Mergers & Acquisitions and CSR: Managing Compliance Through the Transition

Professional Knowledge Series | M&A Advisory | CSR Compliance

I. Executive Summary

Neither Section 135 of the Companies Act, 2013 nor the Companies (Corporate Social Responsibility Policy) Rules, 2014 contain detailed rules specifically for mergers, demergers, share acquisitions, or business transfers. So, the rules must be understood from the CSR framework, Sections 230 to 232, the terms of the specific scheme or transfer agreement, and the NCLT order. The main difference is between future CSR requirements, usually decided company-wise under Section 135, and existing CSR funds, project commitments, and liabilities, whose legal responsibility depends on the transaction type and related documents.

II. Legal and Regulatory Background

Section 135(1) applies the CSR test to the company based on its net worth, turnover, or net profit from the previous financial year. If Section 135 applies, the company must spend the amount required by Section 135(5). Any unspent amount not linked to an ongoing project must be transferred to a fund listed in Schedule VII within six months after the financial year ends. Amounts related to continuing projects must be moved within 30 days after the financial year to a special Unspent CSR Account and used within three financial years from the transfer date. Any leftover after that must be transferred to a Schedule VII fund within the legal time frame. The definition of an ongoing project under Rule 2(1)(i), including how long it can last, should be considered separately from the three-year spending period under Section 135(6).

Sections 230 to 232 allow an NCLT-approved scheme to transfer all or part of a company's business, property, and liabilities from the transferor to the transferee or resulting company. The legal effect depends on the exact wording of the approved scheme and the Tribunal's order: a merger usually transfers almost all assets and liabilities and dissolves the transferor without winding it up, while a demerger transfers only the specified business and liabilities. Section 232(6) requires the scheme to name an Appointed Date from which it is considered effective. The Effective Date is usually set in the scheme and depends on filing the NCLT order with the Registrar and meeting certain conditions. Until the scheme is active, the transferor is still a separate legal entity and must keep meeting its CSR obligations. Any claim that it operates 'in trust' for the transferee must be clearly stated in the scheme and is not automatic.

Current-law update: This article reflects the CSR framework as at 30 July 2026, including the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2026 and the corresponding amendment to Schedule VII notified on 27 May 2026 for subscription to zero-coupon, zero-principal instruments on the Social Stock Exchange. Those amendments expand an available CSR implementation route but do not alter the transaction-structure analysis set out below.

III. Key Provisions and Professional Analysis

3.1 Four Structures, Four Different Answers

The first analytical step is to identify the legal form of the transaction. Four structures require separate treatment:

• A scheme-based merger or amalgamation, in which the transferor is ordinarily dissolved.
• A demerger, in which an identified undertaking and specified liabilities move under the scheme.
• A share acquisition, in which only ownership or control changes while the target remains the same legal person.
• A contractual business or slump sale, which does not by itself create the statutory vesting produced by an NCLT-sanctioned scheme.

3.2 Merger and Amalgamation: Transfer Subject to the Scheme and NCLT Order

When an NCLT-sanctioned merger transfers all or most assets and liabilities and dissolves the transferor, the transferor's Unspent CSR Account balance and the related obligation to use those funds for CSR purposes usually pass to the transferee, as set out in the scheme and Tribunal's order. This should only be confirmed by those documents. The scheme should clearly mention statutory CSR balances, ongoing projects, project assets, implementing-agency contracts, records, and related liabilities. The existing timeline for using amounts transferred under Section 135(6) continues; the merger does not restart or extend it.

3.3 Demerger: Separate Future Applicability and Express Allocation of Existing Obligations

A demerger requires two distinct enquiries.

First, future CSR applicability must be examined independently for the demerged company and the resulting company under Section 135(1), by reference to the immediately preceding financial year legally relevant to each company after considering the scheme's Effective Date and the applicable financial statements. It is not simply a test of the current post-demerger balance sheet, nor should the pre-demerger CSR obligation be apportioned by turnover, asset value or profit without a legal and scheme-based basis.

Second, the treatment of an existing Unspent CSR Account, ongoing-project commitment, project asset or implementing-agency contract depends upon the allocation made in the scheme and the NCLT order. The scheme should expressly identify the company that will hold and utilise each balance and complete each project. In the absence of an express transfer, the conservative position is that the statutory obligation remains with the company that originally incurred it. Where an obligation is transferred, the existing Section 135 timelines should, as a conservative compliance position, be treated as continuing rather than commencing afresh.

3.4 Share Acquisition: The Target's Legal Identity and CSR Position Continue

In a share acquisition, the target remains the same legal person before and after the change of ownership or control. Its CSR applicability, historical defaults, Unspent CSR Account, ongoing projects, annual action plan, implementing-agency arrangements and reporting obligations therefore continue with the target. The acquisition does not require novation of every CSR contract merely because the shareholders change, although change-of-control clauses and changes in authorised signatories should be reviewed. If directors change, the Board should ensure that CSR responsibilities continue without interruption. Section 135(9) permits the Board to discharge CSR Committee functions where the amount required to be spent under Section 135(5) does not exceed Rs. 50 lakh; however, the proviso to Rule 3 requires a company having a balance in its Unspent CSR Account to constitute a CSR Committee and comply with Section 135(2) to (6).

