flexibility for genuine long-term CSR initiatives while ensuring accountability for funds not immediately deployed.

3. Excess Spending / Set-off of CSR Expenditure

The Companies (CSR Policy) Amendment Rules, 2021, introduced a significant provision allowing companies to set off excess CSR spending. If a company spends an amount in excess of its statutory CSR obligation in a financial year, it can carry forward such excess expenditure and set it off against the CSR obligation for the immediately succeeding financial years.

  • Conditions for Set-off:
    • The excess amount available for set-off can be carried forward for a period not exceeding three immediately succeeding financial years.
    • The excess amount cannot include the surplus arising out of the CSR activities, which, as per the rules, cannot be considered as part of the business profit of the company. Such surplus must be used for CSR activities or transferred to the Unspent CSR Account or a Schedule VII fund within a specified timeframe.
    • The Board’s Report needs to disclose the details of such set-off.

This provision encourages companies to undertake larger, more impactful projects that might require front-loading of expenditure, without penalizing them for exceeding the minimum requirement in a given year. It provides flexibility and incentivizes robust CSR programs.

Monitoring, Reporting, and Non-Compliance

Role of the CSR Committee and Board

The CSR Committee plays a crucial role in overseeing the CSR activities. It is responsible for:

  • Formulating and recommending to the Board, a CSR Policy indicating the activities to be undertaken by the company in areas or subjects specified in Schedule VII.
  • Recommending the amount of expenditure to be incurred on the CSR activities.
  • Monitoring the CSR Policy of the company from time to time.

The Board of Directors, after considering the recommendations of the CSR Committee, approves the CSR Policy and ensures that the activities included in the CSR Policy are undertaken by the company. The Board also has the responsibility to ensure that the company spends the amount specified in its CSR Policy.

Annual Report on CSR Activities

Companies are required to include an Annual Report on CSR activities in their Board’s Report. This report is a critical disclosure mechanism and must contain details such as:

  • An overview of the company’s CSR policy.
  • Composition of the CSR Committee.
  • Average net profit for the three preceding financial years.
  • Prescribed CSR expenditure (2% of average net profit).
  • Details of amount spent on CSR activities during the financial year, including particulars of projects or activities undertaken, sector, amount, and mode of implementation.
  • Details of any unspent CSR amount and its transfer to the Unspent CSR Account or Schedule VII fund.
  • Details of any excess CSR expenditure and set-off utilized.
  • A responsibility statement from the CSR Committee that the implementation and monitoring of CSR policy are in compliance with CSR objectives and policy of the company.

For companies with a CSR obligation of ten crore rupees or more, an impact assessment of their CSR activities must be undertaken through an independent agency for projects with outlays of one crore rupees or more.

Non-Compliance and Penalties

The Companies (Amendment) Act, 2019, initially introduced stricter penalties, including imprisonment for defaulting officers, for non-compliance with CSR provisions, particularly regarding the unspent amount. However, the Companies (Amendment) Act, 2020, decriminalized many CSR-related offenses, including the failure to spend the mandatory CSR amount or transfer unspent funds.

Currently, the non-compliance attracts monetary penalties:

  • For the company: A penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent CSR Account, as the case may be, or one crore rupees, whichever is less.
  • For every officer of the company who is in default: A penalty of one-tenth of the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent CSR Account, as the case may be, or ten lakh rupees, whichever is less.

This shift from criminal to civil penalties reflects a more facilitative approach, aiming to encourage compliance rather than impose punitive measures that might deter CSR initiatives. However, the significant financial penalties underscore the seriousness with which the government views CSR non-compliance.

Evolution and Rationale of Guidelines

The detailed policy guidelines regarding CSR spending and the treatment of unspent amounts reflect an evolutionary journey in India’s CSR landscape. Initially, the focus was on mandating a minimum spend. However, over time, the emphasis shifted towards ensuring effective utilization and preventing the mere declaration of intent without action.

The 2021 amendments, in particular, brought about significant changes aimed at improving transparency, accountability, and impact:

  • Clearer Definition of “Ongoing Projects”: This provided clarity for companies undertaking long-term initiatives.
  • Mandatory Transfer of Unspent Funds: The introduction of the “Unspent CSR Account” and the strict timelines for transferring unspent amounts to specific funds significantly tightened the screws on companies. This ensures that funds not spent by the company directly are still channeled towards public welfare through designated governmental mechanisms.
  • Allowance for Set-off of Excess Spending: This pragmatic change addresses corporate concerns about front-loading investments in large-scale projects and encourages companies to go beyond the minimum requirement without fear of forfeiture of excess spend.
  • Impact Assessment: For larger projects, the requirement for an independent impact assessment underscores a move towards results-oriented CSR, encouraging companies to measure the actual change brought about by their interventions, rather than just focusing on expenditure.
  • Decriminalization of Defaults: While penalties remain significant, removing imprisonment clauses reduces the regulatory burden and allows companies to focus on implementation rather than fear of criminal proceedings, making the CSR framework more business-friendly.

The intent behind these policy guidelines is multifaceted: to institutionalize CSR as an integral part of corporate governance, to ensure that designated funds are not left idle but contribute actively to social development, to foster greater transparency in CSR reporting, and ultimately, to make corporate India a more active and accountable participant in nation-building.

The policy guidelines regarding the quantum of CSR spending and the treatment of unspent amounts in India are comprehensive and robust, designed to ensure both compliance and effective utilization of funds. The mandate of spending “at least two per cent of the average net profits of the company made during the three immediately preceding financial years” sets a clear financial obligation for eligible companies. This calculation is carefully defined, with specific exclusions to ensure fairness and prevent double-counting of CSR efforts within the corporate ecosystem.

Crucially, the detailed framework for handling unspent amounts underscores the government’s commitment to seeing CSR funds translated into tangible social and environmental benefits. The clear distinction between funds allocated for “ongoing projects” and those “other than ongoing projects,” coupled with precise timelines for their transfer to either a dedicated “Unspent Corporate Social Responsibility Account” or specified Schedule VII funds, ensures that no obligated funds remain unutilized or unaccounted for. This systematic approach eliminates ambiguity and promotes accountability in CSR spending.

Furthermore, the provisions allowing for the set-off of excess expenditure and the introduction of mandatory impact assessments for larger projects reflect a dynamic and evolving regulatory landscape. These measures aim to encourage more strategic and impactful CSR interventions, moving beyond mere compliance to foster genuine corporate stewardship. While the shift in penalties from criminal to civil signifies a more facilitative approach, the continued imposition of substantial monetary fines for non-compliance reinforces the serious nature of the CSR obligation. India’s CSR framework thus serves as a global model, demonstrating how legislative mandates can drive significant corporate contributions to national development priorities, ensuring funds are not only earmarked but also effectively deployed for public good.