In India, CSR is no longer a soft, voluntary gesture. Since 2014, the Companies Act has made corporate social responsibility a hard obligation for eligible companies. Over a decade later, enforcement has clearly tightened. The government now closely monitors filings, and regulators have begun imposing steep penalties when boards treat CSR as a mere box-ticking exercise. Recent adjudication orders show how costly non-compliance with Section 135 has become for corporate India.
This article explains why CSR penalties are rising, what exactly Section 135 of the Companies Act requires, how the penalty mechanism works, and why boards must treat corporate social responsibility as a strategic priority rather than a regulatory afterthought.
Section 135: How CSR Became Mandatory
India became the first country in the world to legally mandate corporate social responsibility when Section 135 of the Companies Act, 2013 (hereafter “the Act”) came into force from April 1, 2014.
Under Section 135, a company becomes subject to CSR obligations if, in the immediately preceding financial year, it meets any of the following criteria:
- Net worth of at least ₹500 crore, or
- Annual turnover of at least ₹1,000 crore, or
- Net profit of at least ₹5 crore.
Once a company crosses any of these thresholds, the law mandates:
- Constitution of a CSR committee of the board.
- Formulation of a CSR policy aligned with Schedule VII of the Companies Act.
- Adoption and approval of annual CSR projects and budgets.
- Spending at least 2% of the company’s average net profits over the preceding three years on CSR activities every financial year.
Thus, for most large and profitable Indian firms, corporate social responsibility is no longer optional. It is mandatory.
Originally, the law required companies that failed to spend to disclose a shortfall in their Board’s Report (i.e., a “comply or explain” model). Over time, however, many companies underspent or parked funds while claiming an explanation. Recognising this, regulators strengthened enforcement.
What Companies Must Do: Spend, Transfer, Report
Under current law and regulatory guidance, eligible companies must follow a detailed compliance cycle:
1. Formulate CSR policy & committee
The company must set up a CSR committee (if eligibility criteria are met), which recommends a corporate social responsibility policy. The board must approve that policy.
2. Select eligible CSR activities
The policy must identify projects or programmes in sectors listed under Schedule VII of the Companies Act, typically education, health, rural development, environment, skill development, livelihood, sanitation, and similar socially beneficial areas.
3. Allocate and spend 2% of the average net profit
Each financial year, the company must spend at least 2% of the average net profits (derived over the preceding three years).
4. Handle unspent CSR amounts properly
If, for any reason, the company cannot spend the full amount in that financial year, two scenarios apply:
- For ongoing projects: transfer unspent amount into a designated Unspent CSR Account within 30 days after year-end, then spend within the next three financial years.
- For other activities: transfer the unspent amount to a specified central or government fund under Schedule VII within six months of the financial year end.
5. Disclose in Board’s Report and on website
Companies must publicly disclose their CSR policy, committee details, the amount spent, the projects undertaken, and the reasons for any shortfall.
In effect, corporate social responsibility compliance is a continuous governance commitment — not a one-time philanthropic gesture. The 2% spend, transfer, or timely allocation, and reporting obligations combine into a tightly regulated compliance regime under the Companies Act.
The Penalty Mechanism: Section 135(7) Makes Non-Compliance Costly
The strictness of this compliance regime emerges clearly in the penalty structure under Section 135(7) of the Companies Act.
If a company defaults on the obligations under sub-section (5) (the spending requirement) or sub-section (6) (the transfer of unspent CSR amount), the following penalties apply:
- The company shall be liable to a penalty equal to the lower of: (a) twice the amount required to be transferred; or (b) ₹1 crore.
- Every officer in default (e.g., a director, or other key managerial personnel) faces a penalty equal to the lower of: (a) one-tenth of the amount required to be transferred; or (b) ₹2 lakh.
In short, CSR penalties are no longer nominal or symbolic. For large firms with significant unspent obligations, “twice the amount required to be transferred” can run into several crores. Even small oversights can lead to six or seven-digit fines.
