Can CSR Funds Flow Through a Trust Connected to the Company's Directors?

Consider a private limited company that wants to meet its corporate social responsibility obligation by funding free eye-care camps. It proposes to route the money through a registered public trust whose trustees happen to be the company's own directors, and to have the camps conducted by an eyewear business that is a related party of the company. The activity is plainly charitable; the structure is where the legal difficulty lives. Two distinct questions are often conflated here: whether a director-linked trust can receive and deploy CSR funds (it can, subject to conditions), and whether a related party can conduct the CSR activity itself (on this, the law is conspicuously silent).

What Rule 4 Permits: The Implementing-Agency Framework

Section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014, as amended with effect from 22 January 2021, define who may carry out a company's CSR activities. Rule 4(1) provides:

"The Board shall ensure that the CSR activities are undertaken by the company itself or through—(a) a company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act [or] (b) a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government; or (c) any entity established under an Act of Parliament or a State legislature"

A registered public trust holding the specified income-tax registrations therefore qualifies as an implementing agency. Since 1 April 2021 there is an additional gateway: per the MCA's CSR FAQs (General Circular No. 14/2021), "every implementing agency, who intends to undertake any CSR activity, shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar". A trust that is not on the CSR-1 register cannot lawfully implement CSR.

Director-Trustees: Permitted, but Independence Is Expected

Nothing in Section 135 or Rule 4 prohibits a trust whose trustees are also directors of the contributing company. The MCA's FAQs do not restrict such trusts either. What the framework does demand is undiminished board oversight. Rule 5(2) requires the CSR Committee to formulate and recommend an annual action plan covering, among other things, the modalities of utilisation of funds and implementation schedules. And General Circular No. 14/2021 states:

"the Board of a company shall satisfy itself that the funds so disbursed have been utilised for the purposes and in the manner as approved by it and the Chief Financial Officer or the person responsible for financial management shall certify to the effect."

The dual role of director and trustee is thus a governance issue rather than a statutory bar: the CSR Committee must operate at arm's length from the trust, keep separate records of utilisation, and obtain certification that funds were applied to approved CSR purposes. It should be noted that the MCA has issued no specific guidance on the trustee-director dual role; best practice treats it as an independence concern even though the statutory position is unclear.

Where the Related Party Enters: Sections 2(76) and 188

The harder problem is the vendor. Section 2(76) of the Companies Act defines "related party" in relation to a company to include:

"(i) a director or his relative; … (iv) a private company in which a director or manager or his relative is a member or director; … (viii) any company which is a holding, subsidiary or an associate company of such company"

An eyewear company in which the CSR-spending company's directors hold membership or directorships, or which is a group associate, is a related party. Section 188(1) then requires the consent of the Board, by resolution, before a company enters into any contract or arrangement with a related party with respect to, among other things, "availing or rendering of any services". Engaging the related vendor to conduct eye camps is a rendering of services within clause (d). A board resolution is mandatory, and shareholder approval by special resolution is required where the transaction value crosses the thresholds in Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 — for service transactions, 10% of turnover.

Could the company argue that CSR spending sits outside Section 188 altogether? No authority supports that. Neither the courts nor the MCA have said CSR is exempt from the related party transaction framework. The accounting rules point the other way: the Companies (Accounts) Rules, 2014 require disclosure of related party transactions and specifically flag "contribution to a trust controlled by the company in relation to CSR expenditure" as a matter to be disclosed per the relevant Accounting Standard. Nor does the arm's-length escape hatch in Section 188 obviously help: that exemption covers transactions "in the ordinary course of business" on arm's length terms, but CSR is expressly excluded from the ordinary course of business by Rule 2(1)(d) of the CSR Rules. The MCA's General Circular No. 1/2016, which mentions arm's-length transactions, concerns ordinary business dealings with related parties, not CSR implementation structures.

The Two-Tier Structure and Its Compliance Gap

The proposed arrangement is really a two-tier structure: the trust as implementing agency (eligible under Rule 4(1)), and the related company as the entity actually conducting the camps (nowhere mentioned in Rule 4). That second tier is the critical unanswered question. Rule 4 neither forbids nor authorises a related party vendor conducting the CSR activity.

The contrast within Rule 4 itself is instructive. Rule 4(3) expressly permits engaging international organisations, but only "for the limited purposes of designing, monitoring, and evaluation of the CSR projects or programmes, or for capacity building of personnel of the company" — not to conduct the activity. The rule-maker knows how to authorise third-party involvement in narrow terms when it wants to. No equivalent permission exists for related parties, and the MCA has issued no FAQ or circular clarifying that CSR can be conducted by or through related parties on an arm's length basis.

The registration architecture sharpens the point. If the related company is the actual implementer of the eye camps, it must itself register as an implementing agency on Form CSR-1 — which a commercial eyewear business is unlikely to be able to do without restructuring as a Section 8 company or a dedicated trust. If, instead, the trust genuinely conducts the camps and the related company merely supplies eyewear or equipment as a vendor at market prices, the arrangement looks like ordinary CSR procurement. But the documentation must actually show that the trust, not the vendor, is the implementer, and that pricing is at arm's length; an implementing-agency label pasted over a vendor-run programme invites scrutiny at the Registrar of Companies.

What the 2021 Amendments Changed, and Pointedly Did Not

The Companies (CSR Policy) Amendment Rules, 2021, effective 22 January 2021, tightened the regime in three relevant ways: contribution to the corpus of any entity ceased to be admissible CSR expenditure; companies with an average CSR obligation of ₹10 crore or more must have completed projects impact-assessed by an independent agency; and "administrative overheads" was clarified to cover general management and administration expenses while excluding costs directly incurred on designing, implementing, monitoring and evaluating a CSR project.

