Wednesday, March 2, 2016

Budget 2016 amends FCRA - paves way for CSR by FOCCs

[The following guest post is contributed by Aditi Jhunjhunwala, who is a partner at Vinod Kothari & Co, and can be reached at aditi@vinodkothari.com].

Amongst the various amendments proposed in the Finance Bill, 2016, one such relates to changes to the provisions of the Foreign Contribution (Regulation) Act, 2010 (the Act/FCRA), which has come as a relief to foreign owned and controlled companies (“FOCCs”).

The provisions of FCRA are applicable if a 'person' having a definite cultural, economic, educational, religious or social programme receives any foreign contribution from any foreign source. Further, pursuant to provisions of Section 135 of the Companies Act, 2013 (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. In this context it becomes pertinent to discuss few relevant provisions of the FCRA as below:

Section 2(1)(j) defines "foreign source" as below:

(j) "foreign source" includes,-

(iii) a foreign company;

(iv) a corporation, not being a foreign company, incorporated in a foreign country or territory;

(vi) a company within the meaning of the Companies Act, 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:-

(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;

Proposed amendment vide the Finance Bill, 2016

In the FCRA, the following proviso shall be inserted in sub-clause (vi) stated above and shall be deemed to have been inserted with effect from the 26 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 thereunder, 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;”

Section 2(1)(h) defines "foreign contribution" as under:

"foreign contribution" means donation, delivery or transfer made by any foreign source of article, currency ( whether Indian or foreign) and security.

Scenario as on date

Effectively, all the FOCCs were falling under the definition of foreign source, and therefore amounts contributed through any registered NGO or trust for the CSR purpose were regarded as foreign contribution. The recipient entities were required to comply with the applicable provisions of FCRA and accordingly register themselves with Central Government.

Accordingly, such companies while making contribution for CSR purposes through an eligible entity, i.e. a section 8 company or a trust etc., were facing difficulties, inter-alia in terms of complying with following:

- Registration under section 11 of FCRA

- Monitoring utilising of foreign contribution as provided under Section 8 of FCRA;

- Manner of receiving foreign contribution as prescribed under Section 17 ;

Non- compliance of the provisions of FCRA would attract the repercussions under section 35, 37 and 38 of the Act.

Budgetary respite

Considering the proviso inserted, it may be interpreted that companies whose nominal capital has been held by the foreign companies with holding within the sectoral caps as provided under the FEMA Act, 1999 will not be regarded as a foreign source. In that case, the contributions made by such entities will cease to be regarded as foreign contribution and compliances under FCRA shall not trigger in.  Further, this means that all the FOCCs will be out of the purview of FCRA altogether for any matter whatsoever after insertion of the proviso as they cease to be a foreign source.

Retrospective effect of the amendment

Further, the proviso to be inserted will have retrospective effect from 26 September 2010. It is to be noted that the Act was issued on 26 September 2010 and was enforced on and from 27 September 2010. Therefore, the amendment is dating back to the date of the enforcement of law itself. Hence, any non-compliance by such FOCC companies with respect to the provisions of section 135 of the Act, 2013 may be ruled out altogether. Henceforth, FOCCs while undertaking any CSR activities through an NGO trust etc. need not comply with applicable provisions of the Act.


- Aditi Jhunjhunwala

2 comments:

sargam marwaha said...

The FCRA came into force with effect from 1st May, 2011 and not September 27, 2010.

Anonymous said...

While the proposed amendment addresses the problem in Section 2(i)(j)(vi), the definition of "Foreign Company" which includes an Indian subsidiary, has not been changed. Therefore the question that still remains is whether an Indian subsidiary of a foreign company can make contribution without being considered as a foreign source?