Originally, non-compliance carried potential criminal liability, including imprisonment for officers in default. But after amendments (including in 2019), the regime was decriminalised, and today compliance failures lead to civil penalties.
However, while the criminal dimension has receded, the financial “teeth” remain, and regulators are showing willingness to use them.
Real-World Enforcement: Cases Illustrate Rising CSR Penalties
Theoretical penalty provisions matter far more when regulators start enforcing them, and recent years have seen more concrete adjudication under CSR rules than before.
Example: 2025 – ₹1 crore penalty for unspent CSR
In 2025, the Registrar of Companies (ROC), Bengaluru, imposed a penalty, ₹1 crore on a company and ₹2 lakh on its Managing Director for failing to spend mandated CSR amounts across multiple years and failing to transfer unspent amounts as required under Section 135.
In that case, though the unspent amount was computed at ₹26.63 lakh, the ROC invoked the maximum penalty threshold under the law, showing regulators are willing to pursue full statutory fines even when defaults are relatively modest.
Company-level compliance breakdowns: A broader picture
While many large corporations do comply, data show persistent compliance issues:
- According to a credible survey, in FY 2021–22, over 4,800 companies failed to meet their CSR spending obligations.
- Government responses to parliamentary questions confirm that about 30 companies were penalised for CSR non-compliance over the three years up to FY 2025.
Corporate disclosure failures also draw action
Non-compliance is not limited to under-spending. In some cases, companies failed to form a CSR committee, did not adopt a CSR policy, or failed to attach a CSR report to the statutory board report. These lapses under Sections 135(1) or 135(4) also attract penalties under the Companies Act.
One case involved a firm that met the financial thresholds but did not constitute a CSR committee or disclose a policy, and did not spend the CSR amount or transfer unspent funds. The company and its officers were penalised.
Thus, the regulatory message is clear: non-compliance with CSR rules under the Companies Act now carries real, painful consequences.
Why CSR Penalties Are Rising — Not Just in Money, but in Stakes
Why is the regulator suddenly more aggressive about enforcing corporate social responsibility compliance? There are several interlocking reasons:
Growing CSR Pool — Greater Public Interest
Over the years, CSR spending in India has mushroomed. According to recent data, in FY 2023–24, the total CSR spend by Indian companies is estimated at around ₹35,000 crore, with listed companies contributing nearly ₹18,000 crore.
As CSR funding becomes a major source of development finance, often channelled to education, health, environment, and rural development, the public expects transparency, accountability, and actual delivery. The regulator’s stricter enforcement reflects this increased social and political importance of CSR funds.
Shift from “Comply or Explain” to “Comply or Be Penalized”
Initially, Section 135 operated on a “comply or explain” basis. Companies could skip CSR spending if they explained the shortfall in their Board Report. But many firms abused this option, raising doubts about sincerity. Recognising this, the government amended the law and related rules to impose concrete penalties. The shift transformed CSR from a soft legal mandate to a binding regulatory requirement.
Increased Regulatory Oversight and Public Scrutiny
With advances in data reporting, such as via the MCA-21 registry and the national CSR portal, regulators can easily identify non-compliant companies. Public interest and media attention have also grown. Together, these factors make non-compliance riskier, reputationally and financially.
Alignment with ESG and Investor Expectations
Globally and domestically, investors increasingly assess companies on environmental, social, and governance (ESG) metrics, not just financial performance. A firm failing CSR norms under the Companies Act may score poorly on “S” and “G” metrics, damaging investor confidence, increasing the cost of capital, or triggering divestments.
