[The following guest post is contributed by Swati Rampuria at Vinod Kothari & Co. She can be contacted at firstname.lastname@example.org]
The Foreign Contribution (Regulation) Act, 2010 (‘FCRA’), regulates the receipt and utilization of foreign contribution by certain persons and also disallows acceptance and utilization of foreign contribution for certain activities. Being a special legislation, the FCRA supersedes and prevails over other legislation such as Companies Act, 2013, (‘Act, 2013’): that is to say even if some transactions are allowed as per Act, 2013, any restrictions imposed by the FCRA shall prevail.
Pursuant to provisions of Section 135 of the Act, 2013 read with Rule 3 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (‘CSR Rules’) every company including its holding or subsidiary, and a foreign company, having its branch office or project office in India which has net worth of rupees five hundred crores or more, or turnover of rupees one thousand crores or more or a net profit of rupees five crores or more during any financial year, have to comply with the provisions of Section 135 of the Act, 2013 and the CSR Rules.
This post is an endeavor to shed light upon the provisions of FCRA which inadvertently come in the way of a foreign company and a Indian company with more than 51% of its share capital as foreign direct investment (‘FDI’) from carrying out CSR activities with ease.
Analysis of the provisions of FCRA and Act, 2013
Any contribution received in the form of an article or currency or security from a foreign source by any person within the meaning of section 2(1)(m) of the FCRA is referred to as foreign contribution under section 2(1)(h) and, thus, attracts the provisions of FCRA.
The opening lines of section 135 (1) of the Act, 2013 states that “every Company having net worth.....” The term ‘every company’ includes foreign companies as well. Thus, foreign companies falling within the limits as laid down in Section 135(1) of the Act, 2013 will have to carry out CSR activities. It is from here that the difficulty arises for foreign companies. Although Section 135 clearly covers a foreign company, it is important for a foreign company to also assess the restrictions levied by other applicable laws. This is where a study of the provisions of the FCRA becomes significant.
The relevant provisions of the FCRA are reproduced below:
Section 2 (1) (j) of the FCRA classifies “foreign source” as under:
i. the Government of any foreign country or territory and any agency of such government;
ii. any international agency (excluding World Bank, International monetary fund etc.);
iii. a foreign company;
iv. a corporation not being a foreign company, incorporated in a foreign country or territory;
v. a multi-national corporation;
vi. a company within the meaning of Companies Act, 1956, and more than half of the nominal value of its share capital is held, either singly or in aggregate; by one or more of the following, namely:-
A) the Government of a foreign country or territory;
B) the citizens of a foreign country or territory;
C) corporations incorporated in a foreign country or territory;
D) trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory;
E) foreign company;
vii. a trade union in any foreign country or territory, whether or not registered in such foreign country or territory;
viii. a foreign trust or a foreign foundation, by whatever name called, or such trust or foundation mainly financed by a foreign country or territory;
ix. a society, club or other association of individuals formed or registered outside India;
x. a citizen of a foreign country.
On an analysis of aforesaid definition, we can infer the following:
1. An Indian company which is a subsidiary of a company incorporated outside India is a foreign company and hence a foreign source.
2. Where such Indian company has a subsidiary company incorporated in India, such subsidiary company will be a foreign source.
Hence, foreign companies and foreign owned and controlled companies (FOCC entities) will be regarded as foreign source.
Meaning of Foreign Company
Before proceeding, one needs to analyze what will be a foreign company, for the purpose of CSR. Whether the meaning of foreign company will be drawn from the definition as provided under Section 2 (g) of FCRA or from what is laid down under Section 2 (42) of Act, 2013. In this regard, Rule 3(1) of the CSR Rules stipulates that for the purpose of CSR, the meaning of foreign company will be as defined under the Act, 2013.
Section 2 (42) of the Act, 2013 defines “foreign company” as:
Any company or body corporate incorporated outside India which-
a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
b) conducts any business activity in India in any other manner.
Thus, from the provisions cited above, it is apparent that for the purpose of CSR the meaning of foreign company should not be taken from FCRA.
Options available to Foreign Companies to carry out CSR under Act, 2013
Foreign Companies may undertake its CSR activities approved by the CSR Committee, through the following:
1. A registered trust or a registered society or a company established under Section 8 of the Act, 2013 by the company, either singly or along with its holding or subsidiary or associate company, or along with any other company or holding or subsidiary or associate company of such other company, or otherwise.
2. Foreign Companies may engage a registered trust or a registered society or a company established under Section 8 of the Act, 2013 with an established track record of three years in undertaking similar programs or projects that the foreign company intends to undertake.
Here, it is pertinent to understand the concept of foreign contribution under FCRA.
Section 2 (1)(h) of the FCRA defines "foreign contribution" as under:
means donation, delivery or transfer made by any foreign source,-
i. 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;
ii. of any currency, whether Indian or foreign;
iii. of any security as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 and includes any foreign security as defined in clause (o) of section 2 of the Foreign Exchange Management Act, 1999.
