[The following
guest post is contributed by Swati
Rampuria at Vinod Kothari & Co. She can be contacted at swati@vinodkothari.com]
guest post is contributed by Swati
Rampuria at Vinod Kothari & Co. She can be contacted at swati@vinodkothari.com]
Introduction
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.
(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.
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.
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
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.
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.
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:
(j) of the FCRA classifies “foreign source” as under:
i. the Government of
any foreign country or territory and any agency of such government;
any foreign country or territory and any agency of such government;
ii. any
international agency (excluding World Bank, International monetary fund etc.);
international agency (excluding World Bank, International monetary fund etc.);
iii. a foreign
company;
company;
iv. a corporation
not being a foreign company, incorporated in a foreign country or territory;
not being a foreign company, incorporated in a foreign country or territory;
v. a multi-national
corporation;
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:-
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;
a foreign country or territory;
B) the citizens of a
foreign country or territory;
foreign country or territory;
C) corporations incorporated
in a foreign country or territory;
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;
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;
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;
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;
or other association of individuals formed or registered outside India;
x. a citizen of a
foreign country.
foreign country.
(emphasis supplied)
On an analysis
of aforesaid definition, we can infer the following:
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.
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.
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[1]
(FOCC entities) will be regarded as foreign source.
companies and foreign owned and controlled companies[1]
(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.
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:
of the Act, 2013 defines “foreign company” as:
Any company or body corporate
incorporated outside India which-
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
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.
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.
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
carry out CSR under Act, 2013
Foreign
Companies may undertake its CSR activities approved by the CSR Committee,
through the following:
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.
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.
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.
pertinent to understand the concept of foreign contribution under FCRA.
Section 2
(1)(h) of the FCRA defines “foreign
contribution” as under:
(1)(h) of the FCRA defines “foreign
contribution” as under:
means donation, delivery or
transfer made by any foreign source,-
transfer made by any foreign source,-
i. of any article,
not being an article given to a person[2] 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;
not being an article given to a person[2] 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;
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.
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.
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.
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.
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.
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.
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.
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
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:
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.
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:
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
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.
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.
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:
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.
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.
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.
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.
Conclusion
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.
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
Rampuria
[1]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.
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.
[2]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
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.
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.