Section 135 of the Companies Act: A First-Time CSR Setup Guide for Indian Companies (2026)

The financial year a company first crosses the Section 135 threshold is a consequential one. The CFO has confirmed during the year-end review that the company has met one of the statutory thresholds. The Board is now formally responsible for constituting a Corporate Social Responsibility Committee, formulating a CSR policy, identifying programmes, and ensuring the company spends at least the prescribed percentage of average net profit on CSR activities aligned to Schedule VII.

For most first-time CSR companies in India, the months between threshold confirmation and the next financial year-end are when the operational architecture gets built. The CSR Committee is constituted. The policy is drafted. The annual action plan is formulated. The implementation partner is identified. The disbursement happens. And the first annual CSR report enters the Board's report under Section 134(3)(o).

This article walks through how Indian companies should approach the first-time CSR setup after crossing the Section 135 threshold. It covers the threshold calculation, the governance framework, the policy and annual action plan drafting, the partner selection process, the first-year programme structuring, and the compliance documentation that supports the company's first CSR audit.

It is written for the CFO, the Company Secretary, the CSR Committee chair, the head of Corporate Affairs, and the Board members who collectively own the first-time CSR setup decision. By the end, you will have a clear sequence for the first-year setup, an understanding of what each component requires operationally, and a working reference for how to make the first CSR cycle deliver compliance and outcome value at the same time.

Important note: This article provides operational guidance on first-time CSR setup under the Companies Act 2013. The Section 135 framework is a serious compliance regime with statutory consequences for non-compliance. Every threshold calculation, governance constitution, policy drafting, and disbursement decision should be reviewed and approved by the company's Chartered Accountant, Company Secretary, and Legal counsel before implementation. This article is informational and is not a substitute for professional advice on your specific company's situation.

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Section 135 Eligibility: The Three Threshold Tests

Section 135 of the Companies Act 2013 mandates the CSR obligation for companies that meet any one of three financial thresholds during any of the immediately preceding financial year. A company that crosses any of these triggers becomes liable to constitute a CSR Committee, formulate a CSR policy, and spend on CSR.

The three thresholds, as currently in force in 2026, are:

Threshold 1: Net worth. A net worth of Rs 500 crore or more during any of the immediately preceding financial year.

Threshold 2: Turnover. A turnover of Rs 1,000 crore or more during any of the immediately preceding financial year.

Threshold 3: Net profit. A net profit of Rs 5 crore or more during any of the immediately preceding financial year.

Crossing any one of the three thresholds in any of the immediately preceding financial year triggers the Section 135 obligation. The company need not cross all three; one is sufficient.

The thresholds apply to all categories of companies covered by the Companies Act, including private limited companies, public companies (listed and unlisted), foreign company subsidiaries, and government companies, with specific provisions applicable to each. Section 135(1) and the Companies (CSR Policy) Rules 2014 are the relevant references.

The First-Time CSR Setup: A Sequenced Operational Approach

Companies that cross the Section 135 threshold for the first time often face an operational compression because the timeline between threshold confirmation and the first compliance milestones is shorter than expected. A sequenced approach, broken into six stages, reduces the compression and supports a clean first-year CSR cycle.

Stage 1: Threshold confirmation and Board awareness

The first stage is confirming that the company has crossed the Section 135 threshold based on the audited financials of the immediately preceding financial year. This is typically done during the year-end audit cycle, with the CFO and statutory auditor jointly verifying the threshold position.

Once confirmed, the Board is informed in the next Board meeting. The Board's awareness should include the threshold calculation, the operational implications for the next year, and the proposed timeline for setting up the CSR governance framework. This early Board awareness is important because Section 135 imposes obligations on the Board itself, not just on management.

Stage 2: CSR Committee constitution

Section 135(1) requires the Board to constitute a CSR Committee. The Committee must consist of at least three directors, of which at least one should be an independent director. For private companies and companies that are not required to appoint an independent director, the Committee may be constituted with two or more directors.

