A company may implement its Corporate Social Responsibility (CSR) activities either directly or through external implementing agencies as permitted by Rule 4(1) of the Companies (CSR Policy) Rules, 2014. These implementing agencies can take several forms, and their use is subject to specific legal provisions and compliance requirements. This article provides a comprehensive legal analysis of such implementing agencies, focusing on their permissible types, qualifications, and regulatory requirements under Section 135(5), Section 135(6), Rule 4(1), Rule 4(2), Rule 4(5), and Rule 7(4) of the Companies Act, 2013 and associated CSR Rules.
Types of Implementing Agencies
Companies may engage in CSR implementation through one or more of the following types of implementing entities: a company, trust, or society established by the company; a company, trust, or society established by the Government; an entity established under an Act of Parliament or State Legislature; or another company, trust, or society not established by the company or Government but meeting specific legal conditions.
Implementation Through Company, Trust, or Society Established by the Company
A company may implement its CSR programs through a dedicated entity it has established, singly or along with any other company. This implementing agency must meet the following conditions. It must be a Section 8 company under the Companies Act, 2013, a registered public trust, or a registered society. It must be established by the company either alone or jointly with other companies. It must be registered under Sections 12A and 80G of the Income-tax Act, 1961. It must also be registered with the Central Government under the CSR Rules by Rule 4(2). A company previously licensed under Section 25 of the Companies Act, 1956, is also considered covered due to the repeal provisions in Section 465(2)(g) of the 2013 Act.
Requirement of Registration Under Section 12A and Section 80G of the Income-tax Act, 1961
The requirement of registration under Section 12A and approval under Section 80G is applicable to all three types of entities, namely, a company, trust, and society. This interpretation is supported by the syntax of Rule 4(1)(a), which uses commas that separate “a company established under section 8 of the Act,” “a registered public trust,” and “a registered society,” and thereafter continues with “registered under sections 12A and 80G.” This indicates that the registration requirement applies to all three types. Form CSR-1, used for registration of implementing agencies with the Central Government, explicitly requires proof of registration under Section 12A and 80G for each entity type. The Ministry of Corporate Affairs (MCA) has also clarified this requirement in response to Question 5.3 of General Circular No. 14/2021 dated 25 August 2021.
Registration Under Section 12AB
Although Rule 4(1) still refers to Section 12A, it should be interpreted to include Section 12AB, which replaced Section 12A effective from 1 April 2021. Entities registered under Section 12AB are deemed to meet the requirements of Rule 4(1). The deadline for applying for registration under Section 12AB or approval under Section 80G was extended until 31 March 2022 as per Circular No. 16/2021 issued by the CBDT on 29 August 2021.
Approval Under Section 10(23C) is Not Sufficient
Section 10(23C) provides certain exemptions to charitable institutions, but for CSR purposes, such approval does not satisfy the requirement of Rule 4(1). Only registration under Section 12A or 12AB, along with approval under Section 80G, is considered sufficient for an implementing agency.
Entities Not Eligible for Approval Under Section 80G
Certain entities are ineligible for approval under Section 80G. This includes entities set up for the benefit of a particular religious community or caste, and those that spend more than 5 percent of their income on religious activities. Such entities are excluded from being implementing agencies under Rule 4(1).
Ineligibility of Private Trusts
Private trusts, which cannot obtain registration under Section 12A or approval under Section 80G, are not permitted to act as CSR implementing agencies.
Meaning of “Registered” Trust
The term “registered” as used in “registered public trust” refers to registration under State Trust Laws where such registration is mandatory. Where no such local law exists, registration under the Income-tax Act, 1961,, is considered sufficient. This clarification is based on the MCA’s response to Question 5.4 of General Circular No. 14/2021 dated 25 August 2021. Therefore, a trust will be regarded as “registered” if it is registered under a State trust law where applicable or under the Income-tax Act where State registration is not required. Registration of the trust deed under the Indian Registration Act, 1908, is not mandatory in either case.
Scope of the Term “Society”
The rules do not clearly define whether “society” is limited to entities registered under the Societies Registration Act, 186,0, or whether it may also include cooperative societies. The general interpretation is that it refers to societies under the 1860 Act, unless clarified otherwise by the MCA.
