Introduction
“We did everything we could, but we still got penalised. Is that fair?” This particular statement was articulated as the opening remark by the General Counsel of a mid-sized publicly listed Indian corporation during a phone conversation that took place in January of the year 2024. The organization had allocated 1.7% of their average net profits towards Corporate Social Responsibility (CSR) initiatives for the fiscal year spanning 2022 to 2023, which was just a fraction below the legally mandated threshold of 2%. The reason for this shortfall was primarily attributed to a significant flagship education project that was intended to aid a tribal region in Odisha, which unfortunately could not be completed on time due to unforeseen delays in obtaining necessary local approvals as well as issues related to access to land. In adherence to regulatory requirements, the company had transparently disclosed this situation in its annual CSR report, specifically earmarked the amount that remained unspent, and subsequently transferred these funds to the designated unspent CSR account as mandated by law.
Fast forward three months later, the Registrar of Companies (RoC) commenced the adjudication proceedings against the company, which ultimately culminated in the imposition of a substantial penalty amounting to Rs. 10 lakh under Section 135(7) of the Companies Act, 2013, a development that was particularly disconcerting for the organization. To exacerbate the situation further, not only was the company itself penalized, but the Chief Financial Officer (CFO) along with individual members of the CSR Committee were also subjected to personal fines, adding another layer of complexity and concern.
The palpable sense of frustration expressed by the client was unmistakable as they articulated their sentiments, saying, “We diligently followed all the established rules, acted in good faith throughout the entire process, even went the extra mile to consult the CSR guidelines and yet, here we are, still facing punishment for our efforts?”
This particular incident served as a catalyst that prompted us to undertake an in-depth exploration into the intricate legal and regulatory tensions that exist between the enforcement of CSR requirements and the ongoing policy shift towards decriminalization within the corporate sector.
The CSR Regulatory Framework in India and recent enforcement trends
India's CSR regulatory framework1, which was first established under the Companies Act of 2013, has received worldwide acclaim for its innovative approach that effectively merges the principles of corporate governance with the imperative of generating a positive social impact for the community at large. In a noteworthy development, the Companies (Amendment) Act of 20202 undertook the important step of decriminalising instances of non-compliance related to CSR obligations, thereby replacing the previous provisions for imprisonment with a system of civil fines. However, as time has progressed, this framework has transitioned from a relatively lenient comply-or-explain model to a more stringent and enforced obligation, particularly following the significant amendment made in 20213 to Section 135, which now prescribes civil penalties for instances of non-compliance and mandates the transfer of funds for any unspent amounts allocated for CSR purposes.
However, the enforcement landscape experienced a marked shift in the years 2023 to 2024, as evidenced by the Ministry of Corporate Affairs (MCA) taking decisive action by issuing adjudication orders against more than thirty companies that were found to be deficient either in their spending on CSR initiatives or in their reporting practices pertaining to these expenditures4.
In the case of Naresh K. Patel v. Union of India (2023)5, the esteemed Gujarat High Court undertook the significant task of quashing a criminal complaint that had been lodged against the directors of a company, which alleged their non-compliance with corporate social responsibility (CSR) obligations; in doing so, the Court emphatically affirmed the necessity for the retrospective application of the 2020 legislative amendment that decriminalised CSR infractions. The Court, in its meticulous examination, invoked the legal principle that legislation designed to confer benefits should be construed in a manner that is liberal and favourable to those individuals who find themselves accused.
While this particular judgment undeniably restored a measure of legal clarity to the situation at hand, it simultaneously brought forth a consequential question that merits serious consideration: What implications does this have for civil enforcement mechanisms? Furthermore, is it possible that companies could still face penalties or repercussions for failures that, despite being well-intentioned, nonetheless fall short of compliance?
The Client's Case: Penalty Despite Compliance Efforts
In the particular situation concerning our client, the penalty order issued by the Ministry of Corporate Affairs (MCA) failed to make any discernible distinction between instances of wilful default, which is characterized by intentional non-compliance, and procedural delays that may arise from legitimate or unforeseen circumstances. The Registrar of Companies (RoC) categorically treated the shortfall in compliance as an absolute and unqualified liability, irrespective of the specific circumstances involved or the bona fide intentions of the parties concerned.
This scenario encapsulates the intricate governance conundrum that lies at the very core of India's Corporate Social Responsibility enforcement framework, which presents a paradoxical situation. While the implementation of CSR initiatives is mandated by law, the underlying objectives that guide these initiatives are fundamentally voluntary in nature and are oriented towards developmental goals that benefit society. The legislative framework encourages and promotes innovative approaches to fulfilling social responsibility, yet paradoxically, the existing penalty structure tends to incentivize a culture of risk aversion and mere compliance with minimal standards, often resulting in a box-ticking approach to CSR. Moreover, even the most minor lapses in compliance or unforeseen delays in project execution have the potential to attract blanket penalties as stipulated under Section 135(7), without allowing any room for discretion concerning the intent or efforts made by the organizations involved.