The Committee's terms of reference, as prescribed under Section 135(3), include formulating and recommending the CSR policy, recommending the amount of expenditure to be incurred on CSR activities, and monitoring the CSR policy's implementation. The Committee is the governance body that the Board relies on for CSR decisions.

The Board resolution constituting the Committee should include the names and roles of the members, the terms of reference, the meeting cadence (typically quarterly or as required), and the reporting line to the Board. The resolution is then filed appropriately with the MCA as part of the Board's regulatory filings.

Stage 3: CSR policy formulation

Once the Committee is constituted, its first substantive task is formulating the company's CSR policy. The policy is a written document that the CSR Committee recommends to the Board, and the Board approves.

The policy should include the company's overall CSR philosophy, the focus areas aligned to Schedule VII clauses, the cause areas the company prioritises, the geographic focus where applicable, the implementation approach (in-house, through implementation partners, or both), the governance and monitoring structure, the annual CSR action plan framework, and the public disclosure approach.

The policy is uploaded to the company's website (where the company has one) under Section 135(4)(a) and forms part of the public record. The Board's report under Section 134(3)(o) references the policy.

Stage 4: Annual action plan

The annual action plan is a separate operational document that the Companies (CSR Policy) Amendment Rules 2021 introduced as a mandatory deliverable. The Plan, recommended by the CSR Committee and approved by the Board, includes the list of CSR projects or programmes that the Board intends to undertake during the financial year, the manner of execution (whether directly or through implementation partners), the modalities of utilisation of funds, the implementation schedules, and the monitoring and reporting mechanism for the projects.

The Annual Action Plan is the operational document that turns the CSR Policy's principles into specific projects with budgets, timelines, and partners. For first-time CSR companies, the Annual Action Plan typically covers two or three priority projects in the first year, scaling up in subsequent years as the programme matures.

Stage 5: Implementation partner identification and onboarding

Most first-time CSR companies, particularly mid-sized companies, operate through implementation partners (Trusts, Societies, or Section 8 Companies that hold valid 12A, 80G, and CSR-1 registrations). Section 4(1) of the Companies (CSR Policy) Rules 2014 specifies the eligibility criteria for implementation partners.

The implementation partner identification process for first-time CSR companies typically takes three to six months from initial outreach to MoU signing. The process includes identifying potential partners aligned to the company's focus areas, conducting due diligence on the shortlisted partners, agreeing on programme structure and budget, and signing the MoU.

For companies in their first CSR year, working with an experienced implementation partner generally delivers better outcomes than running a programme entirely in-house. The partner brings programme design experience, beneficiary access, documentation discipline, and the operational infrastructure that takes years to build internally.

Stage 6: Disbursement and execution

Once the partner MoU is signed and the Annual Action Plan is approved, disbursement follows the agreed schedule. The implementation partner runs the programme, captures documentation continuously, issues periodic Utilization Certificates, and reports on outcomes against the milestones agreed in the MoU.

For the first year, regular review meetings between the company's CSR Committee or CSR coordinator and the implementation partner (typically monthly or quarterly) keep the programme on track and surface any operational adjustments needed.

The CSR Spend Calculation: Two Percent of Average Net Profit

Section 135(5) requires the Board to ensure that the company spends, in every financial year, at least two percent of the average net profit of the company made during the immediately preceding three financial years on CSR activities aligned to Schedule VII.

The two-percent calculation is the foundational financial obligation under Section 135. Several operational considerations support an accurate calculation.

The "average net profit" calculation. Section 135(5) defines net profit by reference to Section 198 of the Companies Act, which sets out specific inclusions and exclusions. The CFO and statutory auditor jointly calculate the Section 198 profit for each of the immediately preceding three years and average them. The two percent of this average is the minimum CSR spend obligation for the current financial year.

The "immediately preceding three financial years" reference. For a company first crossing the threshold, the three-year reference is the three financial years prior to the current year. If the company has not been in existence for three years, the calculation is based on the years it has been in existence.