Involvement of Directors and Shareholders
Directors and shareholders of the company may act as trustees, directors, or members in the implementing agency established by the company. There is no legal restriction preventing such dual roles.
No Track Record Requirement
Entities established by the company are not required to have a prior track record of three years in implementing similar CSR projects. This exemption allows newly formed agencies to qualify as implementing partners.
Meaning of “Established”
The term “established” has been judicially interpreted to mean created, set up, or founded. For a Section 8 company, the term applies only when the CSR-contributing company is a subscriber to its memorandum of association. For a trust, the company must be the settlor. For a society, the company must be a subscriber to the memorandum of association. The presence of additional individuals as subscribers (for meeting legal requirements) does not dilute the fact that the entity was established by the company.
Entities Established by Subsidiaries Are Not Covered
The implementing entity must be established by the company incurring CSR expenditure. If an entity is established by a subsidiary or holding company, it does not satisfy the criteria under Rule 4(1)(a). CSR projects of the company cannot be implemented through entities established by other group companies.
Implementing Entity for Collaborating Companies
When companies collaborate on a CSR project under Rule 4 and choose to implement the project through an implementing entity, all collaborating companies must be involved in establishing the entity. This means that all such companies should be subscribers to the memorandum in the case of a company or society, or co-settlors in the case of a trust.
Classification as Interested Party
Under Section 13(3)(a) of the Income-tax Act, 1961, a company may be regarded as an interested party in the implementing entity it has established. Consequently, the entity’s funds and assets cannot be used to benefit the company under Section 13(1)(c). Services must be rendered at arm’s length with appropriate remuneration under Section 13(2)(d). Although some argue that CSR implementation is a statutory obligation and thus outside the scope of inadequate remuneration, others suggest that the implementing entity should charge a markup to cover overheads. There is no explicit restriction on markup in the CSR Rules. However, to avoid compliance risks, the safer course is for the implementing agency to recover reasonable overheads through appropriate pricing.
Classification as Related Party
The implementing entity may also qualify as a related party of the company under Section 2(76) of the Companies Act, 2013. This classification does not restrict CSR implementation but may invoke additional compliance under the Act.
CSR Applicability and Legal Requirements
The applicability of CSR obligations is governed primarily by Section 135 of the Companies Act, 2013. The section stipulates that every company having a net worth of ₹500 crore or more, a turnover of ₹1000 crore or more, or a net profit of ₹5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee and comply with CSR obligations. Such companies are required to spend at least 2% of the average net profits made during the three immediately preceding financial years on CSR activities.
Rule 3 of the Companies (CSR Policy) Rules, 2014, further clarifies that once the criteria are met, the obligation applies for the financial year, even if the financial thresholds are not met in subsequent years, unless the company ceases to meet the thresholds for three consecutive financial years.
The legal requirement also includes forming a CSR committee (unless exempted), formulating a CSR policy, and ensuring its implementation. Non-compliance with the spending requirement must be explained in the Board’s Report, and any unspent amount related to ongoing projects must be transferred to a special CSR account within 30 days of the end of the financial year and spent within three years. If not spent, it must be transferred to a fund specified in Schedule VII.
Eligible CSR Activities
Schedule VII of the Companies Act, 2013, lists the activities that qualify as CSR. These include eradicating hunger and poverty, promoting education, gender equality, environmental sustainability, and contributions to government funds like the PM CARES Fund. The scope of eligible activities has been interpreted liberally by the Ministry of Corporate Affairs through various circulars and FAQs.
The activities must be undertaken in project or program mode. Activities benefiting only the employees or their families, or those undertaken in the normal course of business (with some exceptions for R&D during COVID-19), are not considered eligible CSR activities. Contributions to political parties also do not qualify.
Modes of Implementation
A company may undertake CSR activities through:
- Itself, i.e., directly through its CSR department.
- A company established under Section 8 of the Act, a registered public trust, or a registered society, either established by the company itself or in collaboration with another company.
- An implementing agency that is a Section 8 company, registered trust, or registered society with at least three years of experience in similar activities.
Rule 4 of the Companies (CSR Policy) Rules, 2014, lays down the permitted modes. The implementing agency must be registered with the Central Government and obtain a unique CSR Registration Number from the MCA21 portal. This is a mandatory precondition for availing of CSR funds.