What the amendments did not do is equally telling. They introduced no express prohibition on related parties conducting CSR, but nor did they grant permission — even though the same rules expressly authorise international organisations for limited purposes. The direction of travel, tightening fund flows to affiliated entities and requiring independent assessment, cuts against structures that could route benefit back to the corporate group. The absence of explicit permission, in a regime otherwise amended in detail, is a negative indicator for related party CSR.

The Activity Itself Is Safe: Eye Camps Under Schedule VII

None of this casts doubt on the eye camps as such. Item (i) of Schedule VII covers "eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation… and making available safe drinking water." The MCA directed in Circular No. 21/2014 that the Schedule be read generously:

"The entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule."

Eye camps and eye healthcare, including provision of eyewear and diagnostic services to underserved communities, fall squarely within preventive healthcare, and eye hospitals and eye-care camps are routinely cited as Schedule VII-eligible projects. The compliance exposure lies entirely in the implementation mechanism, not the object.

What Non-Compliance Costs

Section 135(7), inserted by the Companies (Amendment) Act, 2019 with effect from 21 December 2020, penalises failure to spend or transfer unspent CSR amounts: the company is liable to twice the amount required to be transferred to the Schedule VII fund or the Unspent CSR Account, or ₹1 crore, whichever is less; every officer in default is liable to one-tenth of that amount or ₹2 lakh, whichever is less (Section 135).

Misrouting is caught by a different net. Per the MCA's FAQ 8.4, "in case of non-compliance with any other provisions of the section or rules, the provisions of section 134(8) or general penalty under section 450 of the Act will be applicable" — a penalty of up to ₹10,000 plus up to ₹1,000 per day for continuing violations. The consequence is that penalties can follow even where the full 2% was technically spent, if the implementation structure breaches Rule 4 or Section 188. A Section 188 breach carries its own consequences for the directors concerned, including disqualification exposure. Enforcement is not theoretical: in the Registrar of Companies' adjudication against Comviva Technologies Limited (2021), penalties of ₹11,00,244 on the company and ₹55,012.20 on each defaulting officer were imposed for failure to transfer unspent CSR within the statutory six-month window.

So, Can It Be Done?

The trust leg of the structure is lawful: a registered public trust with the requisite income-tax registrations and a CSR-1 registration may implement CSR even if its trustees are the company's directors, provided board oversight and certification are real. The related party leg is where the ambiguity sits. No Supreme Court or High Court judgment has addressed whether CSR activities can be conducted through related parties, or whether Section 188 applies to CSR spend; the MCA has never said that arm's-length related party CSR is permissible; and audit and ROC scrutiny concentrates on CSR fund integrity. The arrangement is not per se prohibited, but it survives only if built defensively, with the paperwork demonstrating that the public, not the group, is the beneficiary.

Practical Takeaways

• Register the trust, not the vendor, as the implementing agency on Form CSR-1, and ensure the record shows the trust as the actual implementer of the camps.
• Treat the vendor engagement as a related party transaction: a board resolution recording pricing, scope and the justification for using a related party, and shareholder approval if the value crosses the Rule 15 threshold (10% of turnover for services).
• Commission an independent arm's-length pricing analysis comparing the vendor's rates for eyewear and camp services to market rates, and place it before the CSR Committee and the Board.
• Keep governance separation: CSR Committee oversight distinct from the trustees' management of the trust, periodic utilisation reports certified by an independent financial authority, and CFO certification of fund utilisation.
• Document that benefits flow to camp beneficiaries, and not to the company, the vendor or their shareholders; disclose the related party engagement in the annual CSR report and Form CSR-2.
• If the average CSR obligation is ₹10 crore or more, run the mandatory independent impact assessment for the project.
• If the governance burden is too high, consider a structural alternative: a wholly independent Section 8 company or CSR-dedicated trust as implementing agency, which can engage the vendor at arm's length with cleaner separation.

Key Authorities

1. Companies Act, 2013, Section 135 and Schedule VII — the CSR obligation, penalties under Section 135(7), and eligible activities. Source
2. Companies (Corporate Social Responsibility Policy) Rules, 2014 — Rules 2(1)(d), 4, 5(2) and 8(3), as amended by the Companies (CSR Policy) Amendment Rules, 2021 (effective 22 January 2021) — implementing agencies, CSR-1 registration, corpus prohibition and impact assessment.
3. Companies Act, 2013, Sections 2(76) and 188; Companies (Meetings of Board and its Powers) Rules, 2014, Rule 15 — related party definition, approval requirements and thresholds.
4. MCA General Circular No. 14/2021 dated 25 August 2021 (CSR FAQs) — board satisfaction and CFO certification; CSR-1; penalty position for misrouting. Source
5. MCA General Circular No. 21/2014 dated 18 June 2014 — liberal interpretation of Schedule VII. Source
6. ICSI, FAQs on CSR (28 April 2021) — 2021 amendment guidance, including the corpus and overheads changes. Source
7. MCA General Circular No. 1/2016 dated 12 January 2016 — arm's-length language in the context of ordinary-course related party transactions.
8. Comviva Technologies Limited, Registrar of Companies adjudication (2021) — penalties of ₹11,00,244 (company) and ₹55,012.20 (each officer) for unspent-CSR default.

This analysis reflects the law as at July 2026. It is published for general information and does not constitute legal advice.