Key changes under Foreign Contribution (Regulation) Amendment Act

Introduction
Transfer of foreign contributions
Reduced limit for administrative expenses
Government's power to restrict foreign contribution recipients from using or receiving funds
New identification requirements
Suspension of registration certificates
Surrender of certificates
New FCRA accounts
Comment

Introduction

The Foreign Contribution Regulation Act (FCRA) 2010 regulates the acceptance and use of foreign contributions by certain individuals, associations and companies. It also aims to prohibit the acceptance and use of foreign contributions for activities that are detrimental to national interest and for matters connected thereto. The FCRA predominantly regulates the activities of non-governmental organisations (NGOs) that receive foreign contributions, donations or hospitality. However, certain instances have been reported in recent years wherein violations of the FCRA have been found and consequently the government cancelled various NGOs' registrations. Thus, in order to bring greater transparency and strengthen the compliance mechanism for such organisations, on 29 September 2020 the central government notified the Foreign Contribution (Regulation) Amendment Act 2020 to amend certain provisions of the FCRA.

The amendment act aims to:

• strengthen organisations' compliance mechanisms;
• enhance transparency and accountability in the use of foreign contributions; and
• prevent the misuse of funds received from foreign contributions by certain organisations and instead promote the use of such funds by genuine NGOs which are working to improve the welfare of society.

This article discusses the key changes that have been introduced under the amendment act.

Transfer of foreign contributions

Section 7 of the FCRA allowed persons authorised to receive foreign contributions to transfer such contribution, or part thereof, to:

• registered persons which were in receipt of a certificate under the FCRA; or
• unregistered persons, provided that the central government's prior approval for the transfer had been obtained.

However, the amendment act restricts the transfer of foreign contributions to any other person whether or not the transferee is registered under the FCRA or has obtained the central government's approval. While this amendment aims to ensure that foreign funding is not diverted and will be used only by the organisation which has received the foreign contribution, this amendment will have severe implications for smaller NGOs which mostly depend on larger NGOs for their contributions to help them fulfil their objectives.

Reduced limit for administrative expenses

The amendment act has reduced the limit for administrative expenses from 50% to 20% to ensure that the funds forming part of foreign contributions are used for the objective for which they are primarily received. The amendment might pose a challenge for larger NGOs since they have heavy administrative expenses considering their sizable workforce and the costs associated with projects and filing reports.

Government's power to restrict foreign contribution recipients from using or receiving funds

Previously, if a person was found guilty of violating the FCRA, the central government's approval was required for them to be able use or receive the unused or unreceived foreign contribution. The amendment act has given the central government the power to restrict the usage of unused foreign contribution for persons which have been granted prior permission to receive such contribution if, based on any information or report and after holding a summary inquiry, the government believes that such person has contravened the FCRA and the amendment act.

New identification requirements

The amendment act has inserted a new Section 12A in the FCRA, which provides that any person seeking permission, registration or renewal of registration must provide:

• the Aadhaar cards of all its office bearers, directors or key functionaries as an identification document; or
• a copy of a passport or an overseas citizen of India card in case of foreigners.

Suspension of registration certificates

Further, the amendment act has revised the number of days for which the central government may suspend a person's registration certificate if they violate the FCRA. The limit has been increased to a maximum of 360 days from the earlier cap of a maximum of 180 days.

Surrender of certificates

The amendment act has inserted a new Section 14A for the surrender of certificates. If such a request is made, the central government may permit any person to surrender their registration certificate. However, prior to granting such permission, the central government may make such inquiry as it deems fit and, if it is satisfied that such person has not contravened the FCRA and the management of their foreign contribution and assets, if any, created out of such contribution has been vested in an authority prescribed by the government, allow the surrender of certificates.

New FCRA accounts

To streamline the flow of receiving foreign contributions and bring more transparency, the amendment act has introduced a new Section 17 which provides that foreign contributions must be received only in an account specifically designated by a bank as an 'FCRA account'. The FCRA account must be opened with the main New Delhi branch of the State Bank of India (11 Sansad Marg, New Delhi 110001). Further, other than the foreign contribution, no other funds should be received or deposited in this account. It is a great move by the government to monitor the funds that flow through a centralised channel but there is also a challenge for organisations scattered in various parts of the country to open a bank account in a particular state as this will increase their overhead costs.

Comment

The amendment act has brought a much-awaited regime to enhance transparency and the accountability of NGOs that use foreign contributions. However, while the amendment act was long awaited, another high priority has been the amendment of the corporate social responsibility (CSR) provisions under the Companies Act 2013 to ensure that companies which have foreign investment and undertake CSR activities (either through themselves or through implementing agencies) have a smooth and transparent mechanism to comply with the CSR requirements. Recently, the Ministry of Corporate Affairs (MCA) introduced various amendments to the CSR provisions regarding its implementation. One of the amended provisions now requires that NGOs which accept funds from companies for undertaking projects to fulfil the company's CSR obligations will have to register with the MCA by filing Form CSR-1 from 1 April 2021. NGOs must present their registration number and permanent account number at this time. Thus, the government is looking to track the disbursement of funds by companies and of those entities on the receiving end. If a thread is drawn between the abovementioned amendments to the FCRA and the recent developments in CSR provisions under the Companies Act, companies which have foreign investment must now be more diligent and ensure full disclosure on the part of the NGOs which use funds contributed by these companies for their CSR activities.

For further information on this topic please contact Neetika Ahuja or Tanuja Kaushik at Clasis Law by telephone (+91 11 4213 0000) or email (neetika.ahuja@clasislaw.com or tanuja.kaushik@clasislaw.com). The Clasis Law website can be accessed at www.clasislaw.com.