In 2015
India emerged on top of the foreign direct investment (FDI) league overtaking
China and US1. Given that India has become one of the favourite
destinations for foreign corporations to set up companies or joint ventures,
there are a large number of companies which are classified as subsidiaries of a
foreign company or having foreign shareholders owning more than one half of the
capital (hereinafter Indian
Subsidiaries, for convenience).
Mandatory
CSR spend for Indian Subsidiaries
On 1st
April 2014 India became the first country, to have legislated Corporate Social
Responsibility (hereinafter CSR or Legislated
CSR, for convenience)2. A company incorporated in India has mandatory social
responsibility to be performed by it if it has a net worth of Rs. 500 crores or
turnover of Rs. 1000 crores or net profit of Rs. 5 crores, as mandated by the
Companies Act, 2013.
Therefore,
Indian Subsidiaries too will be bound by section 135 of
the Companies Act, 2013 to spend either directly towards CSR or give grants to
other entities towards CSR purposes.
Schedule
VII of the Companies Act, 2013 lists out the activities which are considered as
CSR initiatives. It is interesting to note that these CSR purposes listed out
in the Schedule are very closely related with those which Foreign Contribution
(Regulation) Act, 2010 (hereinafter FCRA,
for convenience) regulates - cultural, economic, educational, religious or
social program.
What is
under FCRA?
Any money,
amongst other things, received from a 'Foreign Source' is categorized as
'Foreign Contribution' in terms of section 2(1)(h) of FCRA. Definition of the term
'Foreign Source' covers 'Foreign Company', and definition of 'Foreign Company'
covers an Indian Subsidiary. Therefore, any contribution by an Indian
Subsidiary to another organization in India will qualify as Foreign
Contribution. Receipt of Foreign Contribution is regulated. It cannot be
received in India without the recipient entity having been registered or having
obtained prior permission.
In terms
of section 2(1)(h) of
FCRA, "Foreign
Contribution" means the
donation, delivery or transfer made by any foreign source, -
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(i)
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of any article, not being an article given to a person as a
gift for his personal use, if the market value, in India, of such article, on
the date of such gift, is not more than such sum as may be specified from
time to time, by the Central Government by the rules made by it in this
behalf;
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(ii)
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of any currency, whether Indian or foreign;
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(iii)
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of any security as defined in clause (h) of
section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and includes any foreign
security as defined in clause (o) of section 2 of the
Foreign Exchange Management Act, 1999 (42
of 1999).
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In terms
of section 2(1)(j) of
FCRA, the term "Foreign
Source" includes, -
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(i)
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the Government of any foreign country or territory and any
agency of such Government;
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(ii)
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any international agency, not being the United Nations or any
of its specialised agencies, the World Bank, International Monetary Fund or
such other agency as the Central Government may, by notification, specify in
this behalf;
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(iii)
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a foreign company;
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(iv)
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a corporation, not being a foreign company, incorporated in a
foreign country or territory;
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(v)
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a multi-national corporation referred to in sub-clause (iv)of clause (g);
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(vi)
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a company within the meaning of the Companies Act, 1956 (1 of 1956), and more than one-half of the
nominal value of its share capital is held, either singly or in the
aggregate, by one or more of the following, namely: -
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(A)
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the Government
of a foreign country or territory;
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(B)
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the citizens of
a foreign country or territory;
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(C)
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corporations
incorporated in a foreign country or territory;
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(D)
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trusts,
societies or other associations of individuals (whether
incorporated or not), formed or registered in a foreign country or
territory;
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(E)
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foreign
company;
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(vii)
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a trade union in any foreign country or territory, whether or
not registered in such foreign country or territory;
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(viii)
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a foreign trust or a foreign foundation, by whatever name
called, or such trust or foundation mainly financed by a foreign country or
territory;
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(ix)
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a society, club or other association of individuals formed or
registered outside India;
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(x)
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a citizen of a foreign country;
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In terms
of section 2(1)(g) of
FCRA, the term "Foreign
Company" means any
company or association or body of individuals incorporated outside India and
includes -
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(i)
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a foreign company within the meaning of section 591 of the
Companies Act, 1956 (1 of 1956);
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(ii)
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a company which is a subsidiary of a foreign company;
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(iii)
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the registered office or principal place of business of a
foreign company referred to in sub-clause (i) or company referred to in
sub-clause (ii);
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(iv)
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a multi-national corporation.