The Hidden Costs of CSR Non-Compliance: Beyond Fines
The immediate penalty under Section 135(7) is only the most visible cost. Non-compliance with CSR obligations can hurt companies in multiple ways beyond statutory fines:
- Regulatory scrutiny and legal proceedings
Even if a company eventually rectifies its CSR spend or transfers unspent funds, it may still face investigations, show-cause notices, and adjudication proceedings. These consume management time, create uncertainty, and expose broader governance issues. - Reputational damage
Media headlines about “CSR penalty under the Companies Act” or “failure to spend on CSR despite high profits” can harm a company’s goodwill among customers, employees, and communities. Especially at a time when corporates are under public pressure to contribute to social causes, such reputational hits can have long-term consequences. - Investor confidence and ESG ratings
As said earlier, investors increasingly evaluate companies on ESG performance. Repeated CSR non-compliance might lead to lower ESG ratings, higher risk perception, and eventually higher cost of capital or lower valuations. - Operational risk and stakeholder distrust
NGOs, project partners, local communities, the very stakeholders CSR programmes aim to benefit — may lose trust in a company that repeatedly underwrites its social obligations. That may jeopardise future on-ground projects, partnerships, and long-term social license to operate.
In short, the “cost” of ignoring corporate social responsibility goes well beyond a one-time fine.
Why Boards Must Hard-wire CSR into Governance: Lessons for Corporate India
Given these risks, company boards must rethink CSR not as a compliance chore, but as a core governance and strategic issue. Here are a few recommendations:
- Ensure the CSR committee includes independent directors who understand development issues as well as the company’s business model.
- Align CSR priorities with long-term corporate strategy for example, a healthcare company focusing its CSR on public health, or an energy major investing in renewable energy and climate resilience.
- Incorporate CSR budgets, project approvals, disbursement, and utilisation reporting into the company’s internal controls and annual planning cycle, rather than treating it as a last-minute compliance afterthought.
- Use technology to monitor CSR projects and spending in real time, reducing the risk of unspent amounts accumulating unnoticed.
- Encourage transparency and stakeholder communication, including communities benefitting from CSR, to build trust and deliver real impact.
When companies treat corporate social responsibility as part of their purpose and governance, rather than a regulatory burden, the chances of default shrink. And even when compliance is tight, the strategic value of a well-run CSR programme, for reputation, stakeholder engagement, and long-term value creation, often outweighs the cost.
Non-Compliance Isn’t Worth the Risk — CSR Done Right Pays Off
In India’s evolving corporate ecosystem, CSR has outgrown the realms of philanthropy and charity. Under the Companies Act, it is a binding legal obligation, and regulators are now using the full force of Section 135 to penalise non-compliance. The examples of enforcement, the growing number of compliance breaches, and rising CSR spend across India all point to a clear reality: defaulting on corporate social responsibility is risky, expensive, and reputationally dangerous.
For Indian corporates, the choice is simple: treat CSR as a governance priority and a long-term strategic investment, or risk paying heavy penalties, losing stakeholder trust, and damaging corporate reputation. In today’s world, CSR compliance under the Companies Act isn’t optional. It is essential.
References
- Ministry of Corporate Affairs – Section 135 (CSR) – Bare Act
- MCA CSR Rules – Corporate Social Responsibility Policy Rules, 2014
- TaxGuru – Penalties for CSR Non-Compliance (Case Law & Analysis)
- Ropes & Gray – Analysis of CSR Amendments & Compliance Requirements
- Drishti IAS – Data on CSR Spending Trends in India
FAQs on CSR Penalties
- 1. What is CSR under the Companies Act?
CSR under the Companies Act refers to mandatory corporate social responsibility activities that eligible companies must undertake, including spending 2% of their average net profits on approved social initiatives.
- 2. Who is required to comply with CSR provisions?
Companies that meet the financial thresholds in Section 135 of the Companies Act based on net worth, turnover, or profit must comply with CSR obligations and follow approved corporate social responsibility rules.
- 3. What happens if a company fails to meet CSR spending requirements?
Non-compliance with CSR spending under the Companies Act can lead to financial penalties on both the company and responsible officers, as Section 135 strictly enforces corporate social responsibility rules.
- 4. Can unspent CSR funds be carried forward?
Yes, the Companies Act allows unspent CSR amounts for ongoing projects to be transferred to an Unspent CSR Account and used within three years, ensuring proper use of corporate social responsibility funds.
- 5. Why is CSR reporting important?
CSR reporting ensures transparency and accountability under the Companies Act, showing how companies implement corporate social responsibility initiatives and whether they meet mandated CSR requirements.
