The Foreign Contribution (Regulation) Act, 2010, and the rules framed thereunder regulate ‘foreign contribution’. This post examines how heightened policing calls for stringent compliance by entities receiving ‘foreign contribution’.
Evolving regulatory framework for ‘foreign contributions’
The first law to regulate ‘foreign contributions’ in India, the Foreign Contribution (Regulation) Act of 1976 (“Old Regime”), was passed during the Emergency to safeguard against the misuse of ‘foreign contributions’ for activities that may be detrimental to ‘national security’.[1] This was thereafter replaced by the Foreign Contribution (Regulation) Act, 2010 (“FCRA”). The Ministry of Home Affairs (“MHA”) said that the FCRA was an improvement over the Old Regime, “as more stringent provisions have been made in order to prevent misutilisation of the foreign contribution received by the associations”.[2]
Under the FCRA, ‘foreign contribution’ has broadly been defined as donation, delivery or transfer made by a ‘foreign source’.[3] Further, ‘foreign source’ has been defined broadly to include inter alia a foreign company/ corporation, foreign government, international agency[4], a foreign citizen, and also Indian companies with more than 50% of their shareholding being held by a foreign entity[5]. It is pertinent to note that while there are no restrictions on ‘foreign source’, the FCRA regulates ‘foreign contribution’ in mainly two ways – firstly, it creates an embargo on the receipt of ‘foreign contribution’ by certain persons/ entities[6], and secondly, it creates a comprehensive compliance regime for those entities that are not barred from receiving ‘foreign contribution’ in India.
Stringent policing calls for heightened compliance
The government seeks to regulate foreign contributions under the FCRA inter alia to prevent misuse (and protect India’s national security) and also work toward the ‘AatmaNirbharBharat Abhiyan’, i.e., making India ‘self-reliant’. Interestingly, while logically, one would assume that becoming self-reliant would not imply excluding financial support for India’s social sector (which is also not the object or intent behind the FCRA), the regulatory thresholds created by the FCRA, along with the stringent policing, have created an atmosphere where stakeholders have to ensure spirit and letter compliance to the fullest extent, failing which they may lose their ability to obtain and utilise foreign contributions/donations. In the recent past, the government has increased control and scrutiny over ‘foreign contribution’ via the FCRA, largely in the realm of the following:
Increased cancellations/ suspensions of FCRA registrations and approvals: There has been an increased crackdown on entities that are receiving ‘foreign contributions’. The MHA has cancelled a staggering 20,694 FCRA licences[7], which include inter alia international charities/ NGOs such as Greenpeace,[8] Amnesty International,[9] etc. Owing to national security concerns, reasoned orders are not published, making it difficult for entities to challenge the decision since cancellations/ suspensions could range from being on account of procedural non-compliances to indulging in ‘political activities’ prohibited under the FCRA.[10] Furthermore, since the FCRA does not include stipulated timelines for grants/ rejection of approvals/ permissions/ registrations, it can disrupt implementation of many projects that rely on ‘foreign contributions’. It is pertinent to note here that unlike many other legislations, for the FCRA, spirit and letter compliance is a must, and consequently, the smell test has invariably acquired a much higher threshold. It is, therefore, crucial that entities receiving foreign contribution are more conservative in how they approach their FCRA compliances.
Prohibition on sub-grants/ sub transfers of ‘foreign contribution’: The MHA amended the FCRA in 2020, vide the Foreign Contribution (Regulation) Amendment Act, 2020 (“2020-Amendment”), and introduced inter alia a complete prohibition on sub-grants/ sub-transfers by amending Section 7 to read: “no person who (a) is registered and granted a certificate or has obtained prior permission under this Act; and (b) receives any foreign contribution, shall transfer such foreign contribution to any other person”. The 2020-Amendment, including the amendment to Section 7 of the FCRA, was challenged across various High Courts in India and ultimately it was considered by the Supreme Court of India (“SC”).
In Noel Harper v. Union of India,[11] the SC while staying most of the challenges before the various High Courts, upheld the 2020-Amendment, almost in its entirety. The petitioners argued that the prohibitions on sub-transfers/ sub-grants was not constitutional and violated Articles 14, 19 and 21 of the Constitution of India. However, the SC found “it imperative for the recipient of foreign contribution to utilise the same “itself” for the designated or specified purposes for which it was so permitted” and further that since “there had been cases of successive transfers and creation of a layered trail of money, making it difficult to trace the flow and final utilisation” to enhance transparency and accountability in “the matter of acceptance and utilisation of foreign contribution”.[12] Further, the SC noted that “foreign contribution is qualitatively different from foreign investment. Receiving foreign donation cannot be an absolute or even a vested right”.[13] The SC upheld the validity of the amendment to Section 7 of the FCRA, holding that “the rationale of Section 7 as amended, inter alia, is that the donor (foreign source) is made fully aware of the definite purposes already declared by the recipient and permitted by the competent authority and corresponding obligation upon the recipient regarding utilisation of the funds itself for stated purposes and none else”.[14] Finally, the SC held that “there is no fundamental right vested in anyone to receive foreign contribution (donation) or foreign exchange; and that the purport of the Principal Act and impugned amendments are only to provide a regulatory framework and not one of complete prohibition”.[15]This amendment could have unintended consequences, such as increased costs for the Indian entities receiving ‘foreign contribution’, which may cause large NGOs/ NPOs to rethink their collaborations and partnerships with smaller functionaries, who could now be put out of commission since they would find it difficult to get ‘foreign’ funding due to their inability to showcase credibility/ impact on a global scale and also for the Indian NGOs/ NPOs as they are now restricted from sub-granting/ sub-transfers.
