CSR funds for incubators: what Schedule VII allows

Every year, large Indian companies must spend part of their profits on corporate social responsibility. Incubators are one of the places that money can legally go, but the law draws the line carefully.

This guide covers what the Companies Act allows, which incubators qualify, how companies choose a partner, and what an incubator owes once the money arrives. It explains the rules; it is not legal advice, so check your case with a professional.

What does Schedule VII allow for incubators?

Schedule VII item (ix)(a) lets companies count contributions to incubators or research projects in science, technology, engineering and medicine as CSR, if the incubator or project is funded by the central or state government, a public sector undertaking or a government agency. Item (ix)(b) covers contributions to public research bodies.

The current wording comes from notification G.S.R. 525(E) of 24 August 2020, which substituted item (ix) in full. You can read the consolidated text in the Companies Act on India Code.

Item (ix)(b) lists publicly funded universities, the IITs, national laboratories and autonomous bodies under DAE, DBT, DST, the Department of Pharmaceuticals, AYUSH and MeitY, plus DRDO, ICAR, ICMR and CSIR, when they do research aimed at the Sustainable Development Goals. An incubator hosted by one of these may also fall within that sub-item.

Which incubators can receive CSR funds?

The clearest fit is an incubator funded by government in a science, technology, engineering or medicine field: an AIM Atal Incubation Centre, a DST NIDHI-TBI, a BIRAC BioNEST centre or a state-funded incubator. If the incubator also runs the CSR project, it must meet the rules for implementing agencies.

The CSR amendment rules of January 2021 (G.S.R. 40(E)) list who may implement CSR. Routes open to incubators are a section 8 company, trust or society set up by government; an entity set up by a central or state law; or one registered under sections 12A and 80G of the Income Tax Act with a three-year track record.

Incubator type	Fit with item (ix)(a)	Check before pitching
Government-funded, in a STEM field	Direct fit	Sanction letter from the funding scheme
Hosted by a public university or national lab	Possible fit under (ix)(b)	Host's status and research focus
Privately funded	Outside item (ix)(a)	Whether another Schedule VII item applies
Implementing the project itself	Needs agency status	Form CSR-1 and a CSR Registration Number

Every implementing entity must register with the Central Government through Form CSR-1, verified by a practising chartered accountant, company secretary or cost accountant. The system then issues a CSR Registration Number, which most companies will ask for in the first meeting.

Which companies have to spend on CSR?

Section 135 applies to a company with net worth of Rs 500 crore, turnover of Rs 1,000 crore or net profit of Rs 5 crore in the preceding financial year. It must spend at least 2% of its average net profits of the last three years on CSR, preferring the local area where it operates.

That local-area preference is worth using. A company with a plant or office near your incubator has a reason in law to look at you first. For where CSR sits among an incubator's other income lines, see our guide to how incubators make money.

How do companies choose an incubator for CSR?

Companies choose through their CSR committee, which must put each project in an annual action plan. The plan names the Schedule VII item, how the project will be executed, how funds will be used, how it will be monitored and reported, and any need or impact assessment. Incubators that make each of those easy get chosen.

In practice the committee looks for proof of eligibility, a project in plain Schedule VII language, a budget it can defend, and outputs it can report. Use the same numbers you already give scheme funders; our guide to incubator performance metrics covers which ones they trust.

One exclusion matters. The 2021 rules say CSR does not include activities in the company's normal course of business. A paid startup scouting or pilot programme for the company's own products is a separate deal, covered in our guide to corporate innovation programmes.

What does CSR reporting ask of an incubator?

The company's board must satisfy itself that the money was used as approved, and its chief financial officer certifies this. So the incubator should expect to supply utilisation certificates, progress reports, details of any assets bought, and data for impact assessment if the company is a large CSR spender.

• Overheads: the company's administrative overheads may not exceed 5% of its total CSR spend for the year, so keep project costs and general costs apart.
• Capital assets: a lab or equipment bought with CSR money must be held by a registered section 8 company, trust or society, by the beneficiaries, or by a public authority.
• Ongoing projects: a multi-year project may run up to three years beyond the year it starts. Money unspent on it moves to a special account within 30 days of the year end, under section 135(6).
• Impact assessment: a company with an average CSR obligation of Rs 10 crore or more must commission an independent assessment of projects of Rs 1 crore or more, at a cost capped at 5% of CSR spend or Rs 50 lakh.

A CSR proposal is read by a board that must later certify how every rupee was used. Write it for that reader.

How should an incubator prepare a CSR proposal?

Write the proposal backwards from the company's report. State the Schedule VII item you fall under and attach the evidence, then give a budget, timeline, output targets, asset ownership and a reporting calendar that follows the company's financial year. Keep it short enough for a committee meeting.

1. Eligibility pack: government funding sanction, registration documents, CSR Registration Number, and 12A and 80G certificates if they apply.
2. Project in their words: name item (ix)(a) or (b), the STEM field and the startups or research the money will reach.
3. Budget: separate programme costs, capital items and your own administration.
4. Outputs: startups supported, prototypes built, jobs and follow-on funding, with how each is counted.
5. Reporting calendar: quarterly updates, a year-end utilisation certificate and an asset register.

CSR money works best on top of a scheme grant, not instead of one. Our map of grants for incubators in India shows which central schemes fund the core first.

Questions

Can CSR funds be given to a private incubator?

Not under item (ix)(a) of Schedule VII, which covers incubators funded by the central or state government, a public sector undertaking or a government agency. A privately funded incubator would need its project to fit another Schedule VII item, and the company's legal team decides that, so take professional advice before you pitch.

Does an incubator need CSR-1 registration?

An entity that undertakes a CSR activity for a company, as an implementing agency, must register with the Central Government by filing Form CSR-1, under the CSR rules amended in January 2021. The form is verified by a practising chartered accountant, company secretary or cost accountant, and the system issues a CSR Registration Number.

Which companies have to spend on CSR in India?

Under section 135 of the Companies Act, 2013, a company with net worth of Rs 500 crore, turnover of Rs 1,000 crore or net profit of Rs 5 crore in the preceding financial year must spend at least 2% of its average net profits of the last three years on CSR.

What reports does a company need from a CSR-funded incubator?

The company's board must satisfy itself that the money was used as approved, and its chief financial officer certifies this. So expect requests for utilisation certificates, progress against outputs, details of any capital asset created, and, for large CSR spenders, data for an independent impact assessment.

Sources: India Code, Companies Act, 2013, section 135 and Schedule VII (as amended) · Gazette of India, MCA notification G.S.R. 525(E) substituting Schedule VII item (ix), 24 Aug 2020 · MCA, Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, G.S.R. 40(E), 22 Jan 2021 (gazette text)

For more on running an incubator in India, read the MyStartupValley blog or see MyStartupValley for incubators.