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Section 11(1) of FCRA prohibits receipt of any
foreign contribution unless the recipient organization having a definite
cultural, economic, educational, religious or social program is registered
under FCRA or has taken prior permission from the Central Government (administered
by the Ministry of Home Affairs).
Interplay
of FCRA and Legislated CSR - makes it curious
The
Companies Act makes CSR spend mandatory regardless of its ownership – Indian or
foreign. In order to comply with this Legislated CSR, the Indian Subsidiaries
will find themselves violating the provisions of FCRA - as Foreign Sources
cannot undertake social activities directly for reasons of national interest.
On one hand, the Companies Act mandates; on the other hand, FCRA stops - making
it a curious case.
Therefore,
such Indian Subsidiaries can only contribute to the CSR efforts carried out by
other entities. Even here, the hands of the recipient are tied. FCRA requires
that the organisations engaged in cultural, economic, educational, religious or
social program (hereinafter Social
Organisations, for
convenience) should either be registered or has taken prior permission from the
Ministry of Home Affairs before accepting the contribution from foreign
companies.
Social
Organisations are ever willing to receive any penny which anybody wants to
give. Ever since the CSR has become mandatory, Social Organisations have
started approaching companies for contribution towards social works mindless of
company's ownership - whether Indian ownership or foreign ownership. It is seen
that such Social Organisations are not aware of the shareholding pattern of the
companies whom they approach.
Options to
such Indian Subsidiaries
Given that
the Indian Subsidiaries are not incorporated with social work in the list of
main objects in their Memorandum of Association, it is likely that instead of
undertaking such social works directly, they will only fund such works carried
out by other Social Organisations. If at all, such Indian Subsidiaries wish to
undertake CSR initiatives by themselves, FCRA requires them to register or
obtain prior permission. It is unlikely that they will be given registration or
prior permission in view of national interest under FCRA.
In order
that contributions of the Indian Subsidiaries are utilized fruitfully, it will
be wise to advise the recipient Social Organisation to get the registration
under FCRA, if already not taken. This can be done by conducting Eligibility
Test of the recipient organization. Indian Subsidiary can protect themselves by
ensuring these:
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(i)
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has the recipient obtained FCRA registration or has the
recipient obtained prior permission?
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(ii)
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keep a copy of the certificate of registration or prior
permission
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(iii)
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get declarations from the recipient that they will abide by
the provisions of FCRA and intimate the donor immediately in case the FCRA
registration/prior permission is withdrawn/revoked by the Central Government.
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Options to
Social Organisations
The
Legislated CSR has given a shot in the arms of Social Organisations. It would
do good to keep their excitement in check and conduct Ownership Test of the
donor entities. In case it is found that the donor entity has foreign ownership
in excess of one half of its paid up capital, the recipient organization needs
to be cautious. To benefit from the CSR legislation, it will be important for
such willing organisations to get registration in terms of section 11(1) of
FCRA. This will broaden their donors-base. Such a registration will be valid
for a period of five years. These organizations will prefer
"Registration" over "Prior Permission" as it will eliminate
the necessity of approaching the Ministry of Home Affairs for every case of grant.
What
Government can do
One hand
of the government requires to donate, while the other hand prohibits receipt of
this donation! Enable the receiving hand – this is the least the government can
do. There are three options before the government, to resolve this quandary.
One, the
Ministry of Corporate Affairs may issue a notification/circular giving
over-riding effect to section 135 of
the Companies Act, 2013 notwithstanding anything contained in any other Act.
Second,
Ministry of Home Affairs may pass a notification/circular exempting Indian
Subsidiaries from the requirements of registration or prior permission in case
they fall within the mandate of section 135 of the Companies Act, 2013. Section 50 of
FCRA vests the Central Government with power to exempt.
Third, in
exercise of its power under section 5o of FCRA, the Ministry of Home Affairs
can alternatively pass a notification/circular exempting receipt of funds from
Indian Subsidiaries, in discharge of latter's CSR duty, from the definition of
Foreign Contribution.
It will be
really difficult for the government to pass any of these three
notifications/circulars given the underlying national interest which is the
prime reason for existence of the Foreign Contribution Regulation Act, 2010.
Summary
CSR
mandate by the Companies Act conflicts with the restrictions imposed by the
Foreign Contribution Regulation Act (FCRA). Given that FCRA has an element of
national interest, Companies which have received Foreign Investment amounting
to more than one half of their paid-up capital and to whom CSR also is
applicable will need to tread carefully. The recipients of grants from such
companies will need to be even more cautious. A basic Ownership Test of the
grantor company will help the recipients.