This regulatory environment creates a chilling effect on corporate initiatives. Consequently, clients are increasingly posing the question: “In light of these stringent penalties, would it be safer to simply contribute funds to the PM CARES fund or to adhere strictly to pre-approved non-governmental organizations, rather than to pursue any ambitious or innovative CSR projects?”
Herein lies the comprehensive actions undertaken on behalf of our esteemed client: we submitted an elaborate representation in accordance with Rule 3 of the Companies (Adjudication of Penalties) Rules, 2014, positing 6that, the deficiency was inadvertent and warranted justification under Rule 7(2) of the CSR Rules7. Monetary resources had already been allocated to the unspent CSR account, in adherence to Section 135(6). The postponement occurred due to governmental clearance challenges, rather than corporate oversight. We referenced the ruling of the Gujarat High Court, which underscored that enforcement must differentiate between malafide defaults and challenges pertaining to implementation. We invoked the principles articulated in Article 14 concerning arbitrariness in administrative penalties, contending that imposing identical fines for both minor and major transgressions contravene the principle of proportionality. Ultimately, the financial penalty was considerably diminished, and the issue was resolved without imposing personal liability upon the members of the CSR committee.
Recommendations for Reform
This particular episode cannot be regarded as a singular or isolated occurrence within the broader context of corporate governance. Numerous corporations in the contemporary business landscape are grappling with the complexities and inherent ambiguities associated with the structural aspects of compliance and enforcement related to Corporate Social Responsibility (CSR) initiatives. Drawing upon our extensive advisory experience, we are firmly of the opinion that the existing regulatory framework necessitates a more refined and calibrated approach that is fundamentally principles-based, which should encompass the following key components:
- A graduated penalty structure: It is imperative that instances of CSR defaults be evaluated within a contextual framework, taking into account various factors such as the feasibility of the specific project, the adverse impacts resulting from pandemics, or unexpected delays, rather than treating these instances as uniform infractions that warrant the same punitive measures across the board.
- Guidelines for Registrars of Companies (RoCs): The Ministry of Corporate Affairs (MCA) ought to formulate and disseminate comprehensive Standard Operating Procedures (SOPs) that provide clear guidance for the adjudication of cases of CSR non-compliance, which should include considerations of mitigating factors such as an entity's prior compliance history and their demonstrable efforts to adhere to CSR mandates.
- Incentives for voluntary disclosure: Corporations that take the initiative to voluntarily disclose any lapses or challenges encountered in the implementation of CSR initiatives should be afforded a degree of leniency or safe harbour protection, thereby promoting a culture of transparency and responsible governance within the corporate sector.
- Establishment of a dispute resolution forum: The creation of a specialized CSR Appellate Authority would serve the essential purpose of enabling companies to appeal against orders perceived as unjust or inequitable, thus allowing them to resolve disputes without the necessity of engaging in protracted and costly litigation processes.
Conclusion
The experience of our client demonstrates the inherent tension between the aspirational ethos of Corporate Social Responsibility and the rigid enforcement mechanisms currently in place. While India's CSR framework has indeed set a global benchmark by mandating corporate contributions to social development, its implementation has revealed structural gaps that risk discouraging innovation and genuine impact. For businesses, the key takeaway is twofold. First, compliance must be approached with the same rigor as other statutory obligations, timely allocation of funds, transparent disclosures, and proactive engagement with regulators are non-negotiable. Second, companies should develop internal CSR governance frameworks that emphasize documentation, monitoring, and contingency planning, particularly where projects depend on external approvals or logistical challenges.
At the same time, corporates must not retreat into risk-averse strategies such as limiting CSR activities only to safe options like statutory funds. Instead, they should continue to design socially meaningful projects while simultaneously advocating for a principles-based enforcement regime—one that distinguishes between wilful default and genuine difficulty. By combining legal diligence with strategic advocacy, businesses can not only minimize their regulatory exposure but also contribute to shaping a more balanced CSR compliance environment. The path forward lies in responsible innovation backed by strong governance systems, ensuring that CSR remains both a developmental tool for society and a credible facet of corporate accountability.
Footnotes
1. The Companies Act, 2013, No. 18 of 2013, Section 135.
2. Ministry of Corporate Affairs, Companies (Amendment) Act, 2020, Gazette of India, Jan. 28, 2020.
3. Ministry of Corporate Affairs, Companies (Corporate Social Responsibility Policy) Rules, 2014 (as amended in 2021)
4. Economic Times, “30 companies penalised in three years over non-compliance with CSR rules,” The Economic Times (July 30, 2025).
5. Naresh K. Patel v. Union of India, R/Special Criminal Application No. 3369 of 2021, Gujarat High Court (2023)
6. Rule 3, Companies (Adjudication of Penalties) Rules, 2014.
7. Rule 7(2), CSR Rules, 2014 (as amended).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.