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Foreign Contribution (Regulation) Amendment Act 2010: A case of over-regulation or need of hour?

Since its notification on 29 September 2020, the Foreign Contribution Regulation Amendment Act (“FCRA Amendment”) has been in the news for many reasons. Before we look at the amendments carried out in 2020, it would be appropriate to have a look at the historical context of this law which has been in the statute book […]

Since its notification on 29 September 2020, the Foreign Contribution Regulation Amendment Act (“FCRA Amendment”) has been in the news for many reasons. Before we look at the amendments carried out in 2020, it would be appropriate to have a look at the historical context of this law which has been in the statute book for about 45 years. The Foreign Contribution Regulation Act, 1976 (“FCRA 1976”) was the first law to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain persons or associations, with a view to ensuring that parliamentary institutions, political associations and academic and other voluntary organisations, as well as individuals working in the important areas of national life, may function in a manner consistent with the values of a sovereign democratic republic, and for matters connected therewith. Like many other laws, the stakeholders faced many difficulties in complying with the provisions of FCRA 1976. In order to bring greater transparency in the dealings in foreign contribution and acceptance of foreign hospitality, the law was substantially overhauled and was substituted by the Foreign Contribution Regulation Act, 2010 (“FCRA 2010”).

While some of the provisions of FCRA 1976 required some rethinking, the extent of remodelling the law was clear from the preamble of FCRA 2010. One of the prominent objects of FCRA 2010 was to prohibit acceptance and utilisation of foreign contribution and foreign hospitality for any activities detrimental to the national interest. The radical change of the legislative mindset from ‘regulation’ to ‘prohibition’ was mired in political undertones. The new law emphasised defining restrictions on negative attributes and departed from enabling persons working in important areas of national life to function with values enshrined in the Constitution of India.

The ambit of FCRA 2010 is pervasive and all-encompassing in the field of foreign funding in the voluntary and social sector. It also provides the executive with power, to enforce a system of checks and balances.

At the outset it should be noted that under Section 3 of the FCRA 2010, the following persons are prohibited from accepting foreign contribution or foreign hospitality: candidates for election; correspondents, columnists, cartoonists, editors, owners, printers or publishers of news in print, audio or audio-visual or electronic communication mode; judges, Government servants or employees of any corporation or any other body controlled or owned by the Government; members of any legislature; any political party or office bearer thereof; organisations of a political nature; associations or companies engaged in the production or broadcast of audio news or audio-visual news or current affairs programmes through any electronic mode; individuals or associations which have been prohibited from receiving foreign contribution.

FCRA 2010 also empowers the Central Government to notify any organisation as an organisation of ‘political nature’. Further, the organisations registered under FCRA 2010 are mandated to renew their certification every five years.

While the changes revealed a paradigm shift, the obedience of this law has been dismal over the past several years. Needless to say, this has resulted in the cancellation of a significant percentage of registrations by the Ministry of Home Affairs, the governing ministry under FCRA 2010. As of October 2020, out of a total of 49,861 organisations registered under FCRA 2010, only 22,427 i.e. less than 45% are active as of date! Many organisations registered under FCRA 2010 have failed in submitting the returns for several years and their registrations have been either suspended or cancelled. Several organisations have also failed in periodically renewing their registrations, a feature which was introduced only in 2010. Organisations registered under FCRA 2010 have therefore suffered a lack of credibility due to the apathy towards compliance.

In order to enhance transparency, streamline and monitor the funds received by the organisations registered under FCRA 2010, and weed out the entities which were not utilising the foreign contribution for the purpose it was received, the recent amendment was brought about.

The FCRA Amendment Bill was passed by the Lok Sabha on 21 September 2020, by Rajya Sabha on 23 September 2020, and received the assent of the President on 28 September 2020. On 29 September 2020, it was published in the Official Gazette of India and notified on the same day.

The major changes brought upon by the recent amendment include:

• As noted above, Section 3 of FCRA 2010 includes the list of persons who are prohibited from receiving the contribution. The list has now been amended to include a ‘public servant’ as defined under the Indian Penal Code, 1860. Such addition will primarily prohibit persons, in the service or pay-roll of the Government or remunerated by fees or commission for the performance of any public duty for the Government, from receiving any foreign contribution. The amendment appears to be based on the presumption that acceptance of foreign contribution by such persons may prevent rational decision-making by those discharging public duty. It is also expected to prevent such public servants from being influenced by funding organisations in any manner.

