Fettering Sub-granting of Foreign Contribution

• Author(s): Rudra Srivastava, Neha Meena
• Date: 01-Apr-2024
• Post in: Corporate & Commercial

Foreign contribution means the donation, delivery or transfer of any article, currency (Indian/foreign) or security made by any foreign source to an Indian recipient and includes interest or income derived from such contribution[1].

Unchecked foreign contribution may influence the country’s electoral politics, judiciary, media[2] and administration and thus, on realising the potential risks associated to it, the Indian Parliament enacted the Foreign Contribution Regulation Act, 1976 to regulate the inflow of foreign contribution/donations in India. However, due to deficiencies in the application of the said law over a period of time, the Parliament replaced it with the Foreign Contribution Regulation Act, 2010 (“FCRA”) to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by recipients (association/individual/company) and to prohibit the acceptance and utilisation of the same for activities detrimental to national interest[3]. The FCRA requires adherence of registration/prior approval/renewal/disclosure requirements for receiving and utilising foreign contribution and prescribes transfer restrictions. Despite the 2010 Act in place, many associations were found to be misappropriating/misusing the foreign funds due to which the Parliament felt the desperate urge to make the provisions more stringent and it accordingly amended the Act in 2020 to effectively fulfil the objectives of the FCRA law. Two major changes that were introduced were the prohibition on transfer of foreign funds/sub granting to third parties under section 7 and reduction of administrative expense limit from 50% to 20% under section 8. Since section 7 directly affects the functioning of FCRA registered recipients involved in social and cultural activities, it is pertinent to understand the transfer restrictions pre and post the 2020 amendment[4] along with its purpose, recent judicial developments, permissible remittance limits and related procedure under the FCRA. 

Transfer restrictions under FCRA: As per the FCRA, only a recipient which has obtained regular registration of 5 years [renewable at discretion of Ministry of Home Affairs (MHA)] or ad hoc registration in the form of prior permission by the MHA is entitled to receive foreign funds from overseas donors and the said funds can only be utilised for FCRA activities including cultural, economic, educational, religious or social programme[5] and to serve cause of humanity as declared by the recipient at the time of obtaining registration/permission. Thus, utilisation for any other activity is not allowed.

Due to the ongoing and probable misuse of foreign contribution, the Parliament prescribed transfer restrictions under the FCRA in the following terms:

Transfer restrictions pre 2020 amendment: Under the section 7 (unamended) of the FCRA, a recipient could not transfer foreign funds to any other person unless the same was certified or holding prior permission under FCRA. Such person could with prior approval of the central government, transfer part of the funds further to any other person not certified/holding permission under FCRA.

Transfer restrictions post 2020 amendment: Vide Foreign Contribution (Regulation) Amendment Act 2020, section 7 was amended to the extent of absolutely prohibiting transfer/sub-granting of foreign funds by the recipient to third parties including its partners or other not-for-profit entities.

The Ministry of Home Affairs in its Annual Report 2021–2022, stated the following reasons for amending sections 7 and 8 in 2020[6]:

1) Effective monitoring of receipt and utilization of foreign contribution.

2) Better compliance of the Act and to ensure adherence to the declared and lawful purposes in addition to transparency and accountability.

3) Ensuring exact identification of office bearers, eliminating chances of benami/bogus entry and discouraging expenditure on unproductive items like inflated staff salaries, posh buildings and office and luxurious vehicles etc.

Judicial developments: As a result of the 2020 Amendment, the functioning of the recipients in India was impacted and outraged by the same, the chairman of a trust challenged the validity of the said amendment before the Hon’ble Supreme Court (SC) in the case of Noel Harper and Others v. Union of India and Another[7].  The SC upheld the 2020 amendment and held that there was a rational nexus between the amended Section 7 and the object sought to be achieved by the principal Act and thus the prohibition on transfer of foreign contribution to third parties was a reasonable restriction on rights protected under Articles 19(1)(c) and 19(1)(g) of the Constitution.

Accordingly, the current position is that the recipient organisation must directly utilise the grants for fulfilling its activities etc. in furtherance of their project requirement without involving any intermediary. However, limited remittance of foreign funds is permissible under FCRA if the said funds are used for payment of service fees or for administrative purposes. Reliance is placed on the SC’s interpretation of the term “transfer” (as used in section 7) and the language used in section 8 (amended) as discussed in the Noel Harper case. Relevant extract of the said interpretation is produced below:   

“The expression “transfer” has not been defined in the Act. The meaning of expression “transfer” in the subject enactment would presuppose giving away of the foreign contribution in whole or in part to third person without retaining any control thereon; and such change of hands is obviously without offering any services in return, namely, free of costs”.

The above interpretation implies that some amount from the foreign funds can be paid as fees to a service provider for providing services for completion of declared FCRA activities in the ordinary course of its business and such a service arrangement will not be covered under the ambit of transfer restrictions under section 7 and thus not be violative or circumventive of the FCRA law. However, the recipients must ensure that the foreign contribution received should be utilised only for the purpose for which it was received/activities declared and not for any other purpose including speculative business. Thus, there should be a direct link between the services availed by them and the purpose for which foreign contribution was received. Section 8 provides that only 20% of such contribution (received in a financial year) can be used for administrative purpose and in case this threshold is to be exceeded, prior approval of the central government must be obtained. Administrative expenses have been listed under Rule 5 of the Foreign Contribution Regulation Rules 2011 (FCRR). 

Procedure: For effective implementation of sections 7 and 8, FCRA has prescribed filing and declaration procedures which must be followed by the recipients. As per Rule 17 of the FCCR, the recipients which have received and utilised the foreign contribution, need to submit an annual report in FORM FC-4 with copies of account (bank, receipt and payment), income and expenditure statements and balance sheet for every financial year. The annual return in Form [FC-4] shall reflect the foreign contribution received in the exclusive bank account and include the details in respect of the funds transferred to other bank accounts for utilisation. Further, in Form FC-4, the recipient need not give details of expenses/utilisation of foreign contribution transaction wise but if the cap of 20% (provided under Section 8) is breached (without prior approval), then the authorities can ask the recipient to show individual expenses showing transaction/expenditure details of its arrangements with all vendors/service providers.  Consequently, the authorities may conduct further inquiry.

Violations: FCRA lays down the consequences of non-adherence of transfer restrictions. In case a particular recipient is found to be in violation of section 7 or section 8 of FCRA, it will be liable for penalty under section 37 of the FCRA and the possibility of its registration being cancelled under section 14 is quite high. As per Notification No. S.O. 3025(E), dated July 1, 2022, read with section 41 of FCRA, the offences under section 37 for contravening section 7 and section 8 are compoundable (for section 7 violation, only once) by way of payment of penalty prescribed thereunder. However, continued violations will attract serious consequences.

There is no doubt that the 2020 amendment has dramatically affected the smooth functioning of recipient NGOs, however, it has also served to be a crucial step in securing national interest of the country and preventing misuse of foreign contribution for activities not covered under FCRA, as was intended by the framers of the FCRA law. Even though the FCRA requires strict adherence of transfer restrictions and related procedures, it also permits remittances in form of exceptions as explained in section 8 and the Noel Harper case. However, in every case, the recipient, while making disclosures, must justify that the transfer of foreign funds done by it is within the permissible limits of the Act. Thus, it is important for recipients to understand the strict procedures/processes and exceptions under FCRA to avoid heavy penalties or seizure and confiscation of foreign contribution receipts or cancellation of FCRA registrations.