3.5 Business or Slump Sale: Statutory Liability Ordinarily Remains With the Seller

A contractual business transfer or slump sale does not, by itself, produce the statutory vesting mechanism available under Section 232. The seller's annual CSR obligation and compliance relating to its Unspent CSR Account therefore ordinarily remain with the seller because they arise from the seller's status and financial thresholds as a company. A business transfer agreement may require the buyer to continue a community project, assume an implementing-agency contract, reimburse the seller or bear an agreed economic burden. Such an inter se allocation does not, without a statutory basis, discharge the seller from liability under Section 135. The buyer must also determine its own CSR obligations independently. The agreement should separately address project assets, records, personnel, community commitments, cooperation, indemnities and the consequences of any pre-completion CSR default.

3.6 The Appointed Date-to-Effective Date Gap: A Compliance Risk Window

A scheme may be deemed effective from its Appointed Date under Section 232(6), while becoming operational only on the Effective Date defined in the scheme after NCLT sanction, filing and satisfaction of stated conditions. During that interval, the transferor continues as a legal person and should continue approving its annual action plan, monitoring projects, making statutory transfers and completing disclosures through its own Board or CSR Committee, as applicable. The pendency of a scheme is not a safe basis for postponing a deadline under Section 135. The transferee may coordinate transition planning, but should not assume that such coordination replaces the transferor's statutory governance before the Effective Date. Promptly after effectiveness, the transferee should reconcile and integrate the transferred balances, projects, documents and disclosures in accordance with the scheme and the Tribunal's order.

3.7 CSR Governance, Annual Action Plan and Handover Controls

A good transition process must match all CSR ledger balances with bank statements and Board disclosures, identify the original transfer date and deadline for each amount in the Unspent CSR Account, and separate ongoing from non-ongoing shortfalls. It should confirm the Schedule VII classification and approved scope of every project, check if a CSR Committee is needed based on Section 135(9) and Rule 3, and update the annual action plan and, if the company's approach changes, the CSR Policy. It should also verify CSR-1 eligibility, ensure implementing agencies' contracts continue, collect utilisation records and required certifications, and keep impact-assessment reports where needed. The scheme, Board minutes, financial statements, and Board's report should all show the same allocation of responsibility. Projects can only be changed through the proper governance process, with good reason and Board approval if a CSR Committee is required. CSR funds cannot be used as general working capital just because the company or undertaking has been reorganised.

IV. Practical Comparison by Transaction Structure

V. Business Implications

5.1 For Acquirers in Scheme-Based Mergers

During merger due diligence, you should calculate every unspent amount, check if it is linked to an ongoing project, confirm the bank balance and original transfer date, and match the amount to financial statements, Board reports, and CSR disclosures. The scheme should clearly state how CSR balances, liabilities, contracts, records, and project assets are transferred. Transaction documents should also assign responsibility for any default before the Effective Date, including financial exposure under Section 135(7) if the spending or transfer requirements of Section 135(5) or Section 135(6) are not met.

5.2 For Companies Undertaking a Demerger

When carrying out a demerger, do not assume that the historical CSR position moves with the transferred undertaking in the same proportion as assets or revenue. The scheme should clearly assign each existing Unspent CSR Account balance and ongoing project commitment, and both companies should separately assess future CSR applicability under Section 135(1). Accounting entries, bank arrangements, implementing-agency documents, and Board disclosures should all match this allocation before the scheme takes effect.

5.3 For Buyers and Sellers in Share Acquisitions and Slump Sales

In a share acquisition, the buyer should make sure the target's CSR governance continues and include any unresolved CSR issues in completion accounts, indemnities, and post-closing action lists. In a slump sale, both parties should clearly address projects linked to the transferred undertaking and state that any contractual assumption or reimbursement does not automatically transfer the seller's statutory liability. If the buyer is expected to carry on a project, the documents should provide for access to records, transfer of project assets, implementing-agency consent, reporting, proof of utilisation, and cooperation with the seller's Board or CSR Committee.

VII. Conclusion

There is no single rule for CSR continuity that fits every merger or acquisition. A merger that dissolves the transferor, a demerger that splits an undertaking, a share acquisition that keeps the target's identity, and a business sale all have different legal results. It is also important to separate future company-level CSR requirements from where existing Unspent CSR Account balances, project commitments, contracts, and records will go.

Since the MCA has not given detailed guidance on this issue, the safest approach is to clearly state CSR allocation in the scheme or transaction documents, keep up compliance until the Effective Date, preserve the existing statutory timelines, and formally record the governance handover after completion. This helps prevent missing a restricted CSR balance or facing penalties for spending or transfer defaults under Section 135(7). You should still get legal advice for each transaction, especially if the scheme is unclear, the project is partly finished, or the allocation is different from the company that first had the obligation.