CSR Committee under Sec 135 — when, how, and the 2% spend obligation

The three threshold triggers

Any company satisfying ANY of these in the immediately preceding FY must comply with CSR:

1. Net worth ≥ ₹500 crore
2. Turnover ≥ ₹1,000 crore
3. Net profit ≥ ₹5 crore

"Net profit" for this purpose is computed under Sec 198 — excludes capital profits, profits from foreign branches, dividend received from CSR-exempt companies. So a holding company collecting ₹100 Cr dividend from subsidiaries may not breach the ₹5 Cr net-profit threshold.

The 3-year average

Once you're CSR-obligated, the 2% spend is computed on average net profit of the immediately preceding three FYs (or such shorter period if company is younger). So FY 2025-26 CSR spend = 2% × average(FY 22-23, FY 23-24, FY 24-25 net profits).

A new company that crosses ₹5 Cr profit in FY 25-26 for the first time:

• Becomes CSR-applicable from FY 26-27
• Must compute 2% × average of FY 23-24 + 24-25 + 25-26 net profits (or only those years where company existed)
• Spend in FY 26-27

CSR Committee composition

For companies above the threshold:

• Minimum 3 directors (one must be independent if company is required to have ID)
• If company doesn't need ID (most private companies don't), minimum 2 directors
• Composition disclosed in board's report and on company website

Small private companies often have just 2-3 directors total — the entire board doubles as the CSR Committee. Public companies typically have a separately constituted committee with at least one ID.

Committee responsibilities

1. Formulate and recommend a CSR Policy to the Board
2. Recommend amount of expenditure
3. Monitor implementation
4. Annual CSR action plan (since 2021 amendment) listing specific projects, budgets, modalities of implementation

Eligible CSR activities — Schedule VII

Activities recognised under Schedule VII (broad categories):

• Eradicating hunger, poverty, malnutrition
• Promoting education (including special education)
• Promoting gender equality, women empowerment
• Reducing child mortality, improving maternal health, healthcare
• Environmental sustainability, ecological balance, water conservation
• Protection of national heritage, art, culture
• Measures for benefit of armed forces veterans / war widows
• Training to promote rural sports, nationally recognised sports, Paralympic sports, Olympic sports
• Contributions to PM National Relief Fund, PM CARES, technology incubators, scientific research
• Rural development projects
• Slum area development
• Disaster management including relief, rehabilitation, reconstruction

What's NOT eligible CSR

• Activities benefiting only the company's employees and their families
• Activities undertaken in pursuance of normal business (e.g., marketing-disguised philanthropy)
• Direct / indirect political contributions
• Activities outside India (with limited exceptions for training Indian sports personnel)
• Activities for benefit of specific religious community / caste

The unspent-amount cascade — major 2021 amendment

What if you don't spend the full 2% in the year?

Ongoing projects: Unspent amount earmarked for ongoing multi-year projects must be transferred to a separate bank account (CSR Unspent Account) within 30 days of FY end. Must be spent within 3 years from transfer date. If not spent, transferred to Schedule VII Fund within 30 days.

Other unspent: If unspent for any reason other than ongoing project, transfer to a Schedule VII Fund (PM CARES, PM National Relief Fund, etc.) within 6 months from FY end.

CSR-1 + CSR-2 filings

• CSR-1: One-time filing by the implementing agency (NGO / trust) you're routing CSR through. Establishes them as eligible to receive CSR funds. They file with MCA + give you a unique CSR registration number.
• CSR-2: Annual filing by the company itself disclosing CSR expenditure and details. Filed with MCA annually as an addendum to AOC-4.

Penalty regime (FA 2020 hardening)

Pre-2020 CSR was "comply or explain". FA 2020 made it "comply or pay":

• Company: penalty = twice the unspent amount OR ₹1 crore, whichever lower
• Every officer in default: 1/10th of the company penalty OR ₹2 lakh, whichever lower

Spending-floor vs activity-floor

Critical distinction: Sec 135 sets a spending floor (2% of avg net profit) but no activity-quality floor. So you can spend 2% on a single low-impact project + still comply. The result: lots of CSR spending is "spent" but barely "impactful". Activist shareholders increasingly question CSR effectiveness, not just expenditure.

The Finclar take

For a company straddling the ₹5 Cr net-profit threshold, CSR is a real obligation — typically ₹10-30 L per year of mandatory spending. Two operational choices: (a) build an in-house CSR programme (own employees, own implementation, full control but high overhead), or (b) route through a registered implementing agency (lower overhead, but you cede control of execution). Most clients we serve go the second route, with quarterly impact reviews and an annual board-level update. Document everything — CSR-2 disclosures are public and increasingly scrutinised.