Treatment of unspent amounts. If the company spends less than the prescribed amount in any financial year, Section 135 specifies treatment depending on whether the amount relates to an ongoing project. Unspent amounts not relating to ongoing projects must be transferred to a fund specified in Schedule VII within six months of the end of the financial year. Unspent amounts relating to ongoing projects must be transferred to an "Unspent CSR Account" with a scheduled commercial bank within thirty days of the end of the financial year, and used for the project within three financial years from the date of transfer. This is one of the most consequential operational provisions of Section 135 and merits specific Legal team review.

The relationship between net profit and CSR-2 filing. Form CSR-2, introduced in the 2022 amendments, requires every Section 135 company to file annually with the MCA. The CSR-2 filing captures the financial details of the company's CSR obligation and spend for the year. First-time CSR companies should anticipate the CSR-2 filing requirement when planning the first-year cycle.

The Governance Architecture: Roles and Responsibilities

The Governance Architecture: Roles and Responsibilities

Section 135 distributes responsibilities across the Board, the CSR Committee, and management. Understanding the architecture helps first-time CSR companies set up the right operational structure.

The Board's role. Under Section 135 and the related Rules, the Board is responsible for approving the CSR policy on the recommendation of the CSR Committee, ensuring that the activities included in the CSR policy of the company are undertaken, ensuring the company spends at least two percent of average net profit on CSR activities aligned to Schedule VII, approving the Annual Action Plan, and including the CSR-related disclosures in the Board's report under Section 134(3)(o).

The CSR Committee's role. The Committee formulates and recommends the CSR policy, recommends the amount of CSR expenditure, monitors the CSR policy's implementation, and recommends the Annual Action Plan to the Board. The Committee meets at the cadence required to discharge these responsibilities, with meeting minutes and resolutions recorded.

The CFO's role. Under Rule 4(5) of the Companies (CSR Policy) Rules 2014, the Chief Financial Officer (or the person responsible for financial management) is required to certify that the funds disbursed by the company under CSR have been utilised for the purposes and in the manner approved by the Board. This CFO certification is foundational to the company's annual CSR compliance.

The Company Secretary's role. The Company Secretary supports the Board and the CSR Committee on procedural and compliance matters, including the timely filing of MCA forms (CSR-1 registration verification of partners, CSR-2 annual filing, Board's report disclosures), and the maintenance of CSR-related records and resolutions.

The CSR coordinator or in-house CSR team's role. For companies that have an in-house CSR team or designated CSR coordinator, this role manages the operational interface between the company's governance bodies and the implementation partners. The role includes partner onboarding, programme oversight, documentation review, periodic reporting, and supporting the CSR Committee's monitoring function.

The First-Year Programme Structure: Practical Recommendations

First-time CSR companies often face a choice between spreading the budget thinly across many small projects or concentrating it on a few focused projects. The operational experience across the Indian sector suggests focused programming generally delivers better first-year outcomes.

Practical recommendation 1: Two to three priority projects in the first year. For a first-year CSR budget of Rs 50 lakh to Rs 5 crore, two to three projects spread across two or three Schedule VII clauses typically produce the best balance between focus and learning. Spreading across more than four projects in year one usually results in shallow execution.

Practical recommendation 2: One geography or two geographies maximum. Geographic concentration in the first year supports learning, partner relationship building, and field operations. Spreading across many states or districts in year one creates coordination overhead that diminishes outcome quality.

Practical recommendation 3: Mix of cause areas aligned to Schedule VII. The two or three projects should align to two or three Schedule VII clauses. Common combinations for first-year CSR companies include education + skill development (clauses ii and ii), or environmental sustainability + rural development (clauses iv and x), or healthcare + women's empowerment (clauses i and iii), depending on the company's priorities.

Practical recommendation 4: Working with an established implementation partner. Year one is not the time to build implementation infrastructure from scratch. An experienced implementation partner with documentation discipline, multi-state operational capability, and BRSR-aligned reporting (where the company is in BRSR scope) substantially accelerates the first-year cycle.

