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Thursday, November 20, 2014

Tweaking The FCRA To Enable CSR Funding

By: Gerald Manoharan, Partner - JSA

In India, it is mandatory for large companies to spend on social welfare activities. With effect from April 1, 2014, every company, private limited or public limited, which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities (‘CSR’). India’s charity laws, however, have made it quite difficult for companies to fulfill their CSR obligations.

The Foreign Contribution Regulation Act, 2010 (‘FCRA’) regulates foreign contributions to non-profit organizations (‘NPO’s). Under the FCRA, NPOs can only accept contributions from a foreign source once they register with or obtain prior permission from the Central Government. Without FCRA approval, grantee organizations in India may not legally receive foreign contributions from any donor.

The issues with the FCRA stem from the definition of ‘foreign source’, provided in Section 2(j) of the FCRA. Under this definition, an Indian subsidiary of a foreign company is deemed to be a foreign company, and consequently, a foreign source. Additionally, Indian companies which have foreign ownership of more than 50% are also treated as foreign sources. With liberalized FDI norms and foreign investment limits, several Indian companies have foreign holding of more than 50%. Therefore, this definition complicates the funding process by encumbering the flow of money from such companies to various NPOs.

Thus, due to this provision, if an Indian subsidiary or Indian company with substantial foreign ownership wants to create a foundation for undertaking charity work and fulfilling its CSR obligation, it will have to obtain FCRA registration before doing so. The Companies Act, however, doesn’t insist that CSR activities be carried out only through a company’s own foundation; companies can also choose to do so on their own or in partnership with NPOs. But NPOs will likewise have to register in order to receive contributions from such foreign-owned or foreign-controlled entities.

While this sounds simple enough, the problem is that the process of registration is stringent and fraught with bureaucratic process. Firstly, all FCRA applications from across the country are processed only by the central office based in New Delhi, making this registration process one of the most difficult in the country. Next, the NPO must be at least three years old to even qualify for registration. Thus, the only way for a new foundation to accept foreign contributions is to obtain prior permission from the government. This permission is applicable to a specific project and specific amount, which means that the NPO cannot use it for a different project or for additional funding for the same project. Third, before granting registration or approval, the Central Government verifies whether the NPO has undertaken reasonable activity in its chosen field for the benefit of society; however, the term ‘reasonable activity’ has not been defined and is open to selective interpretation.

To further complicate the registration process, the Act states that the application for registration or prior permission should ordinarily be granted within 90 days. No specific consequences are provided for not processing the application within the 90 days, and hence it is unlikely that the sanctity of the time frame will be observed. Registration once granted is only valid for a period of five years and must be renewed thereafter. Getting this stamp of approval, however, has proven arduous because of the longstanding suspicion regarded to the overseas funding of non-business activities.

A common sentiment prevailing among companies and NPO’s is that the government shouldn’t lose sleep over who funds whom and why, so long as the activities on the ground don’t jeopardize national security. From their perspective the FCRA is itself archaic, unsuitable for a modern regulatory environment where foreign companies can easily bring money to India without government scrutiny. Particularly after the introduction of the Prevention of Money Laundering Act in 2002, it has been felt that the FCRA serves no meaningful purpose.

Indian NPOs netted a little above Rs. 80,000 crore through foreign funding in the past ten years, twice as much of what the central government allocates per year for NREGA, its flagship poverty alleviation program. Instead of making it easier for NPOs to receive contributions, the FCRA has in fact hindered the process by mandating registration as a prerequisite for receiving grants from a foreign-owned or foreign-controlled Indian company. As discussed above, the broad definition of the term ‘foreign source’ combined with the cumbersome registration process has also frustrated companies in their CSR efforts. If the CSR obligations placed on companies are to be met in letter and spirit, Indian regulators need to act swiftly to dissolve the existing dichotomy and suitably amend onerous FCRA norms.

Source: http://thefirm.moneycontrol.com/story_page.php?autono=1230820

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