• Section 7 of the FCRA 2010 has been amended to prohibit the transfer of any foreign contribution received by organisation registered under FCRA 2010 to any other entity including those who are also registered under FCRA 2010. Previously, such transfer of foreign contribution by person registered under FCRA 2010 to another person registered under FCRA 2010 was permitted. A transfer to organisation which was not registered under FCRA 2010 was permitted only after obtaining express approval from the government. All forms of transfer of foreign contribution are now disallowed without an exception. This amendment seeks to restrict NGOs from acting as fundraisers for other NGOs. It is pertinent to note that the Ministry of Home Affairs has been emphasising the need for utilisation of funds for the purpose of the grant and not deviating from such objective. It is apprehended that this amendment would severely impact the availability of resources at the grass-root level. In our view, this apprehension is somewhat misplaced. The law intends to prohibit “transfer” of foreign contribution and not de-legitimatise “utilisation”. An organisation registered under FCRA 2010 can certainly collaborate with other NGOs to fulfil its objective and use the foreign contribution for its purpose. Surely, some of the past foreign contribution utilisation practices and procedures will need to be realigned with the new normal under the amended FCRA regime.

• Section 8 of the FCRA 2010, has been amended whereby the deployment of foreign contribution towards ‘administrative expenses’ has been reduced from 50% to 20%. Rule 5 under Foreign Contribution (Regulation) Rules, 2011 prescribes what constitutes “administrative expenses”. Permitted administrative expenses include salaries, wages, travel expenses of the members of the Executive Committee or Governing Council; all expenses towards hiring and salaries, wages or any kind of remuneration paid (including the cost of travel) to personnel for management of the NGO activities; all expenses related to consumables like electricity and water charges, telephone charges, postal charges, repairs to premise(s) for NGO’s office; rent of premises, repairs to premises and expenses on other utilities; stationery and printing charges, office equipment, transport and travel charges of the members of the Executive Committee or Governing Council; the cost of accounting for and administering funds; expenses towards running and maintenance of vehicles; the cost of writing and filing reports; and legal and professional charges.

The purpose of such an amendment is to prevent the misuse of foreign contribution by some entities and to promote utilisation of such funds towards the objective of the grant as noted in their registration. The amendment would not only improve the transparency of utilisation of foreign contribution but also bring additional comfort to the contributors of funds that a substantial portion of their contribution will indeed be utilised for the stated objective and purpose. Considering that under the Companies Act, 2013, only 5% of the CSR contribution can be attributed to the administrative expenses of the NGOs, a 20% limit gives a reasonable budget for the NGO to be run professionally.

• Amendment to section 11 of FCRA 2010 introduces a summary enquiry procedure that can result in restriction on unutilised foreign contribution even when the enquiry is pending if the Central Government has a reason to believe that any entity registered under FCRA 2010 has contravened the provisions of FCRA 2010, based on any information or report. Such utilisation or receipt of remaining foreign contribution can now be done only after approval from the Central Government. The said amendment appears to be preventive in nature and empowers the Central Government to prevent illegal receipt and utilisation of foreign contribution at the initial stage itself. Pertinently, such power is already conferred on the Central Government under Section 13 of FCRA which deals with the suspension of the license under FCRA 2010, pending inquiry for contravention of FCRA 2010.

• The FCRA Amendment also enables an organisation registered under FCRA 2010 to voluntarily surrender its registration under the FCRA regime pursuant to the provisions of new Section 14A. Such surrender of registration would only be allowed by the Central Government if is satisfied that the said entity has not contravened any provisions of the FCRA after due inquiry and any asset received as the foreign contribution is vested to the authority designated under Section 15 of FCRA 2010. This shall help the entities to exit in an orderly manner when the purpose for which such entity was formed is fulfilled or has been rendered useless for any reason. Further, as the unutilised money shall remain with the designated authority, it shall become its responsibility to utilise it for the purposes which are in the interest of the nation.