Registration of Implementation Agencies
Effective from April 1, 2021, every implementing agency intending to undertake CSR activities must register itself on the MCA portal by filing Form CSR-1. The form requires basic details of the entity, including PAN, registration number, date of incorporation, and details of trustees/directors. Upon successful verification, a unique CSR Registration Number is issued.
This registration enables monitoring and ensures transparency and accountability in the execution of CSR activities. Entities that are not registered cannot act as implementing agencies. This legal stipulation has elevated the standard of diligence companies must undertake before partnering with a third party for CSR execution.
The obligation for companies to conduct due diligence before engaging an implementing agency includes verifying registration, experience, credibility, and alignment with CSR objectives. This makes CSR implementation a more legally controlled and accountable process.
Ongoing Projects and Implementation Timeline
CSR projects are broadly classified into two categories: one-time and ongoing. The legal framework mandates that for ongoing projects, the unspent CSR amount must be transferred to a separate bank account titled “Unspent CSR Account” within 30 days of the end of the financial year. The amount must be spent within three financial years from the date of transfer. Failure to do so requires the transfer of the unutilized funds to a fund specified in Schedule VII, like the PM National Relief Fund, within 30 days from the completion of the third financial year.
This requirement ensures that funds earmarked for CSR are not indefinitely parked and that they are utilized within a reasonable period for intended purposes. The company’s Board is responsible for monitoring and ensuring the timely execution of these projects and proper utilization of funds.
Penalties for Non-Compliance
Section 135(7) of the Companies Act, 2013, lays down penalties for non-compliance with CSR provisions. If a company fails to spend the CSR amount and fails to transfer it to the designated fund or account, it shall be liable to a penalty twice the unspent amount or ₹1 crore, whichever is less. Officers in default are liable to a penalty of one-tenth of the unspent amount or ₹2 lakh, whichever is less.
This provision has transformed CSR from a mere voluntary guideline to a legally enforceable obligation. Companies need to maintain proper documentation, perform due diligence on implementing agencies, and monitor projects continuously to avoid such penal consequences.
Eligibility of Entities as Implementation Agencies
The Companies (Corporate Social Responsibility Policy) Rules, 2014, have been amended several times to bring clarity to the eligibility of entities that can act as implementation agencies. Rule 4 of the CSR Rules lays down detailed provisions relating to CSR implementation. According to Rule 4(1), a company can undertake CSR activities either by itself or through implementing agencies, which may include a company established under Section 8 of the Companies Act, a registered trust, or a registered society. These entities must be registered under Sections 12A and 80G of the Income Tax Act, 1961. If the implementation agency is not established by the company itself, it must have a track record of at least three years in undertaking similar activities. Rule 4(2) emphasizes that the Board of the company must ensure that CSR activities are undertaken through entities with an established track record. Furthermore, every implementation agency must register itself on the Ministry of Corporate Affairs’ portal in Form CSR-1. This requirement became mandatory from April 1, 2021, as per the Companies (CSR Policy) Amendment Rules, 2021. The registration number generated from Form CSR-1 must be mentioned in the annual report on CSR activities. The rationale behind this registration requirement is to bring transparency and accountability in the utilization of CSR funds by ensuring that only genuine and experienced entities are entrusted with such responsibilities. Additionally, it facilitates monitoring and evaluation by the MCA. Section 135(1) read with Rule 4 also makes it clear that companies can collaborate with other companies for undertaking CSR projects or programs in such a manner that the CSR Committees of the respective companies are in a position to report separately on such projects or programs. The Ministry of Corporate Affairs has clarified in its General Circular No. 01/2016 dated January 12, 2016, that contributions to the corpus of any entity are not considered as an eligible CSR activity. Companies must undertake CSR activities as project/program-based activities with defined outcomes. Companies must undertake due diligence while selecting implementation agencies, including verifying the registration status under CSR-1, income tax registration under Sections 12A and 80G, past track record, project implementation capacity, financial stability, and governance structure. The contractual arrangement between the company and the implementation agency should clearly define the scope of work, deliverables, monitoring mechanisms, fund utilization terms, and reporting obligations. Moreover, companies are encouraged to conduct impact assessments for CSR projects, especially where the outlay exceeds the specified thresholds. This ensures that the resources are effectively utilized and the intended social impact is achieved.