The 2020-Amendment & reduction in annual cap on administrative expenses from 50% to 20% of ‘foreign contribution’ received in a financial year:[16] While the intent behind this amendment seems to be to ensure that most of the ‘foreign contribution’ is utilised and spent directly for the benefit/ betterment of society, the amendment has heightened the regulatory threshold by firstly dictating the ratio of permissible spending on the broadly defined ‘administrative expenses’ and impliedly reducing the autonomy of the receiving entity, and secondly, by mandating that any ‘administrative expenses’ over the 20% threshold would require prior approval.
Additional amendments:
The MHA has recently amended the rules under the FCRA. It released the Foreign Contribution (Regulation) Amendment Rules, 2023 (“2023-Amendment”), on September 22, 2023, which contrary to stakeholder expectation, has only pushed the threshold of regulation by amending Form FC-4 to include a more specific disclosure requirement pertaining to certain details of ‘moveable assets’ and ‘immovable properties’ purchased from the utilisation of ‘foreign contribution’, as on March 31 of that financial year (“FY”). While this is a progressive change, to enforce utilisation of ‘foreign contributions’ in line with their intended purpose/ use, it will certainly increase the compliance burden on entities receiving ‘foreign contribution’, as the 2023-Amendment now requires disclosures pertaining to ‘moveable assets’ to include: (i) value of assets at the beginning of the FY; (ii) value of assets acquired during the FY and (iii) value of assets disposed of during the FY. This would require the entity receiving ‘foreign contributions’ to make more specific disclosures related to moveable assets and immoveable properties separately (purchased from utilisation of ‘foreign contribution’).
Conclusion and way forward
While on one hand, the MHA is trying to increase the compliance thresholds under the FCRA to allow for a more efficient regulatory framework with regard to ‘foreign contributions’, with an intention to prevent any misuse of ‘foreign contributions’ and safeguard ‘national security’; on the other hand, the heightened compliance and regulatory thresholds under the FCRA may prove to be challenging for the development sector. It is crucial for the State to step in and formulate a regulatory framework that balances stakeholder interests alongside national interest.
For further information, please contact:
Sindhushri Badarinath, Partner, Cyril Amarchand Mangaldas
indhushri.badarinath@cyrilshroff.com
[1] Preamble, FCRA.
[2] Press release on the FCRA, dated May 6, 2011. Accessible here https://pib.gov.in/newsite/PrintRelease.aspx?relid=71995#:~:text=While%20the%20provisions%20of%20the,contribution%20received%20by%20the%20associations.
[3] Section 2(1)(h), FCRA.
[4] Section 2(1)(j), FCRA.
[5] Section 2(1)(j)(vi), FCRA. However, where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999, or the rules / regulations made thereunder, then, notwithstanding the nominal value of share capital of a company being more than one-half of such value at the time of making the contribution, such company shall not be a foreign source.
[6] Section 3, FCRA.
[7] Dashboard, Ministry of Home Affairs as of December 7, 2023. Accessible here – https://fcraonline.nic.in/fc_dashboard.aspx.
[8] Government cancels Greenpeace India’s FCRA licence, The Economic Times, (September 4, 2015). Accessible here – https://economictimes.indiatimes.com/news/politics-and-nation/government-cancels-greenpeace-indias-fcra-licence/articleshow/48794340.cms.
[9] Bharti Jain, Amnesty circumvented FCRA regulations: MHA, Times of India, (September 29, 2020). Accessible here – https://timesofindia.indiatimes.com/india/amnesty-circumvented-fcra-regulations-mha/articleshow/78392389.cms.
[10] Section 5, FCRA read with Rule 3, Foreign Contribution (Regulation) Rules, 2011.
[11] Noel Harper v. Union of India [2022] WP (C) 566/2021.
[12] Noel Harper v. Union of India [2022] WP (C) 566/2021.
[13] Noel Harper v. Union of India [2022] WP (C) 566/2021.
[14] Noel Harper v. Union of India [2022] WP (C) 566/2021.
[15] Noel Harper v. Union of India [2022] WP (C) 566/2021.
[16] Section 4, Foreign Contribution (Regulation) Amendment Act, 2020.