Practical recommendation 5: Conservative timeline assumptions. The time from policy approval to first disbursement is typically four to six months for first-time CSR companies, longer than most management teams initially expect. Building this realistic timeline into the year's compliance calendar prevents end-of-year scrambles.

The First-Year Compliance Calendar

A first-time CSR company can structure the year around six compliance milestones.

Q1 of the financial year (April to June). Threshold confirmation following year-end audit. Board awareness of the Section 135 obligation. Constitution of the CSR Committee through Board resolution. Initial work on CSR policy drafting.

Q2 (July to September). CSR policy approved by the Board on Committee recommendation. Annual Action Plan drafted with two or three priority projects. Initial implementation partner identification and outreach. Due diligence and shortlisting begin.

Q3 (October to December). Final implementation partner selection. MoU drafting, legal review, and signing. First disbursement to the partner. Programme execution begins. CSR Committee monitoring meeting cadence established.

Q4 (January to March). Programme execution continues. First Utilization Certificates received from the partner. Year-end documentation consolidation. Preparation for Board's report disclosure under Section 134(3)(o). CSR-2 filing preparation. Statutory audit support for the first CSR cycle.

This calendar is indicative. Specific timelines vary based on when the threshold is crossed, when the CSR Committee can be constituted given Board scheduling, and how quickly the partner identification process moves. Companies that compress this calendar often find the year-end documentation and Board report disclosure stretched.

Common First-Year CSR Mistakes and How to Avoid Them

Across first-time CSR companies in India, six recurring mistakes account for most year-one compliance and outcome challenges.

Mistake 1: Delaying CSR Committee constitution. Some first-time companies wait until the second half of the financial year to constitute the CSR Committee. By then, the runway for partner identification and disbursement is too short. Constituting the Committee in Q1, immediately after threshold confirmation, gives the year a working start.

Mistake 2: Drafting the CSR policy as a generic template. Templated CSR policies that do not reflect the company's actual priorities, focus areas, and intended programme work create operational ambiguity. The policy should be drafted in alignment with the company's strategic intent and the projects the Board actually wants to undertake. Templates as starting references are useful; templates as final documents are not.

Mistake 3: Selecting an implementation partner under time pressure. Companies that rush the partner identification process in Q4, under year-end disbursement pressure, often choose partners they would not have selected with more time. Partner selection in year one establishes the partnership rhythm for years to come; investing time upfront pays dividends.

Mistake 4: Spreading the budget too thin. First-year budgets spread across five or six small projects often deliver shallow execution and weak documentation. Concentrating on two or three projects strengthens partnership focus, partner relationships, and outcome quality.

Mistake 5: Underestimating documentation requirements. First-time CSR companies sometimes treat documentation as a back-office task. The reality is that the documentation produced in year one feeds the statutory audit, the Board's report, the CSR-2 filing, and (for listed companies) BRSR Principle 8 disclosure. Building documentation discipline into the partner MoU from day one prevents year-end scrambles.

Mistake 6: Not anticipating unspent amounts. If the year's spend falls below the two percent obligation, the unspent CSR amount provisions of Section 135 apply. First-time CSR companies that haven't anticipated unspent provisions often face year-end procedural compression. Building unspent contingency planning into Q3 reviews prevents Q4 surprises.

The Documentation a First-Year CSR Company Should Maintain

Year-one CSR documentation falls into seven categories. Maintaining each from the start of the financial year supports clean compliance and audit readiness.

Category 1: Governance documents. Board resolution constituting the CSR Committee. CSR Committee terms of reference. CSR Committee meeting minutes for all meetings during the year. Board resolutions approving the CSR policy and Annual Action Plan.

Category 2: Policy and plan documents. The CSR Policy (publicly disclosed on the company website). The Annual Action Plan with project-wise budgets, timelines, and execution modalities.

Category 3: Partner-related documents. Implementation partner due diligence records. Partner registration verification (Trust/Society/Section 8 certificate, 12A, 80G, CSR-1, FCRA where applicable). Signed MoU with the implementation partner. Any amendments to the MoU during the year.