• Another major amendment pertains to the maintenance of designated bank accounts for receiving foreign contribution under FCRA 2010. While the FCRA regime always required the foreign contribution to be received in a specified bank account notified by the authority under FCRA 2010, it was noticed that many NGOs had defaulted in updating their bank accounts, or in some cases, the banks lagged in upgrading the system for core banking facilities. In February 2017, the Ministry of Home Affairs had published a list of more than 3700 NGOs registered under FCRA 2010 who failed in maintaining bank accounts with core banking facility. Accordingly, in order to streamline the monitoring of the fund flow of foreign contribution received in India, section 17 of the FCRA 2010 was amended. On or before 31 March 2021, every entity registered under FCRA 2010 would be required to open a designated FCRA Account with State Bank of India, New Delhi Main Branch at 11, Sansad Marg, New Delhi – 110 001. The Central Government has clarified that the entities registered under FCRA 2010 will be permitted to operate their existing FCRA accounts in other banks up to the opening of the FCRA designated account with State Bank of India or 31 March 2021 whichever is earlier. Further, the foreign contribution can be transferred by the entity registered under FCRA 2010 in any other account for the utilisation of such funds. The amendment would enable the Central Government to track the inflow of foreign contribution more effectively in an orderly manner. In order to remove practical challenges faced by NGOs, the Central Government has clarified that the NGOs need not visit the New Delhi main branch of the SBI. Instead, they may approach the nearest SBI branch (or any other branch of their choice) for taking action with regard to opening their new account with the SBI.

• Most of the countries in the world recognise that companies, limited liability partnerships, or trusts can continue to function in an opaque manner. Therefore, it has become necessary for the Central Government to know the natural persons who control or manage such companies, societies or trusts. Continuing to comply with India’s international obligations, the FCRA Amendment now imposes stricter KYC norms on the office bearers or directors while seeking registration or renewal of registration under the FCRA regime. The office bearers or directors or other key functionaries are required to provide their Aadhaar number issued under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, or a copy of their passport or Overseas Citizen of India Card, in case of non-residents.

• Lastly, the FCRA Amendment would permit the Central Government to suspend the registration under FCRA 2010 for a period of 360 days instead of the erstwhile limit of 180 days. Any such executive powers cannot be exercised arbitrarily, and any such actions will continue to be subject to judicial review by courts.

By the time this article is published, a month would have elapsed since the notification of the FCRA Amendment. It is quite concerning that the Standard Operating Practice (“SOP”) for opening and operating the FCRA Accounts with State Bank of India has not been published. The NGOs will find it difficult to scramble compliance with the new procedures if there is any further delay in issuance of the SOP.

On the whole, the message is loud and clear, the NGOs receiving foreign contribution have to show greater transparency and respect the stricter compliance regime. The NGOs should also ensure they follow the best practices recommended by the Ministry of Home including:

• conducting appropriate due diligence about the foreign donor and the terms of the grant to ensure that no legal provisions are contravened;

accepting foreign contribu• tion only if the institution is registered under FCRA 2010 and the registration is subsisting in accordance with applicable law;

• ensuring that the institution is compliant with ongoing obligations, such as reporting and filing returns with the Ministry of Home Affairs to avoid suspension or prohibitory orders;

not deviating from the ob• jects of the institution;

not deviating from the purpose of the specific grant;

• not encouraging cash withdrawals;

• not transferring foreign contribution to other persons except as set out in the purpose of the grant; and

• not using the foreign contribution account for any domestic receipts.

The Ministry of Home Affairs on its part has come forward by issuing an advisory to the FCRA registered NGOs and announced that the funds received in their FCRA accounts, in State Bank of India, can be transferred to the other accounts of the organisation for utilisation or investments. It is pertinent that the Ministry of Home Affairs actively discourages FCRA registered institutions from investing foreign contribution in mutual funds or other speculative investments.

As noted above, the amendment to FCRA 2010 has been brought by the Central Government to strengthen the compliance mechanism and enhance transparency and accountability. Further, it gives power to the Central Government and authorities to clamp down on errant entities that do not follow the law as laid down under FCRA 2010. Vide this amendment, the Central Government/ authorities can effectively put a stay on utilisation of funds received under FCRA 2010 even if it has been received when the registration was effective though only after having reason to suspect that there is a contravention of the law and after an inquiry including the summary inquiry. This is a welcome change as such action was not clear under pre-amendment FCRA 2010 and such a bar could have been put only when the registration under FCRA 2010 was suspended. Since this is a matter of improving the checks and balances, it is expected that while taking such coercive action against an entity, the Central Government/ authority shall pass a speaking order which will give a chance to the alleged errant entity to put forward its case as well.

Like most other legislations at work, effective execution and implementation is the key to the success of the new FCRA regime in the social sector. It is also hoped that the new law will bring a new spirit of compliance-oriented NGOs to bring a lasting impression and measurable impact on the Indian social sector.

The authors are advocates at Khaitan & Co. Sharad Abhyankar (Partner) is part of the corporate practice at Mumbai, Vanita Bhargava (Partner) and Milind Sharma (Associate) are part of the Dispute Resolution Practice at Delhi.

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