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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

3 comments

  • 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?

  • Any clarity on this?
    Are subsidiaries of foreign companies still covered as they fall within the definition of foreign company and thus are covered under 2(i)(j)(iii)?

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