Category 4: Financial documents. Calculation of Section 198 profit and the average net profit for the immediately preceding three financial years. Calculation of the two percent CSR obligation. Disbursement records to the implementation partner. Bank statement extracts evidencing disbursement. Utilization Certificates issued by the partner.

Category 5: Programme documentation. Activity records, photographs (ideally GPS-tagged), beneficiary records, and outcome data captured continuously during programme execution. Periodic progress reports from the partner. Site visit notes and any field verification observations by the company's CSR coordinator or CSR Committee members.

Category 6: Compliance filings. CSR Committee composition disclosed under Schedule V Part C of the Companies Act. CSR-2 form filed with the MCA. Board's report including CSR disclosures under Section 134(3)(o). For listed companies, the BRSR Principle 8 disclosure and supporting data.

Category 7: Audit support. Documentation supporting the statutory auditor's review of CSR compliance. CFO certification under Rule 4(5). Treatment of any unspent amount if applicable.

A first-time CSR company that maintains all seven categories from Q1 through Q4 cycles cleanly through the first-year compliance and statutory audit. A company that scrambles at year-end to assemble documentation often faces queries that could have been avoided.

A Note on Listed Companies and BRSR Integration

For listed companies first crossing the Section 135 threshold, the CSR setup intersects with the SEBI Business Responsibility and Sustainability Reporting framework. BRSR Principle 8 (responsible and inclusive growth) requires disclosure on CSR projects, beneficiaries reached, geographies covered, and outcome data.

First-year CSR programmes should be designed with BRSR-readiness in mind. The implementation partner's documentation should capture beneficiary disaggregation, geographic specificity, and outcome data continuously. The partnership MoU should reference BRSR-aligned reporting cadences. The annual review with the partner should include a BRSR data quality check before the year's filing window.

Listed companies that integrate BRSR considerations into the first-year setup avoid retrospective data assembly during the BRSR filing cycle, which is exactly when reporting risks emerge.

A Note on Professional Review

This article walks through the first-time CSR setup framework based on the Companies Act 2013, the Companies (CSR Policy) Rules 2014 with amendments, and observed practice in the Indian sector as of April 2026. CSR compliance is a serious legal and financial regime with statutory consequences for non-compliance.

Every threshold calculation, governance constitution, policy drafting, partner selection, disbursement, and unspent amount treatment described here should be reviewed and approved by the company's Chartered Accountant, Company Secretary, statutory auditor, and Legal counsel before implementation. Specific provisions of Section 135 and the Rules continue to evolve through MCA circulars and amendments; verify against current text and circulars before acting.

The article is operational guidance, not legal or accounting advice. For any specific decision on your first-year CSR setup, work with your professional advisors who know your company's situation in detail.

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How Marpu Foundation Supports First-Time CSR Companies

At Marpu Foundation, we have supported many Indian companies in their first year of CSR compliance. The companies we partner with in their first cycle benefit from our operational discipline on documentation, our Schedule VII alignment expertise across all 12 clauses, our BRSR-aligned reporting for listed company partners, our multi-state operational capability across 23+ Indian states, and our sustained partnership relationships that compound across years.

Our 85 percent partner retention rate, in a sector where the Indian average is closer to 30 percent, is built substantially on the first-year experience. Companies that begin their CSR journey with structured partnership and documentation discipline find their second year and beyond considerably easier.

For companies first crossing the Section 135 threshold and looking for an implementation partner with experience supporting first-year setups, we would be glad to begin a conversation. Send us a brief note on your focus areas, your geographies, your budget range, and your timelines. We respond within two working days with our documentation package, our project portfolio, our Schedule VII alignment references, and a programme proposal aligned to your priorities.

To begin that conversation, write to us at connect@marpu.org or visit marpu.org.

For Boards, CSR Committees, and CFOs preparing for first-year CSR setup, the six-stage approach above is the working reference. Constitute the Committee early. Draft the policy with substance. Select the partner with care. Build documentation from day one. The compounding effect over two to three years is considerable.