Explanation 1.- A donation, delivery or transfer of any article, currency or foreign security referred to in this clause by any person who has received it from any foreign source, either directly or through one or more persons, shall also be deemed to be foreign contribution within the meaning of this clause.
Explanation 2.- The interest accrued on the foreign contribution deposited in any bank referred to in sub-section (1) of section 17 or any other income derived from the foreign contribution or interest thereon shall also be deemed to be foreign contribution within the meaning of this clause.
Explanation 3.-Any amount received, by any person from any foreign source in India, by way of fee (including fees charged by an educational institution in India from foreign student) or towards cost in lieu of goods or services rendered by such person in the ordinary course of his business, trade or commerce whether within India or outside India or any contribution received from an agent of a foreign source towards such fee or cost shall be excluded from the definition of foreign contribution within the meaning of this clause.
From the above, it can be construed that the definition of foreign contribution is wide enough to include not only money, but also any article or security transferred from a foreign source, either directly or indirectly i.e. to say even if the money or article or security is routed through several intermediaries, if the original source is foreign then for the purpose of FCRA it will be treated as foreign contribution. It brings within its ambit all modes of receipt of foreign contribution, be it transfer, gift or delivery in any manner.
By way of explanation 3, FCRA excludes those foreign contributions that are either in the nature of fees or are money received towards the cost of goods or services rendered by such person in the ordinary course of business. Further, the phrase ‘any amount received...towards cost’ would mean that any amount received over and above the cost of goods or services will be considered as foreign contribution. Further, the term goods or services rendered in the ordinary course of business should be liberally interpreted to cover goods or services rendered by the NPOs (Section 8 Companies) in the course of carrying out their own charitable activities.
However, if such NPOs/ Section 8 Companies further provides amount for CSR spending to any other entity then provision of FCRA will get attracted. For any such third party entity, Section 11 of the FCRA requires registration with the Central Government. Section 11 of FCRA lays down the requirement of obtaining a certificate of registration from the Central Government by the person having a definite cultural, economic, educational, religious or social programme. And the person who is not registered with the Central Government can accept foreign contribution only after obtaining the prior permission of the Central Government and such prior permission shall be valid for the specific purpose for which it is obtained and from the specific source.
Implications of FCRA on a Foreign Company undertaking CSR activities
Foreign company considering to undertake CSR activities by contribution of an amount to any third party entity for spending as per the CSR activity eligible under Schedule VII to Act, 2013 need to understand the requirements under FCRA which have been elucidated below:
1. where the foreign company is itself undertaking to do CSR spending, provisions of FCRA will not apply.
2. where the foreign company is intending to incur CSR spending through a third party entity, then:
a. if the third party entity will itself engage in CSR activities out of the contributions made by the foreign company, then FCRA will not apply
b. if the third party entity will be carrying out CSR activities through another person, then that other person has to be registered as per Section 11 of FCRA. Such person, in case already registered, should comply with the provisions of Section 8 of FCRA about manner of utilization of funds and Section 17 pertaining to the receipt of foreign contribution through scheduled bank.
Penal provisions under FCRA
- Section 35 of FCRA state that persons accepting or assisting in accepting foreign contribution in contravention of provisions of FCRA shall be punished with imprisonment for a term which may extend to 5 years, or with fine, or with both.
- Further, Section 37 reads as follows:
Whoever fails to comply with any provision of this Act for which no separate penalty has been provided in this Act shall be punished with imprisonment for a term which may extend to one year, or with fine or with both.
- Section 38 in further extension to Section 37 state that if such offence is convicted again then that person shall not accept any foreign contribution for a term of five years from the date of the subsequent conviction.
Although the implications of violation of the provisions of FCRA are not on the donor but on the person receiving the contribution, foreign companies will anyway have to take note of the same considering the provisions of sections 35 to 38 of FCRA.
Thus, where the intent behind the provisions of Section 135 of Act, 2013 is noble, the legal provisions may serve as a major obstacle to foreign companies. Although FCRA does not prohibit CSR spending altogether, however, it is an addition to the already long list of compliances required to be observed. Looking at the various penal provisions of FCRA, it is clear that for foreign companies, compliance with Section 135 of Act, 2013 is not sufficient. Where the foreign company intends to carry out CSR activities through a third party, it has to carry out proper due diligence of that entity to ensure compliance with Section 11 of FCRA, if required. Surely, the additional compliance burden is unintentional, but having said so foreign companies may need to be doubly cautious while providing funds to third party entities for CSR activities.
- Swati Rampuria
Company ‘Owned by non-residents’ means an Indian company where more than 50% of the capital in it is beneficially owned by non-residents; Company ‘Controlled by ‘non-residents’ means an Indian company where non-residents have the power to appoint a majority of its directors in that company.
Section 2(1)(m) defines “person” as under:
"person" includes an individual, HUF, an association and a company incorporated under section 25 of the Companies Act, 1956
"association" is also defined under section 2(1)(a) to mean an association of individuals whether incorporated or not having an office in India including a society whether or not such society is registered under the Societies Registration Act or any other organization by whatever name called.