What doesn’t count as CSR

Six kinds of activity never count as CSR in India, however worthy they look: the company’s normal business, anything done outside India (with one exception for sports training), contributions to political parties, benefits for the company’s own employees, sponsorship for marketing, and anything another law already requires. They are listed in Rule 2(1)(d) of the CSR Rules, and the Ministry of Corporate Affairs (MCA) has added several more things that can’t be counted.

This guide is for CSR teams, company secretaries, auditors and the NGOs that work with them. It explains each exclusion with examples, the other limits, a table for sorting borderline cases, and what happens if a company counts something it shouldn’t.

The rule

One more boundary frames the rule. CSR spending must follow the company’s CSR policy, which may include only activities within Schedule VII, the list in the Companies Act, 2013 of what CSR money can be spent on. The MCA’s frequently asked questions (General Circular 14/2021, 25 August 2021, cited here as “FAQ” and a number) say spending must be “relatable to Schedule VII”, whose entries “must be interpreted liberally” (FAQ 3.13). The FAQs aren’t law, but they are how the Ministry reads it, and companies and auditors follow them. See Schedule VII at a glance.

The six exclusions, one by one

1. The company’s normal course of business

The test: would the company do this anyway, to run or grow its business? If so, it isn’t CSR. Examples:

• a cement company building a road to its own quarry;
• a bank’s financial literacy camps where staff open accounts for the people attending, if the camps work as customer acquisition;
• a drug maker’s trials of its own products;
• training people for the company’s own vacancies.

The close cousin that counts: the same cement company funding a drinking water scheme in a nearby village. A temporary exception let companies that research new vaccines, drugs and medical devices in their normal course of business count COVID-19 research for 2020-21, 2021-22 and 2022-23 only, if it was done with an institution named in item (ix) of Schedule VII and disclosed separately in the annual report on CSR. It has ended.

2. Activities outside India

Anything done abroad is excluded, even if it is meant to benefit resident Indians (FAQ 4.4). The “only exception” is training Indian sports personnel who represent a state or union territory at national level, or India at international level. A school library in Nepal doesn’t count; the same library in an Indian district does. A training camp abroad for athletes selected to represent India does.

3. Contributions to political parties

Any contribution, “directly or indirectly”, to a political party is excluded. Indirect means any route that ends with a party, such as a payment to an electoral trust or to a body that passes the money on.

4. Activities benefiting employees

Employees here are those defined in section 2(k) of the Code on Wages, 2019. FAQ 4.2 sets the line: an activity “designed exclusively for the benefit of employees” is excluded, but one designed for the public at large still counts when employees and their families are “incidental beneficiaries”. It adds that CSR “should be non-discriminatory to any class of beneficiaries”. A crèche only for staff children, scholarships only for employees’ children and a staff canteen subsidy are excluded. A village clinic that workers’ families also use counts.

5. Sponsorship for marketing benefit

FAQ 4.3 explains that sponsorship of an event aims at marketing benefits, while CSR should run “in a project or programme mode rather than as a one-off event”. Companies “shall not use CSR purely as a marketing or brand building tool”, but “brand building as a collateral benefit does not vitiate the spirit of CSR”. Title sponsorship of a marathon is excluded. A year-long scholarship programme with the company’s name on the certificates counts.

6. Obligations under other laws

If a law, licence or clearance already requires the activity, it isn’t CSR, whichever Schedule VII area it falls in. Examples:

• a green belt or plantation required by an environmental clearance;
• effluent treatment required by a pollution consent;
• compensatory afforestation when forest land is diverted;
• the apprentices a company must engage under apprenticeship law;
• the Internal Committee and awareness sessions the POSH Act requires in its own workplaces;
• resettlement the land acquisition law requires for its project;
• a mining company’s statutory payments to the district mineral foundation.

Other things that don’t count

The FAQs, the Rules and later circulars add more limits.

Each of these has its own guide: employee volunteering, CSR budgets and the 5% overhead cap, capital assets in CSR and CSR and government schemes. Some funds that aren’t named in Schedule VII, such as the Armed Forces Flag Day Fund and the National Sports Development Fund, invite CSR money: support them only as projects under the relevant item, and take advice (see CSR for veterans, sports and government funds). And General Circular 15/2020, which ruled out chief ministers’ relief funds, did accept contributions to State Disaster Management Authorities for COVID-19, under item (xii).

Two newer limits apply to particular routes: the cost of a mandatory impact assessment counts only up to 2% of the year’s CSR spending or ₹50 lakh, whichever is higher (Rule 8(3)(c)), and subscriptions to zero coupon zero principal instruments on the Social Stock Exchange are capped at 10% of the year’s CSR spending (Rule 4A(1)).

Sorting borderline cases

A five-question test

When an activity is borderline, ask these questions in order and record the answers in the project file.

1. Is it relatable to a Schedule VII item? Name the item.
2. Would the company do it anyway, for its business, for its staff, for marketing or because a law requires it? If yes, it isn’t CSR.
3. Is it in India? Unless it is training for Indian sports personnel who represent a state, a union territory or India.
4. Is money actually being spent? Not goods from stock, not volunteers’ hours, not an endowment, and not money sitting unused with an agency.
5. Is the route eligible? The company itself, an implementing agency registered on Form CSR-1, a fund named in Schedule VII, an institution under item (ix), or zero coupon zero principal instruments under item (xiii), within the 10% cap.

What happens if you count something that doesn’t qualify

Money spent on an activity that doesn’t count doesn’t reduce the obligation, so the company has spent less than Section 135(5) requires. The board must give the reasons in its report and transfer the shortfall: to the Unspent CSR Account within 30 days of the year’s end if it relates to an ongoing project, or otherwise to a Schedule VII fund within six months. If it doesn’t, the penalties in Section 135(7) apply. See unspent CSR money and penalties.

For NGOs

Knowing the exclusions protects you as well as your funder. Turn down requests to label a company’s legal obligations, staff programmes or marketing events as CSR projects, and write the Schedule VII item into every proposal. If a funder offers goods instead of money, accept them as a gift, not as part of a CSR agreement. Our guide to ten myths about CSR covers more common misunderstandings.

The Academy’s CSR Law in Depth and CSR Essentials courses include sorting exercises on the exclusions.