Archana Khosla Burman, Founder Partner, Vertices Partners
Vivek Jha, Associate Partner, Vertices Partners
Deep Shah, Associate, Vertices Partners
Background
The Foreign Contribution (Regulation) Act 2010 (“Act”) which was enacted in the year 2010, repealed and replaced the erstwhile Foreign Contribution (Regulation) Act, 1976. The primary objective of the enactment of the Act was to overcome the shortfalls and certain provisions of the Foreign Contribution (Regulation) Act, 1976.
The Act regulates the acceptance and utilization of foreign contribution in India for charity or philanthropic purpose and prohibits the same for any other activity which is detrimental to India’s national / social interest.
Need for the Amendment
Although inflow of foreign currency is considered good for the balance of payment purposes, the Indian government observed that the foreign contributions to NGOs were not appropriately utilized for development purposes and most of them were not even accounted properly. The statement of objects and reasons of the Amendment Act (as defined below) states that it was introduced to, first, curb the underutilisation of foreign contributions and, second, the non-compliance with the annual filing of returns and maintenance of accounts. Hence, to enhance transferability, control, and accountability, certain amendments have been made to the Act vide Foreign Contribution (Regulation) Amendment Act, 2020 (“Amendment Act”). The Amendment Act got the president’s assent on September 28, 2020 and has come into force on and from September 29, 2020.
Brief analysis of the Amendment Act
Prohibition to accept Foreign Contribution:
Under the Act, certain persons are prohibited to accept any foreign contributions / hospitality, like election candidates, editor or publisher of a newspaper, judges, government servants, members of any legislature, and political party, etc.
The Amendment Act has widened the scope of prohibition and extended the prohibition of acceptance of foreign contribution / hospitality to ‘public servants’ as defined under the Indian Penal Code. Public servant includes any person who is in service or pay of the government or remunerated by the government for the performance of any public duty.
The aforesaid prohibition of acceptance of foreign contribution / hospitality by ‘public servants’ shall now prevent those discharging public duty from being influenced through foreign funding and shall avoid any sort of interest other than the intended service to the public.
Transfer of foreign contribution:
Under the Act, the foreign contribution cannot be transferred to any other person unless such person is also registered to accept foreign contribution or has obtained prior permission under the Act to accept foreign contribution.
The Amendment Act prohibits the transfer of foreign contribution to any other person. The term person under the Act includes an individual, an association, or a registered company.
The said amendment may put an end to the transfer of foreign contributions made for illegitimate gains. However, it may simultaneously challenge the survival of small legitimate NGOs who are unable to raise funds on their own.
Reduction in use of foreign contribution for administrative purposes:
Under the Act, a person who receives foreign contribution must use it only for the purpose for which the contribution is received, subject to utilization of 50% (fifty percent) of the contribution for meeting administrative expenses. Administrative expenses are elaborated under Rule 56 of the Foreign Contribution (Regulation) Rules, 2011.
The Amendment Act has reduced the cap of utilization of foreign contribution for administrative purposes from 50% (fifty percent) to 20% (twenty percent). This will ensure that a substantial portion (i.e.at least 80%) of the foreign contribution received is utilized for philanthropic purposes and only a reasonable portion (i.e. 20%) of such funds is accounted for administrative expenses.
Restriction in utilization of foreign contribution:
Under the Act, if a person accepting foreign contribution is found guilty of violating any provisions of the Act, then the unutilized or unreceived foreign contribution may be utilized or received only with the prior approval of the Central Government.
The Amendment Act adds that the Central Government may also restrict usage of unutilized foreign contribution for persons who have been granted prior permission to receive such contribution, if, based on a summary inquiry, and pending any further inquiry, the government believes that such person has contravened provisions of the Act. The said amendment appears to be preventive in nature to avoid any damage that can be caused by persons whose activities are presumed to be detrimental to the interest of the nation.
Aadhaar for registration:
The Act states that a person may accept foreign contribution if they have: (i) obtained a certificate of registration from Central Government, or (ii) not registered, but obtained prior permission from the Central Government to accept foreign contribution. Any person seeking registration (or renewal of such registration) or prior permission for receiving foreign contribution must make an application to the Central Government in the prescribed manner.
The Amendment Act adds that any person seeking prior permission, registration, or renewal of registration must provide the Aadhaar number of all its office bearers, directors, or key functionaries, as an identification document. In case of a foreigner, they must provide a copy of the passport or the overseas citizen of India card for identification. As evident, the said amendment proposes to enhance transparency by identifying the natural persons who ultimately manage the foreign fund and affairs of the organization.
FCRA Account with SBI:
Under the Act, a registered person must accept foreign contribution only in a single branch of a scheduled bank specified by them. However, they may open more accounts in other banks for utilization of the foreign contribution.
The Amendment Act states that foreign contribution must be received only in an account designated by the bank as “FCRA account” in such branch of the State Bank of India, New Delhi, as notified by the Central Government. No funds other than the foreign contribution should be received or deposited in this account. The person may open another FCRA account in any scheduled bank of their choice for keeping or utilizing the received contribution. The said amendment shall facilitate centralization, supervision and monitoring of all the foreign contribution flowing in the country by the Central Government.
Renewal of License:
Under the Act, every person who has been given a certificate of registration must renew the certificate within six (6) months before the expiry of the certificate of registration.
The Amendment Act provides that the Central Government may conduct an inquiry before renewing the certificate to ensure that the person making the application: (i) is not fictitious or benami, (ii) has not been prosecuted or convicted for creating communal tension or indulging in activities aimed at religious conversion, and (iii) has not been found guilty of diversion or misutilization of funds, among others conditions.
Surrender of Certificate:
The Amendment Act adds a provision allowing the Central Government to permit a person to surrender their registration certificate, provided the Central Government (post an inquiry) is satisfied that such person has not contravened any provisions of the Act. Post surrender the management of its foreign contribution (and related assets) shall vest with the authority prescribed by the Central Government.
Extension of the Duration of Suspension of Registration:
Under the Act, the government may suspend the registration of a person for a period not exceeding 180 days. The Amendment Act provides that the suspension can be extended to additional 180 days (i.e. total of one year).
Conclusion
The Amendment Act has not gone well with the NGO sector. While at one end the legislative intent behind the enactment of Amendment Act seems quite valid as it seeks to bring more transparency and accountability in acceptance and utilization of foreign contribution, but on the other end, it is being argued that the Amendment Act may hamper the activity of small NGOs and may even challenge their survival.
Archana Khosla Burman is a Founder Partner of VERTICES PARTNERS. Her specialization areas are Corporate Commercial Law, Venture Capital and Private Equity Investments. She also has proven skill expertise in Mergers & Acquisitions, Joint Ventures and Strategic Acquisitions across multiple sectors.
Vivek Jha is an Associate Partner at VERTICES PARTNERS.
Deep Shah is a Associate at VERTICES PARTNERS.
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