Practical Considerations and Governance
Governance of CSR implementation, especially when outsourced to external agencies, requires stringent controls and oversight mechanisms. The Board of Directors holds the ultimate responsibility for CSR compliance, as mandated by Section 135 of the Companies Act, 2013. The CSR Committee, constituted under Section 135(1), plays a crucial role in formulating and recommending the CSR policy, deciding the CSR projects, monitoring implementation, and ensuring legal compliance. The implementation of CSR projects through agencies requires the company to put in place robust monitoring and evaluation frameworks. These may include quarterly reporting by the implementation agency, independent audits, impact assessment studies, field visits, and third-party evaluations. The implementation agencies must also maintain proper books of accounts and records for CSR funds received and utilized. The CSR policy of the company should lay down detailed guidelines for project selection, budgeting, selection of implementation agencies, monitoring, and reporting. Transparency in CSR spending is critical to prevent misuse or misreporting of funds. Companies must disclose details of their CSR activities in the Board’s Report and the annual report on CSR, as per Rule 8 of the CSR Rules. The report must include details such as the amount spent, project-wise break-up, implementing agencies, monitoring mechanism, and impact assessment. Companies should also ensure that funds disbursed to implementation agencies are spent within the same financial year or a reasonable period. Unspent CSR amounts, particularly relating to ongoing projects, must be transferred to the Unspent CSR Account within 30 days from the end of the financial year, and utilized within three financial years, failing which they must be transferred to a Fund specified in Schedule VII. Companies must avoid front-loading or back-loading of funds and disburse CSR funds in tranches based on milestones or utilization of earlier tranches. Companies may also conduct social audits of CSR projects to evaluate the effectiveness and efficiency of implementation. Social audits involve consultation with beneficiaries, stakeholders, and independent evaluators to assess whether the project has achieved its intended goals and whether the implementation agency has discharged its obligations efficiently. Internal control systems must be strengthened to monitor fund flows, project execution, and compliance. Whistle-blower mechanisms may be extended to cover CSR activities to report irregularities or misuse of CSR funds by implementation agencies. Companies may also consider appointing internal CSR officers or departments to liaise with implementation agencies and ensure smooth coordination. Collaboration with other companies may bring synergies and efficiency, but also requires clear role definition, joint accountability, and independent reporting of outcomes. Joint CSR projects should have Memoranda of Understanding (MoUs) or collaboration agreements outlining the responsibilities, cost-sharing mechanisms, and monitoring framework. Governance and accountability are key to ensuring that CSR objectives are met, legal obligations are fulfilled, and stakeholder trust is maintained. Non-compliance or misuse of CSR funds can lead to reputational damage, legal consequences, and regulatory action under the Companies Act and other applicable laws.
Role of the Board and CSR Committee in Implementation
The Board of Directors and the CSR Committee of a company bear ultimate responsibility for ensuring that the CSR obligations are fulfilled as per the law. The CSR Committee recommends the CSR policy, the amount of expenditure, and monitors the implementation of the projects. However, the final onus lies with the Board. The Board must approve the CSR policy, disclose its contents in the Board’s Report, and ensure that the recommended projects are implemented properly. If implementation agencies are involved, the Board must ensure that proper due diligence is carried out to confirm their eligibility. This includes verification of registration under Rule 4(2), adherence to implementation guidelines, and continuous monitoring of fund usage. If the Board fails to ensure compliance, it may face legal consequences under Section 135 read with the Companies (CSR Policy) Rules, 2014.
Impact Assessment of CSR Activities
The Companies (CSR Policy) Amendment Rules, 2021, introduced the concept of impact assessment. As per Rule 8(3), companies with average CSR obligations of Rs. 10 crore or more in the three preceding financial years are required to undertake impact assessments for CSR projects with outlays of one crore rupees or more. The impact assessment must be done through an independent agency. This requirement ensures that CSR projects are evaluated for their effectiveness and alignment with the intended outcomes. It also enhances transparency and accountability in the CSR process. Impact assessment reports must be annexed to the annual report on CSR, and expenditure on such assessments can be booked as CSR spending, but is limited to 5 percent of the total CSR expenditure or Rs. 50 lakh, whichever is lower. This provision ensures that large CSR spenders are accountable for the social impact of their activities and that implementation agencies are effective in delivering measurable results.
