The Foreign Contribution (Regulation) Act, 2010 (henceforth, FCRA) has been making news since the past couple of years. Be it its use by the Centre to have more Governmental control over the NGOs last year or the recent amendment of the Act to have less Governmental control over the political parties.
The basic purpose of the FCRA, as the name suggests, is to control foreign donation given to Indian companies, associations et al and to prevent utilization of foreign sources for any suspicious activities detrimental to the foreign interest.
The Finance Bill 2016 has proposed a radical change to the FCRA. It proposes to amend Section 2(1)(j)(vi) which defines “foreign source” to insert a proviso which is as stated.
Part xiii to the Finance Bill 2016:
AMENDMENT TO THE FOREIGN CONTRIBUTION (REGULATION) ACT, 2010. In the Foreign Contribution (Regulation) Act, 2010, in section 2, in sub-section (1), in clause (j),in sub-clause (vi), the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 26th September, 2010, namely:—
“Provided that 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 or regulations made there under, 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.”
Didn’t understand the fancy legal terminology above? Don’t worry, let’s look at a simple explanation.
Prior to this amendment, any Indian company or otherwise whose share- value was held by a foreign company and that share-value exceeded 50%, such a company was deemed to be a foreign source. Even if the company was registered in India, it would still be considered so if the above condition was met. This is why companies like I.C.I.C.I and Infosys were considered as foreign sources, because more than 50% of their shares were held by foreign companies.
However, after the amendment, the above type of companies shall NOT be considered as foreign sources even though their foreign stake exceeds 50%, provided that the foreign investment is within the limit specified under the Foreign Exchange Management Act, 1999 or the rules or regulations made there under.
So, basically, the proposed amendment will link the status of a company- whether Indian or foreign- to the FDI cap approved for the company from time to time. So, a company operating in a sector which has approved FDI caps above 50% can still continue to be treated as an Indian source for this purpose.
A lot of sectors have FDI caps above 50%.
Agriculture , pharmaceutical and telecom industries have 100% FDI. Private banks have a FDI limit of 74%. So, basically, what this implies is that a number of companies which were earlier treated as foreign sources will not be treated so and can freely make donations to Indian companies, NGOs or political parties without seeking prior approval or going through the intricacies of the FCRA law.
The proposed amendment also has a retrospective effect. The law shall be applicable with retrospective effect from the 26th September, 2010. Thus, all donations given by such companies since the said date in violation of FCRA shall be condoned.
This amendment is said to be beneficial for companies to carry out their Corporate Social Responsibility (henceforth CSR) with ease. With effect from 1 April 2014, every company with a net worth of Rs.500 crore, a turnover of Rs.1,000 crore or a net profit of Rs.5 crore is required to spend a minimum of 2% of its average profit for the three preceding fiscal years on charitable activities.
However, CSR rules are different for companies that are treated as ‘foreign sources’. These companies cannot choose NGOs of their own liking if such NGOs or charitable organizations are not registered with the FCRA. Even Foundations run by these companies need to be registered with the FCRA so that the companies can donate to them. Needless to say, like most other Indian governmental setups, registration is a cumbersome process.
Further, a study called on Study on corporate foundations: An emerging paradigm conducted by Charities Aid Foundation in association with other not-for-profits shows many companies are facing operational difficulties because of the requirement of an FCRA licence to conduct CSR activities.
Further, Adarsh Kataruka, director at Soul Ace, a CSR consultancy, believes the treatment of funds from some companies as a foreign source limits the CSR options for both companies and not-for-profits. “There are roughly 30 lakh not-for-profits registered in India, of which only 45,000 have FCRA licences. And, of the 45,000 organizations certified to receive foreign funds, barely 20,000 are actually operational… This limits the number of organizations that corporates can work with,” Kataruka said.
Thus, this change will provide an opportunity to all charitable organizations (including those without FC registration) to access corporate grants and CSR funds. Many of the larger corporates of India have more than 50% foreign shareholding and they were compelled to work with FC registration organization. Things might seem easier for these companies after the amendment is passed.
However, there are a multiple reasons why this amendment is raging controversy.
With the passing of this amendment, these companies can even donate to political parties and previous such instances would all be condoned because of retrospective effect of the amendment. However, up until now, the donation by such companies had been illegal and needless to say, there have been several instances of this being broken by political parties and these companies. Some of these political parties included BJP and the Congress. These incidents have come to public knowledge in the recent years.
In fact, the Delhi High Court gave a judgment in March 2014 which found the BJP and the Congress of having violated FCRA 2010 provisions when they received donations from Vedanta group of companies. The Court even ordered the Home Ministry to prepare a consolidated list of ‘foreign source’ donors. The list shows that while the Congress received 10 “foreign” donations of more than Rs. 13 crore between 2007 and 2011, BJP received five such donations amounting to Rs. 1.62 crore.
The foreign companies in the list included Dow Chemicals Intl. Pvt Ltd with 100 per cent foreign holding, Apothecin Pharmaceuticals Pvt Ltd (87.97 per cent foreign holding) and Traspek Silox Industry Ltd (83.28 per cent) among others.
The two political parties have filed an appeal at the Supreme Court and the matter is still pending. However, it is clear that the two parties can be in deep trouble if the appeal is dismissed by the Supreme Court.
Therefore, many are seeing this amendment by the Government as a means to protect its own case. Needless to say, even the Opposition has a stake in it and is therefore quiet. Otherwise, when has the opposition kept silent at any change which the Centre seeks to make/introduce?
Even though this amendment might have other stakeholders involved too- companies, NGOs (One also wonders, since when did this Government decide to help the NGOs?)- it clearly benefits the political parties, especially when they have a high profile case pending against them at the Apex court.
And no voice has been raised, because somehow all the parties will benefit from this move. Who knows, other parties may not have cases against them, but they might have taken such donations themselves in the past. So it will be no surprise if this matter is not debated at length in the Parliament, because come on, who’s to lose by such a move?
And anyway, this will not be the first time when political parties mend the law to benefit their own selves.
(Image Courtesy: Wikimedia Commons)