Penalty for Non-compliance
With the amendment to the Companies Act in 2021, CSR provisions have moved from a “comply or explain” framework to a mandatory compliance regime. If a company fails to spend the required amount on CSR or fails to transfer the unspent amount to the designated fund or Unspent CSR Account, penalties are imposed. Under Section 135(7), the company shall be liable to a penalty of twice the unspent amount or Rs. 1 crore, whichever is less. Officers in default may also be penalised with a fine of one-tenth of the unspent amount or Rs. 2 lakh, whichever is less. Further, failure to ensure proper registration and due diligence of implementation agencies may lead to scrutiny from regulators. Inaccurate reporting or failure to report in the prescribed format (Form CSR-2) may attract additional penalties under the general provisions of the Companies Act. Thus, both the company and the implementation agency must maintain robust records and compliance mechanisms to avoid legal risks.
Reporting and Disclosures
Section 134 of the Companies Act mandates the reporting of CSR activities in the Board’s Report. Rule 8 of the CSR Rules requires companies to include an annual report on CSR containing information such as the list of CSR projects, amount spent, amount unspent, details of implementing agencies, mode of implementation, and reasons for under-spending. From FY 2020-21 onwards, companies are also required to file Form CSR-2 with the Ministry of Corporate Affairs. Non-filing or misreporting in CSR-2 can attract penal provisions. Moreover, disclosures must be made on the company’s website, if any, regarding CSR policy, projects, and composition of the CSR Committee. Proper disclosures ensure stakeholder transparency and allow the public and regulators to assess the genuineness and effectiveness of CSR implementation. Implementation agencies should cooperate with companies to maintain relevant documentation and furnish data to meet these reporting obligations.
Challenges in CSR Implementation through Agencies
Although outsourcing CSR activities to implementation agencies brings expertise and reach, it also creates multiple challenges. Firstly, there is a risk of misutilisation or diversion of CSR funds. To mitigate this, companies must establish detailed contracts and monitoring mechanisms. Secondly, improper due diligence on the eligibility and track record of the agency can result in non-compliance. Thirdly, there may be difficulties in tracking long-term social impact, especially where multiple agencies are involved. Companies must invest in capacity building, use technology to track outcomes, and engage in regular audits. Additionally, aligning the objectives of the company and the implementation agency is critical for project success. Differences in vision, timelines, and delivery methods can affect outcomes. Regulatory uncertainty and frequent changes in the legal framework also pose compliance challenges. Companies must maintain up-to-date knowledge of CSR laws and periodically train their internal CSR teams as well as external partners.
Recommendations for Effective Legal Compliance
To strengthen legal compliance and ensure meaningful CSR, companies should adopt a strategic and structured approach. This includes constituting a well-qualified CSR Committee, conducting thorough due diligence of implementation agencies, and ensuring that only registered agencies are selected. Legal vetting of CSR agreements with agencies can help prevent future disputes. Regular monitoring and evaluation of projects are crucial, and companies should consider deploying internal audit mechanisms. Impact assessment should be undertaken wherever mandated, and documentation of outcomes should be maintained for transparency. Companies must ensure timely filing of CSR-2, proper disclosure in the Board’s Report, and adherence to transfer timelines for unspent CSR funds. Legal departments should work closely with CSR teams to interpret rules and manage risks. Engaging external consultants or legal experts periodically can also provide insights into best practices and regulatory expectations. By embedding legal compliance into the CSR strategy, companies can not only fulfil statutory obligations but also enhance brand reputation and stakeholder trust.
Conclusion
The evolving legal framework governing CSR in India places significant responsibility on companies, particularly when CSR activities are executed through third-party implementation agencies. The Companies Act, 2013, and CSR Policy Rules provide a clear legal roadmap, from agency registration and project execution to impact assessment and reporting. The shift from voluntary to mandatory compliance has added teeth to the CSR regime, making legal diligence a non-negotiable aspect of CSR planning. While implementation agencies play a crucial role in bringing expertise and community connection, their selection and oversight must be done with care. A legally compliant CSR approach requires not only compliance with statutory provisions but also adoption of ethical, transparent, and measurable practices. Companies that view CSR as a strategic priority, rather than a regulatory burden, are more likely to create long-term value for society and mitigate legal and reputational risks. Legal advisors, CSR committees, and implementing partners must collaborate to uphold the spirit and letter of the CSR law.